Current Issues in Green Real Estate Development: Project Location Considerations*

This article takes a fresh look at the traditional concepts of real estate marketing as they relate to property locations through the prism of green building and sustainability.

In most introductory real estate classes, the first and most critical rule taught is the importance of, “location, location, location.” In green building, that old maxim has taken on a series of new meanings and applications, guided by the opposing forces of environmental sensitivity and market accommodation. This article offers a fresh view on an old concept of real estate marketing relating to property location. Identifying a suitable location to assist in obtaining green building certifications or incentives, what specific land features are likely to draw a green property buyer, and how to digest and analyze deal specifics on what may be a proper and profitable site for a green building project are the thrusts of this examination on how to properly appreciate the green building movement.

As a preliminary item of analysis, it behooves a green developer or property owner to make self-inquiry as to why it is building green. This analysis becomes pivotal if the reason for building green is to take advantage of government incentives. Whether applying under a federal, state, or local green building program, most incentives are made available only to affordable housing or Community Reinvestment Act (“CRA”) sites. Most recently, the American Recovery and Reinvestment Act of 2009 (“Recovery Act”) was signed into law on February 19, 2009 by President Obama. The Recovery Act features many incentives and loan guarantees for green building and clean energy, with affordable housing as the central basis for program eligibility.

As an alternative, property developers may elect to build green to integrate a product differentiator into a given marketing plan. In favorable real estate markets, excessive product differentiation, which includes building green, may be unnecessary as units may sell with little marketing assistance. Conversely, in a recessive market condition, only the most differentiated product may allure prospective down-market buyers and bargain seekers, who tend to prioritize deeply discounted units over properties that, although perhaps built suitable to their taste, may lack resounding uniqueness in development concept. Any of the various third-party green building classification and certification systems may rubber stamp and quantify the effect of precisely how green a given property might be and concurrently distinguish the property from both stock competitor property inventory and marginally green properties. Such efforts will likely still be viewed as fodder for bargain hunters in low-ball bidding exchanges with disgruntled sellers. Therefore, simply building green cannot yet be deemed a force with sufficient clout to trump recessive real estate markets. Rather, it may only serve to move a unit that is already positioned to sell.

When choosing to build green as a differentiator, and not in pursuit of specific government incentives, a clear trend appears to be emerging. At the end of the day, green building is still a real estate transaction like any other that must be profitable to its capital contributors in order to be viable. Therefore, it is best to analyze a potential green development site primarily on the basis of its acquisition price, cost to build, and projected market value, as built. Any marketing appeal as a result of building green should be viewed as little more than a modest value enhancement, under most circumstances and site locations. In short, if the construction or development project makes sense without building green, it will make all the more sense by building green, especially given the bridging of the gap in construction costs between green construction materials and traditional materials, accessibility to such green building materials, and the increased quantity of construction vendors offering green products, services, and installations. If building green costs marginally more, if at all, than standard construction, we can only expect enhanced valuation and marketing appeal by selecting a site that is fiscally viable for development or renovation regardless of implementing green construction methods. The question then becomes how to maximize the marketing appeal that building green might generate.

It is at this stage of the analysis that we place special emphasis on the long-held real estate industry maxim of “location, location, location.” For example, if we have done sufficient due diligence and market research to conclude that a particular site shows promise for commercial viability given site acquisition costs, construction costs, and market value, as built, certain features of the land and surrounding neighborhood may further enhance a green project’s specialty. Proximity to parks, bodies of water, fields or other natural land features will quite likely be considered desirable for those who place value in green buildings. Because real estate market valuation is subject to established market forces of supply and demand just as in any other market, the scarcity of land parcels in close proximity to desirable natural land features, when coupled with a special presentation of green building design and materials, can be viewed as a value enhancement for its combined scarcity, market demand, and novelty in building concept.

An additional area of importance on site selection for green buildings is the site’s effect on sustainable development principles. Sustainable development has been defined by the United Nations Report of the World Commission on Environment and Development as development that “meets the needs of the present without compromising the ability of future generations to meet their own needs.” USGBC’s LEED-ND rating system and general smart growth objectives provide good reference points for how extensive these new parameters have become with respect to selecting a green site location.

In fact, there are a number of green building third party certifications that place critical emphasis on property location and its potential effect on the natural environment. Such emphasis may include “community connectivity” and integration within an existing power and infrastructure grid as indicators, and perhaps even as gate-keepers, of what may be credibly termed an environmentally sound structure with respect to site location. In short, by not considering how a site’s selection may so bear on green building principles, a property owner or developer may be precluded from garnering favor from various third-party green building certification systems. Or, perhaps more damaging, it may be admonished by the green building community, in general, as being “cosmetically green” or even faux-green.

From a more general view of the current real estate industry landscape, it is no great leap to conclude that it may be problematic to assess where a development or renovation plan should be projected. The state of the market has clouded the point of origin. For example, what may be deemed a bargain at the time of land acquisition, may be considered an overpayment within just six months. Consequently, the intended development or renovation aim may need to be reevaluated. To further complicate matters in this stressed real estate and economic environment, the target at venture completion appears to move erratically, as well. Some pundits speculate that the bottom has been hit, and it would therefore be timely to begin land acquisition efforts immediately, as the market at time of construction completion will surely be more favorable than would appear today. Still others with industry credibility see no immediate recovery prior to the functioning of our capital markets, which show no signs of life at this time. Acquiring a site for development or renovation in these trying times is as much an exercise in leaping towards one’s faith as it is an exercise in due diligence in dissecting a deal. Deciding how to account for the effect of building green contributes measurably to the pressure on determining a given deal’s attractiveness.

To march in step with green building is to strive for a properly funded, commercially viable real estate deal. The resistance of the real estate development, design and construction industries from embracing green building methods wholesale is as much, if not more, of a characterization of the real estate industry’s economic condition, as it is towards the market’s willingness to demonstrate a demand for green buildings. In short, the recovery of our economy generally can be tied to our real estate industry, and the recovery of our real estate market valuations can inch forward with green building principles serving as some catalyst through the effect of government sponsored financial incentives, and strategic implementation of carefully selected and marketed green buildings and development projects.

*Robert Roth is the President of Green Envy Development Group, part of the team which is developing The Silhouette condominium project in Park Slope.

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