Category: real estate industry/economy

10 Ways Green Construction Can Improve Your Bottom Line

I had the good fortune to attend a real estate conference at my alma mater, Yale University, on April 3, 2009, where I got an opportunity to tour their new state-of-the-green-art building, Kroon Hall.

So-called “green” design and construction of commercial buildings aim to save energy and water, create healthier work environments and reduce the environmental impact of construction.  But does it make economic sense?  Conventional wisdom holds that green design currently adds about 2% to 5% to the cost of new commercial construction, although that premium is likely to decrease as both techniques and material become more mainstream.  The payback period on that investment, however, can be quite quick and the long-term economic benefits significant.  Here’s my short list of bottom-line reasons to go green:

1. Look for tax incentives:  Most states offer some sort of tax incentive to developers of energy-efficient buildings.  Check for the possibility of federal incentives as well.

2. Get a ton of publicity: Ok, maybe you didn’t choose to follow the green-brick road for the fame and glory.  Still, you’re going to want to rent or sell this building and a little profile-raising can go a long way.  One sure way to stand out is by achieving LEED certification for your project.  LEED (Leadership in Energy and Environmental Design) is a rating system developed by the U.S. Green Building Council.  It provides recognized standards for green construction, and four levels of certification — Certified, Silver, Gold, and Platinum — based on design.  Their certification is a mark of distinction worth earning.

3. Find a friendly ear at the bank:  Green construction is “sustainable,” which means it should last longer than your financing, and should give you an edge in attracting and keeping tenants.  In today’s financing markets there are no guarantees, but these are advantages that should work in your favor to find financing and secure the best terms.

4. Reduce demolition and materials costs: If you’re building on a site with existing structures, reuse some of the materials.  You’ll save on the cost of materials, carting and disposal, while at the same time reducing impact on landfills.

5. Reduce construction costs:  Passive solar heat and reduced electric lighting will generally mean you need a smaller HVAC system — less costly to install and to maintain,

6. Reduce heating costs:  Orient the building to take advantage of passive solar heat.  Windows can be recessed or otherwise configured so that they allow full sun to enter in the winter, but are shaded when the sun is higher in summer.

7. Reduce electric costs: Increase natural daylight and thus reduce the number of bulbs and amount of electricity needed to run them.  Add daylight sensors to minimize use when unneeded.  Add photovoltaics to reduce purchased power.

8. Reduce water costs by collecting rainwater and/or recycling “greywater” from dishwashers, clothes washers, etc. and use this for landscape irrigation and toilet flushing.

9. Increase rental revenue and improve tenant retention:  There is evidence to suggest that the healthier environment in green buildings improves worker productivity and reduces absenteeism.  A workplace like that can improve a business’  bottom line and hence is more attractive than a similar but not-so-green space.  Translation: The potential exists for higher rental rates from the green space, and fewer vacancies as well.

10. Increase property value: Increased revenue plus decreased operating expenses equals a higher Net Operating Income — and a higher NOI translates into a greater property value (read my books, do the math).  To sweeten the deal even a bit further, here’s a bit of speculation: Watch for the day when commercial appraisers employ a bonus reduction in cap rate for certified green buildings.

Spring Thaw for Real Estate?

The first sign of of happy news, of course, was that the stock market actually went up recently more than one day in a row.

Then, on St. Patrick’s Day, Reuters reported that housing starts jumped an unexpected 22.2% in February, “the biggest percentage rise since January 1990 and the first gain since April.” It’s enough to make us want to drink green beer.

In a related article, they suggest that the economy may be showing some signs of life, and note, “Sensing that the worst may soon be over, investors have begun putting a bit more money into some of the hardest hit sectors, including retailers and home builders.”

Still more: The Federal Reserve took the financial markets by surprise with a plan to pump about $1 trillion into the economy by buying treasuries and mortgage-backed securities. Whatever else we may think about this plan’s effect on the dollar and future inflation, it is likely to drive mortgage rates down just in time for what would usually be the springtime home-buying season. Just one day before the announcement, pundits were saying that mortgages rates had surely gone as low as they could; now they’re saying 4% is not unthinkable.

And — back in January, an article in Forbes saw incipient signs of a “resurrection in real estate.”

All this doesn’t exactly add up to the return of a roaring bull-market economy, but at least it’s a relief from the relentless drumbeat of bad news to which we’ve become accustomed. It’s food for thought, and worthwhile reading.

Like winter, recessions eventually end. It would be nice to say good-bye to both.

This post is an excerpt from our March, 2009 RealData Dispatch newsletter. To view past issues, or to subscribe: http://realdata.com/newsletter/newsletter.shtml

Making the Case for Your Commercial Refinance

Many of you surely have commercial property loans that are coming up for refinance during 2009.  We have a new article (actually, the first installment of a two-part piece) on realdata.com that we think you’ll find helpful.

In Part One of “Making the Case for Your Commercial Re-Finance,” we tell you what information you must gather before you apply for the loan. We help you understand the loan underwriting process as the lender sees it, and show you how to estimate the maximum amount of financing you can reasonably expect to get.

In Part Two, we’ll demonstrate the process of building a presentation that you can use to make a strong case for your commercial refi.

To view this article, go to realdata.com and click on the “Learn” tab.  You’ll find a link to this and a whole library of articles for investors and developers.

Is Now the Time To Buy Real Estate for Investment?

“Give me a one-armed economist!”  That’s what Harry Truman said as he grew weary of economic advisors who seemingly could never give a straight-out recommendation without adding, “…but on the other hand….”

I believe serious investors understand that they can succeed in both good economies and in bad. They also know that they may have to adjust their approach to fit the circumstances.   Has anyone seen Warren Buffet hiding under a rock?

Income-producing real estate – that is, rental properties – offer investors an excellent opportunity to build wealth over the long term.  It’s important to understand that the value of a typical income property doesn’t necessarily rise and fall in step with the home market.  Investment properties are bought and sold for their ability to produce net income.  So, if you buy a property at a sensible price relative to its income and you manage it well, you should enjoy a good return over the long term.

Everyone expects their investments to succeed in a hot market, but what about now, when the economy is struggling?  It’s not uncommon to see apartment properties do well at times like this.  When money is tight and it’s difficult for buyers to come up with down payments and to afford mortgage terms, demand for apartments typically rises.

Take a look at the medical office buildings in your market.  Health care doesn’t go out of fashion, and with boomers getting older, there’s a good chance that demand will rise.  Look also at university towns.  The turnover of students and faculty typically translates into high demand.

I’ll say more about these and perhaps some other areas of opportunity in future posts.

And finally, what about that one-armed economist?  Is there a, “…but on the other hand?”  As much as we would like every decision to be unambiguous, all investments involve risk.  Otherwise there would be no reward.  So what are the caution flags?

First, remember that all real estate is local.  Your local job market, for example, may be atypically strong, with new employers moving in; or especially weak, with important job sources shutting down.  View all generalities through the prism of your local market.

Remember that cash is king, especially in a weak economy.  It’s all right to try to acquire a property using as little of your own cash as possible (provided, of course, that the deal works on those terms).  But there’s a big difference between using very little cash and having very little cash.  If you have nothing in reserve to fall back on, the risk of a highly leveraged investment may be greater than you can deal with.

This may not be the time to buy with no cash and flip for a profit tomorrow, but it can be an excellent time to buy for the long term.  Do your homework, run the numbers, and prosper.