30 May 2014

The Strategy Behind Green Investing

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How Sustainability Enhances Property Performance

At Principal Real Estate Investors, we recognize the many challenges and opportunities in today’s real estate market. On behalf of our investors and clients, it is our responsibility to anticipate these market changes and execute real estate strategies that best position our investments for success. Increasingly, we see sustainability and “green” buildings as a compelling strategy to enhance value and meet our fiduciary obligations. By focusing on green buildings and sustainability  issues, we aim to deliver the following strategic outcomes for our clients:

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Defining Green

Simply put, green buildings are those that seek to reduce their impact on the environment. Reduced utility consumption (such as energy and water), the use of environmentally friendly materials and construction practices, utilizing renewable energy, and building operations procedures that help improve tenant comfort and health are all characteristics of a green building. At Principal Real Estate Investors, we further define green buildings as a function of “Property Performance,” where improved real estate operations and sustainability practices can lead to high-performing assets that may generate financial and environmental benefits. In the United States, there are two main standards of property enhanced performance. First, the U.S. Green Building Council’s Leadership in Energy & Environmental Design (LEED®) program assesses environmental performance through a tiered point system.  Second, ENERGY STAR® is a program administered by the U.S. Environmental Protection Agency that certifies commercial buildings as having achieved a superior level of energy efficiency.  Both LEED® and ENERGY STAR® are now commonly viewed as industry standard measures of “green” in commercial real estate.

The Investment Opportunity

Our focus on property performance and green buildings offer our investors a compelling array of business  benefits, potentially leading to  improved investment results:

Increased Value

  • Buildings certified under the LEED rating system have been shown to achieve price premiums ranging up to 30%.1
  • Increased tenant attraction to green buildings allows owners to command 4-5% higher rents and lease rates, leading to NOI growth.2

Competitive Parity

  • Over 5,000 U.S. commercial office buildings, nearly 1 billion square feet, have achieved LEED certification since 1999.
  • United states alone offers a $279 billion dollar investment opportunity in green buildings with resulting energy savings over 10 years totaling more than $1 trillion based on an average 30% efficiency gain.4

Cost Reductions

  • ENERGY STAR labeled office buildings are one-third more energy efficient than average U.S. office buildings, reducing energy expenses by at least $0.50 per square foot.5
  • Energy use in LEED-certified buildings has been shown to be 15 to 40% less energy use than non-LEED.6

Risk Mitigation

  • Green buildings offer hedges against changing consumer preferences.7
  • ENERGY STAR and LEED assets can insulate owners from new regulatory and environmental mandates and increasing energy prices.7

Quality Tenants

  • Fortune 500 and other large corporations currently have the highest demand for offices in green buildings.8
  • Green buildings engender higher levels of productivity; therefore, tenants who are dependent on high levels of human capital are more likely to rent green office space.9

Community Appeal

  • Green buildings, which frequently reward transit-oriented development, urban infill, and smart growth, have greater connections to the local communities.10
  • Many jurisdictions provide incentives for green construction, such as providing expedited permitting.10

Making it Happen

No matter what the investment strategy– core, value-add, opportunistic – striving for improved property performance can enhance real estate returns. Green building strategies may vary by market and by situation, but our ultimate approach seeks to earn competitive distinction through any real estate strategy:

New Developments - creating market awareness and tenant interest, and cultivating community excitement through appropriate lEED certification efforts and green building construction practices

Existing Assets - continually striving for reduced costs and enhanced asset value through best-in-class property operations, as detailed in our white paper efficient operations – another path to sustainable real estate

Repositioning and Renovations - leveraging changing market dynamics and construction windows to raise performance levels by upgrading technologies and building systems, and securing green certifications  such as LEED or ENERGY STAR

Achieving optimal property performance requires a comprehensive, integrated program. At Principal Real Estate Investors, our staff and real estate partners aim for green building success through a cycle of performance management actions:

Investigate - assess properties for performance enhancement opportunities, incorporate environmental analysis into due diligence efforts, and pilot and evaluate new technologies and operational practices

Measure - benchmarking and tracking environmental metrics, such as energy, water and waste consumption

Implement - take action through sustained execution, monitor and report results, engage tenants and stakeholders, and further leverage environmental performance to seek enhanced financial outcomes

Green Buildings - A New Market Norm?

Sustainability in commercial real estate is promoted by two marquee programs. since the inception of ENERGY STAR and LEED, 1992 and 2000 respectively, building participation has transformed from a select group of industry pioneers to over 300,000 properties currently.11 The growth in program participation is coupled with competition for recognition, resulting in roughly 24,000 ENERGY STAR and 60,000 LEED certified buildings  across the United States.12

Excellence in green building practices and energy efficiency is becoming pertinent to corporate sustainability initiatives and real estate decisions.   Green office spaces confer the following benefits to tenants:

Reduced Occupancy Costs

Reduced operation and maintenance expenses in green buildings translate to reduced tenant expenses for heating, cooling, lighting, and ventilation.

Health & Wellness

Green buildings directly address the leading causes of sick Building syndrome (SBS), reducing symptoms of SBS by up to 80% through improved ventilation and the use of non-toxic building materials.13

Satisfaction

A focus on health and hygiene within green buildings provides tenants with a clean working environment and increases overall tenant satisfaction.14

Employee Retention and Recruitment

PNC Financial services reports that employee retention and satisfaction was 50% better in its green facility compared to that of a traditional one.15

Profitability

Green buildings that emphasize the use of day lighting as opposed to artificial lighting observe 5.5% employee productivity gain and a 15-40% growth in retail sales.16,17

Brand Enhancement

National organizations are developing green leasing policies and participating in recognition programs. PricewaterhouseCoopers is among an elite group of real estate owners and tenants recently announced as part of the Green lease leader inaugural class.18

The U.S. General services Administration promotes government- wide efforts to create green, sustainable buildings. GSA recently enacted a series of mandates requiring Federal agencies to enter into leasing contracts in ENERGY STAR certified buildings.19

Regulatory Pressures

U.S. cities – New York, San Francisco, Seattle, Washington, D.C., and Austin – have enacted mandatory disclosure legislation, requiring the public disclosure of energy-use data.

As regulations to mitigate climate change begin imposing minimum energy performance standards, non-green buildings could become riskier investments.20

In an increasingly competitive market where demand for green real estate continues to grow, investments in higher-performing buildings have emerged as a method for enhancing returns and gaining an advantage over industry peers.

At Principal Real Estate Investors, we developed the Pillars of Responsible Property Investing (PRPI) initiative as a framework to deliver positive financial and environmental results. Focusing on Market Resilience, corporate Governance, and Property Performance, PRPI demonstrates a commitment to responsible property investing, distinguishing ourselves as a leader in the green building marketplace.

In 2010, Principal Financial Group became a signatory to the United Nations Principles of Responsible Property Investment (UNPRI) and committed to integrating sustainability efforts into our investment decisions.

Our staff currently maintains memberships and partnerships at the nexus of sustainability and commercial real estate:

  • Department of Energy's Better Building Alliance
  • Real Estate Roundtable Sustainability Policy Advisory committee
  • United States Green Building Council
  • ENERGY STAR
  • Global Real Estate Sustainability Benchmark (GRESB)

Leveraging a unique in-house team of engineers with many years of technical and operations experience, our staff is poised to continually analyze our assets and identify opportunities for attractive investments to increase asset value and achieve national recognition.

Successes to Date

In 2009, Principal Real Estate Investors launched the Green Property Fund focusing on the integration of environmental, social, and economic principles into asset management and investment decisions.

We currently hold over 60 assets that have achieved ENERGY STAR and LEED certifications, totaling over 11 million square feet.

Awards and Accolades

In 2013, the GRESB survey ranked the Green Property Fund No.1 among its peer group.

From 2011 to 2013, commercial Property Executive cited Principal as being among the “Greenest Real Estate companies” in the United States.

In 2011, Principal was recognized as a BOMA STAR for efforts in energy efficiency.

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Our unique combination of real estate experience and expertise in sustainability has led to Principal Real Estate Investors’ recognition as a global leader in sustainability. We are poised to continue delivering investment performance for our clients and investors, in part through our focus on “green.”

 

For all supporting charts and graphs, please download our  PDF version.

 

Bibliography

1 WorldGBC, “The Business Case for Green Building”, pp. 38 http://www.worldgbc.org/files/1513/6608/0674/Business_Case_For_Green_Building_Report_WEB_2013-04-11.pdf
2 Franz Fuerst & Patrick McAllister, “Green Noise or Green Value? Measuring the Effects of Environmental Certification on Office Values”, 2011, http://sallan.org/pdf-docs/Fuerst_ HPB_Value.pdf Pg. 46 & 64
3 Custom query and data pull, www.usgbc.org
4 Does Building Green Create Value? Yaron, 2013 Pg. 2
5 Greg Kats and Jeff Perlman,  Financial  Benefits  of ENERGY STAR Labeled  Office  Buildings, U.S. EPA, February 2006.  Pg. 3
6 Muldavin, Scott. Value Beyond Cost Savings. 2010. Page 66 http://www.greenbuildingfc.com/Documents/Value%20Beyond%20Cost%20Savings--Final.pdf
7 Green Building and Property Value – A Primer for Building Owners and Developers, The Institute for Market Transformation and the Appraisal Institute, 2013 https://www.appraisa- linstitute.org/assets/1/7/Green-Building-and-Property-Value.pdf Pg 7
8 US Investor Survey – The Ownership View of Sustainable Real Estate. Cushman & Wakefield. November, 2013. http://www.cushmanwakefield.com/en/research-and-insight/2013/investor-survey-sustain- ability-1113/ Pg.5
9 Eichholtz, Kok, and Quigley, Why Do Companies Rent Green?.  RICS Research Report. (2009). http://www.ucei.berkeley.edu/PDF/EPE_024.pdf Pg. 3
10 American Institute of Architects, “State and Local Green Building Incentives”, Local Leaders in Sustainability, 2011, http://www.aia.org/aiaucmp/groups/aia/documents/pdf/ aias076936.pdf Pg 7 & 9
11 Environmental Protection Agency, “Overview  of EPA’s ENERGY STAR Portfolio Manager”, http://www.epa.gov/climateleadership/documents/events/20131211_webinar_presenta- tions.pdf Pg. 12
12 Green Tech Media, “LEED’s Stunning Growth and What’s Behind It”, http://www.green- techmedia.com/articles/read/leeds-stunning-growth-and-whats-behind-it
13 Fisk, William. Health and Productivity Gains From Better Indoor Environments and Their Implications  for the U.S. Department  of Energy. 2000.  http://energy.lbl.gov/ie/viaq/pubs/ lbnl-47458.pdf Pg. 1
14 WHAT  OFFICE TENANTS WANT:   2013  BOMA  GLOBAL  OFFICE TENANT  SURVEY RESULTS. BOMA International. 2013.
15 WorldGBC, “The Business Case for Green Building”, pp. 76 http://www.worldgbc.org/files/1513/6608/0674/Business_Case_For_Green_Building_Report_WEB_2013-04-11.pdf
16 Carnegie Mellon, “Summary of Day lighting Studies”, 2004, http://www.bristolite.com/interfaces/media/Carenegie%20Mellon%20University%20Daylighting%20Study%202004.pdf  Pg. 2
17 WorldGBC, “The Business Case for Green Building”, pp. 67 http://www.worldgbc.org/files/1513/6608/0674/Business_Case_For_Green_Building_Report_WEB_2013-04-11.pdf
18 Winners: www.greenleaselibrary.com/winners.html
19 Green Lease Policies and Procedures. U.S. General Services Administration. http://www. gsa.gov/portal/content/103656
20 WorldGBC, “The Business Case for Green Building”, pp. 84 http://www.worldgbc.org/files/1513/6608/0674/Business_Case_For_Green_Building_Report_WEB_2013-04-11.pdf

Disclosure

The information in this document has been derived from sources believed to be accurate as of May 2014. Information derived from sources other than Principal Real Estate Investors LLC is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity.

Investments in real estate are subject to various risks including liquidity risk and other risks inherent in real estate such as those associated with general local economic conditions.

The information in this document contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any Investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular invest- ment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security.

Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions in this document.

All figures shown in this document are in U.S. dollars unless otherwise noted.

This document is issued in: The United States by Principal Real Estate Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission.

Principal Real Estate Investors is the dedicated real estate group of Principal Global Investors, a diversified asset management organization and a member of the Principal Financial Group®.

“The Principal Financial Group” and “The Principal” are registered trademarks of Principal Financial Services, Inc., a member of the Principal Financial Group.