Greening the Retail Sector

Green buildings are growing by leaps and bounds. Between 2005 and 2006, project registrations in major LEED categories grew by more than 50%, while project certifications were up 67%.

The retail sector, however, has been slow to adopt LEED. Of the nearly 6,500 projects registered for certification through the end of April 2007, fewer than 100 were retail projects. Of the more than 800 LEED certified projects to date (through mid-June 2007), only 11 retail projects received certification under the LEED for Commercial Interiors (LEED-CI) rating system and only four retail developments under the LEED for Core and Shell (LEED-CS) rating system. Only 50 retail projects had received certification under all systems.

The U.S. Green Building Council is hoping to boost its retail numbers with two new initiatives. The first is LEED-NC for Retail, which was recently released in pilot program. Currently, the USGBC is looking for large retail chains and major developers to partner with in order to test LEED for Retail standards. A companion rating system, LEED-CI for Retail, is in draft form for comment and should enter a pilot evaluation stage later in 2007. The second initiative is the volume build program, which allows companies to certify credits for all building aspects that don't change (such as interior layout), allowing them to concentrate on aspects that do change, such as site factors.

The cost of greening the retail sector

The key issue in all green building is real costs versus speculative benefits. A retailer or developer has to make an investment in green building and certification with the hope of getting significant return over time. Right now, the market opportunity is for innovators and early adopters.

Moreover, getting LEED certification for a retail development could initially cost more, and retailers and developers may not be able to recoup those extra costs via higher rents or faster lease-up. A developer may realize some marketing and public relations benefits, but assigning a value to those items is purely subjective. The greatest benefit may lie in a faster entitlement process and perhaps reduced development fees.

In general, increases in construction costs are only incremental for basic LEED certified (around 1-2% for LEED Silver and 2-4% for LEED Gold), and most developers find that these premiums come down as they gain more green project experience, but for smaller retail projects, LEED certification costs can be a barrier. Volume retailers such as Home Depot and Wal-Mart, and retailers with many small buildings such as bank branches and Starbucks stores, should be able to benefit from the USGBC's volume build program.

The irony in green retail is that it's mostly the developer who pays for green features, but it's the tenant who benefits, through lower operational and common area maintenance costs and through the center's advertising and promotional efforts. Over the long run, lower operating costs for energy, water, and waste disposal should be reflected in higher rents; at this time, it's typically not possible to get rent increases. There is a need to overcome this disparity with creative rewriting of retail leases.

Some developers want to write tenant guidelines that ask or require tenants to use sustainable design and construction measures in their own space fit-outs. In LEED, a set of strong tenant guidelines qualifies for one credit toward certification. If the guidelines are not going to be required, then developers need to engage in a strong tenant education program.

What's driving the green retail market?

The number of large retailers announcing green building initiatives has accelerated in 2007 and should reach a crescendo in 2008-2009. In my opinion, this prospective surge can be attributed to several factors:

1. Consumer demand. Consumers will soon expect their entire shopping experience to be green, and they may start taking their business to retailers who are leading the way in green.

2. Entitlement process. Many locales are beginning to offer preferential treatment to development projects that promise to achieve LEED certification. This treatment can take the form of “top of the pile” priority processing (e.g., Chicago, San Francisco) and density bonuses or reductions in certain other requirements. Currently, some 20 jurisdictions offer some type of development incentive for green buildings.

In the private sector, more than 350 U.S. mayors have signed up for the Mayors Climate Change Initiative, committing their cities to the reduction of carbon dioxide emissions. Down the line, it is not unreasonable to expect these same mayors to start forcing the private sector to do its part.

3. Cost offsets. There are opportunities for reducing initial development costs by reconfiguring shopping center layouts to recover and reuse rainwater. Not all jurisdictions will go along with reducing fees, but it could be a bargaining chip in future negotiations.

4. Tax incentives. In 2005, the Nevada legislature approved a 50% property tax abatement for 10 years to projects that achieved a LEED Silver rating. If the average property tax is 1% of value, then the abatement is worth 5% of project costs, more or less. This law set off a gold rush in Nevada that resulted in a severe drain on local finances, so the legislature made major modifications to the law in 2007.

Oregon and New York are among several states that have state tax credits for green buildings that achieve at least a LEED Silver rating. In the Oregon case, the incentive is based on sf of project area, so that an efficient developer can see a definite benefit equal to the costs of greening a project.

5. Renewable energy incentives. More than 20 states offer solar power incentives. The 2005 Energy Policy Act (as amended in 2006) offers a 30% federal tax credit for systems placed in service through the end of 2008. There are also local utility incentives, state tax credits, sales tax abatements, and accelerated federal deprecation for installing photovoltaics. This past April, the Kohl's chain committed to converting more than 75% of its California locations to solar power.

6. Branding and marketing. Green buildings and solar power offer retailers the opportunity to be part of a thoughtful branding and marketing strategy. But beware: the public is starting to catch on to “greenwashing.” Retailers must have a strong corporate commitment to sustainable strategies before announcing specific elements.