Like it or not, environmentally conscious, or “green” principles have come to dominate the field of commercial real estate development and commercial mortgage lending. Green building and sustainable design are now the standard in new commercial construction and residential developments. And, with local and national governments getting greener all the time, look for energy and resource efficiency to become mandatory, with green mandates being placed directly into building codes. Funding sources such-as banks, Wall Street brokers, insurance companies and hedge funds, are following suite and these principles are rapidly becoming a part of the commercial mortgage industry.
The US Department of Energy’s Center for Sustainable Development recently reported that 40% of the entire world’s energy supply is used by buildings. That’s a huge number. And, in the United States, construction accounts for our largest manufacturing sector, representing a staggering 13% of US GDP and nearly 50% of total wealth creation. Even tiny percentage gains in efficiency can amount to massive over-all energy savings.
Both institutional and private lenders as well as the REIT, (Real Estate Investment Trust) hedge fund and private equity industries have all embraced the environmental building movement. Green is the color of money and green is the color of commercial mortgage construction lending now into the future.
Lenders love green construction because good for profits as-well-as being good for the planet. Energy costs money, resources cost money and cleaning up messes’ costs money. Saving energy, saving resources and sustaining a site all save money, during construction and throughout the operational life of the property. Lenders know that green means efficient and, when they evaluate a project for financing they want to be assured that the funds they invest will be used cost-effectively and that the building will be economically viable.
Environmentally sound buildings can cost substantially less to operate than comparable buildings that disregard such efficiencies and tenants and their clients report higher customer satisfaction rates when doing business in them. To a lender, whose capital is secured by the building, this translates into higher quality collateral and makes their investments more secure.
As a commercial real estate investment banking professional, I can attest to the fact that developers who choose designs that are not green will find it very difficult to raise capital or secure loan approvals for their projects. We are in the midst of a sever liquidity crisis; construction money is in short supply. Lenders are giving priority to green development leaving very little capital available for conventional construction.
The Federal Government’s LEED (Leadership in Energy & Environmental Design) rating system awards silver, gold and platinum certification to buildings that reduce waste and save energy and lower costs. LEED certification is almost (although not officially) a mandatory requirement in-order-to get a big construction project funded today.
Being green is no longer just the passion of the activist anymore; it is the new emerging standard in commercial construction as-well-as commercial real estate finance. Investors and developers who need commercial mortgages will do well to pay attention to this trend.