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Tenant Demand for Green Space Explodes Across Canada

Green Building Retrofits

Part One – The Myth of the Split Incentive

 

By Scott Brooker

Much has been made when it comes to green building retrofits about the so-called “Split Incentive”. This a term bandied about, commonly used by landlords/building owners/managers, etc as a stumbling block to completing green building retrofits. The term refers to landlords completing work that would, for example, reduce energy costs for their tenants, but since, in most standard office leases, those costs are passed through to the tenants and the landlord pays the upfront capital costs and is left with no immediate financial incentive. However, I would argue that this lack of incentive is, in most cases, a myth.

In today’s corporate real estate market, “Green” is the new standard, and when building new it makes little sense to build anything that is not third-party certified green. Simply put, otherwise you are building something that may appeal to only 75% of the market, and that number falling. However, the same approach is not taken in the existing building market. The problem is, the existing buildings are now competing with the new Green building stock, and are at a competitive disadvantage. The Toronto ‘AAA’ market is a prime example of what happens when you put yourself at such a disadvantage.

If we were to look back at the market to the completion of some of Toronto’s newest LEED towers, namely the RBC Dexia Centre, Telus House, PwC Building, and Bay Adelaide Centre we saw a migration of tenants from the traditional “brown” landmark buildings into the new green stock, with the likes KPMG, Fasken Martineau, Heenan Blaikie, and PricewaterhouseCoopers, leaving those traditional “brown” buildings to play catch up.

222 Jarvis LEED Retrofit

Beyond Toronto, we are seeing tenant demand for green space explode across the country. A good indicator of tenant demand growth is the increase in LEED-CI registrations, as this is strictly a tenant driven program.

Since 2007, LEED-CI registrations across Canada have grown by an average of 35% each year. Part of what is fueling this growth is the stance that many organizations have taken within their own corporate commitments and positioning statements. Most, if not all, Fortune 500 companies have made commitments to reduce their operational footprint and provide healthier workplaces for their employees, and especially within the corporate services industry (i.e. banks, consulting, law firms, etc.) typically within this industry it is their office space that has the largest environmental impact. Therefore, to live up to those commitments, they must examine opportunities to create a more efficient work environment, and if that opportunity does not exist within their current accommodations, then they are effectively forced to look at other opportunities within the market to achieve those objectives.

Canadian statistics show, that green buildings do have lower vacancy than the traditional market. In a report published for fourth quarter 2010 by the Cushman & Wakefield Ottawa Green Real Estate Practice Group, statistics showed that throughout 2010 in Ottawa, direct vacancy in green buildings averaged 1.2% lower than in the traditional buildings market. As any landlord or leasing agent will tell you the most profitable tenants, are the ones you already have.

UBC Claims Greenest Building in North America

When looking at the ROI for retrofitting a traditional existing building into a green building, a broader view is required to realize the true value of such a retrofit. How will creating a green building, or not, affect the competitive advantage, and in turn occupancy and overall value, of your building? That is where the landlord’s incentive really lies.

Scott Brooker is a leading Green Real Estate expert. He is a founding member of the Cushman & Wakefield Ottawa, and a founding member and regular presenter of the Better Buildings Breakfast Series. He was a member of the NRCAN/Canmet Energy Commissioning Guidelines for Sustainable Reporting Steering Committee and currently sits on the Canada Green Building Council – Ottawa Region Chapter Existing Buildings Committee. He works as a commercial real estate agent, integrating sustainability into the traditional corporate real estate process, for Cushman & Wakefield Ottawa.

Related Article: Green Leases For Buildings Lead To Better Tenants and Access to Incentives

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One Response to “Tenant Demand for Green Space Explodes Across Canada”

  1. I am Curious says:

    How come when these articles are written there is never specific facts on how much energy costs are p.s.f.? Most smart landlords are upgrading the envelope and windows, then marketing the energy cost p.s.f to prospective tenants. Do not need Leeds to do that.

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