US privately-held developer Hines is a major player in the market for sustainable property in the US, Europe and emerging markets. Jerry Lea, head of sustainability initiatives, tells Shayla Walmsley why pragmatism pays
Gerry Hines started his firm with a mission to create healthy buildings. But while the initial impetus may have been ethical, the key driver was demand.
Before the financial crisis, says head of sustainability initiatives Jerry Lea, there were signs that demand was shifting. "You won't see it so much now but during the economic boom, when it was hard to hire and keep good people, graduates, especially, would ask about sustainability," he says. "Before, tenants and clients were interested in energy efficiency but didn't need a certificate or a plaque. For them, it was just a good business decision. There was a focus on issues such as natural light and better air quality, because it provided a more productive environment for employees."
If there's still appetite on all fronts for sustainable real estate, there has been a shift in the past few years towards formalising it. "Now companies need to have LEED to prove they have a good building. Change has taken place. Companies want to tell a good story," he says.
Given the market imperative, the industry needs to be clear about the return-contours of sustainable real estate - in other words, what does and doesn't generate returns. Lea claims that there is little evidence, for example, that energy-inefficient buildings have significantly higher vacancy rates than efficient ones.
"There are no analytical data to support the assumption that energy-efficient buildings have low vacancy rates," he says. "But Class A buildings will address energy efficiency and you'll get more rental from a Class A building. Energy efficiency is one component of a Class A building, and it means you can lease it quicker, to higher-grade tenants, and for a higher rent."
Of course, Lea says, he would like to see in the US what appears to be happening in the Netherlands, where owners are finding it difficult to let energy-inefficient buildings - just as he would welcome a more stringent, even mandatory, scoring approach in the US. But neither is imminent.
"We have energy-efficient buildings. We'd score highly, so it would differentiate us from the competition," he says. "But you have to take into account that many tenants are smaller, less sophisticated and not necessarily educated in sustainability."
"At the heart of sustainability is the concept of doing the right thing - being a good corporate citizen," says Lea. "The question is how far you take it."
Hines developments in almost all cases involve a partner with a larger percentage of ownership - often up to 80%. Among its partnerships to date is the Green Development Fund set up in 2006 with CalPERS - a frequent partner - to invest in LEED-certified office. Lea says the partnership model requires that "we have to make sure they're comfortable with the money we're spending".
In the US, for example, Hines doesn't use solar panels, except where there are area rebate programmes, because the capital costs are high and the payback doesn't justify it. "I could take the money to the bank and get a better return," says Lea. "Especially with the quantity you'd need to incorporate into our kind of buildings in a central business district, there's no payback without incentive programmes."
Hines hasn't ruled out solar energy per se, though. Lea points to rapidly changing technology that could make it commercially viable. "We're monitoring it," he says. "As soon as it makes sense to use solar, we'll be doing it. But it will have to mean it makes sense to raise the rent."
When it comes to the debate over new build versus retrofitting, for example, Lea says simply that there needs to be a business case for whatever the company does. "It has to pay off over a reasonable period of time," he says. "There's been a major shift in taking good-quality older buildings and recommissioning them - renovating them, making sure the operating building systems are at their peak, upgrading plumbing systems and recladding, for example."
The company takes the same pragmatic approach in its operations in emerging markets. Hines is a member of green building councils in India and Brazil, for example, but doesn't expect the same standards to apply in those countries as in Europe or the US. Earlier this year, the firm signed an agreement with the São Paulo State Education Department for part of its distribution facility just outside the capital. It follows 14 industrial leases it signed last year as the largest industrial developer in the country - most of it in partnership with CalPERS.
"In emerging markets we have to be careful," says Lea. "There might be technology available here [in the US] so there's a question about how far we can push things to make a better-quality building. But the point is always to have a better building than our competitors' buildings."
For a developer operating across markets, the absence of a global standard might be considered a significant handicap. Yet Lea claims that it is not necessarily difficult to work with a number of national and other standards. "There are a lot of standards and some have more value and credibility than others," he says. Attention in the US is focused on LEED, for instance, because it has most credibility with tenants and investors.
In any case, he points out, there is no alternative. "It's not as though there's a Hines standard you can take from country to country. You take what's there and build the best building you can."