The greening of retail: what's the bottom line?

Real Estate Weekly, May 9, 2007 by Ellen Sinreich

These days, you can't pick up a newspaper or magazine without seeing an article about green or sustainability. Green has even been referred to as the new "red, white and blue".

In every choice we make, from where we live to how we get around and what we purchase, there is now a green factor that can be considered. And if, as this author predicts, the war on global warming and the battle to reduce carbon emissions become even more compelling, the consumer is going to have a hard time justifying choices that do not have a green component.

Enter the retailer, who is fighting tooth and nail for market share. Green is now a way to appeal to the consumer and to stand out. Take Home Depot's recent announcement that it will introduce nearly 3,000 products that conserve energy and promote sustainability.

Look at Wal-Mart's highly publicized on-going investment of hundreds of millions of dollars to develop ways to increase energy efficiency and reduce waste.

But the economic benefits of high performance "green" real estate are much broader than those attributable to the green marketing campaign "de jure". In 2005 Wal-Mart opened two experimental stores in McKinney, TX and Aurora, CO to measure the potential benefits of implementing sustainable practices in its thousands of stores. Wal-Mart intends to save millions, if not billions of dollars with its green initiatives. Other retailers are sure to follow suit.

Retail real estate has lagged behind the office and residential sectors in terms of embracing green as a strategy to improve the bottom line. Developer-owners have not had much incentive to "reinvent the wheel" and incorporate high performance, sustainable characteristics into their projects. That is because it is typically the retail tenant, not the developer-owner, who absorbs most of the operating costs of a project, both directly, by paying for their own energy costs, and indirectly, by reimbursing the owner for other operating costs. Thus the retail tenant, and not the developer-owner, is the first in line to benefit from the savings generated by high performance initiatives.

Taking it one step further though, the less the retailer has to pay in the way of operating costs, the more it will be able to pay in the way of other occupancy costs, such as rent, which goes right to the developer-owner's bottom line. For the retailer, to the extent they can retain some of the cost benefits of reduced operating costs--the indisputable result of higher performing--or green--real estate, the better their bottom line will be.

One of the first "retailers" to recognize the potential benefits of high performance buildings was Pittsburgh based PNC Bank, which began building green bank branch locations in 2000 and has over 25 green branches completed and plans for 90 more.

Largely as a result of PNC Bank's campaign with the U.S. Green Building Council, which certifies sustainable real estate through its LEED (Leadership in Energy and Environmental Design) certification program, once a prototype retail location has been built and LEED certified, future prototypes will not be subjected to the same time consuming, costly LEED certification process as the first one in order to achieve LEED certified status.

PNC uses mostly prefabricated green components in its LEED certified branches, which take between 4 to 6 weeks less time to build than usual and generate minimal construction waste. The construction cost savings is estimated at $100,000 per branch.

Their windows are energy efficient, maximize daylight and provide insulation. The countertops, flooring, wall coverings and furniture fabrics are made with recycled content. PNC reports that it is saving 45% in operating costs in each of its LEED certified branches.

Wal-Mart is experimenting with various energy efficiency initiatives in its test stores in McKinny and Aurora, which were built with recycled materials. These initiatives include LED lights in exterior signs and interior grocery, freezer and jewelry cases; day lighting--which involves skylights and clerestories to direct natural light into the stores and dimming controls to monitor the natural light; altered HVAC and refrigeration systems; solar and wind power; water conservation measures, and composting and recycling waste. The lighting initiatives are currently being rolled out nationally. Altered HVAC and refrigeration systems have enabled Wal-Mart to generate about 70% of the hot water needed for its stores from heat generated by the refrigeration systems in these stores, thus potentially saving enough energy to provide hot water for 30,000 homes, not to mention the cost savings Wal-Mart will enjoy as a result.

On the developer--owner side of the equation, Forest City Enterprises recently won LEED certification for its 1.2 million square foot Mainstreet at Northfield Stapleton shopping center located on a runway of the former Stapleton Airport in Denver. Forest City not only won core and shell LEED certification for its construction of the center, but was able to persuade many of its tenants, including Bath & Body Works, Brookstone, and The Children's Place, to incorporate sustainable elements in their stores by putting together a detailed "how to" manual and offering both cash and non-cash incentives.