The Green Advantage: Analysis of National Landlords\' Committment to Sustinability

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ExECUTIvE SUmmARYCONTENTS

Executive Summary

1 Introduction

3 In the Public Eye and in The Bank

4 Overview of Survey Results

5 Analysis of Survey Results

The recent global economic downturn did not have the

expected negative impact on consumer appetite for green

products and services, and this continuing consumer demand

is a driving force behind the growing number of CEOs in all

sectors who feel that sustainability issues will increasingly

become integral to all aspects of their business. This thinking

is in turn becoming the market force, driving commercial

landlords to increasingly view green features as a necessity

when it comes to attracting and retaining these sustainably-

minded businesses as tenants, although the reality is that

many landlords do not yet have much to offer in the way of

sustainable product and are only just beginning to take their

portfolios in this direction.

Cushman & Wakefield, Ltd. , Brokerage 33 Yonge Street, Suite 1000 Toronto, Ontar io M5E 1S9 Tel (416) 862-0611 www.cushmanwakefield.com

THE GREEN ADvANTAGEAN ANALYSIS OF NATIONAL LANDLORDS’ COMMITMENT TO SUSTAINABILITY

INTRODUCTION: THE GREEN ADvANTAGE Consumer demand for green products and services was not set back by the recession, despite what common wisdom might have predicted. And just as it is becoming virtually impossible to find a retailer that doesn’t sell its own version of the now ubiquitous re-usable shopping tote, it would be virtually impossible to find a new construction building that doesn’t list numerous green features among its selling points.

In fact, green features are becoming table stakes, and landlords are increasingly recognizing their importance to staying in the game. And, if not a game, commercial real estate is a competition, and the current perception seems to be that whoever holds the property with the most green features wins.

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That is how commercial real estate landlords across Canada seem to view the situation, at least. In late 2010, Cushman & Wakefield conducted a Canada-wide survey of landlords in all commercial real estate asset classes and the vast majority—71.4%—felt that sustainable green features aided in the marketing of their properties, while 85.7% believed that energy efficiency specifically was a driving factor influencing tenancy occupancy decisions in their portfolios. While there will always be a segment of tenants for whom the lowest cost option is more important than the greenest one, 40% of landlords surveyed believed that sustainability issues would be very important to their company’s future performance—there is clearly sense that the segment of tenants whose stakeholders (whether employees, clients or shareholders) place value on sustainability issues is growing, and that landlords need to address these issues in order to remain competitive.

Landlords are right to take this view. For “Emerging Trends in Real Estate 2011”, PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI) polled more than 600 real estate experts and found widespread agreement that green buildings will become increasingly sought after as tenants look to cut operating costs and back up corporate environmental and social responsibility goals. The majority also described sustainability issues as “unavoidable” for the sector.

This expectation is reinforced by the CEOs who were interviewed as part of the report “A New Era of Sustainability—UN Global Compact-Accenture CEO Study 2010”. According to this report, 96% of CEOs across the globe believe that sustainability should be integrated with operations. In fact, the CEOs in the Accenture report view the coming decade as one which “could usher in a new era where sustainability issues are fully integrated into all areas of business and market forces are truly aligned with sustainability outcomes.”

Cushman & Wakefield conducted a Canada-wide survey of landlords in all commercial real estate asset classes and the vast majority—71.4%—felt that sustainable green features aided in the marketing of their properties, while 85.7% believed that energy efficiency specifically was a driving factor influencing tenancy occupancy decisions in their portfolios.

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IN THE PUBLIC EYE AND IN THE BANk Public perception is more important than ever to businesses finally emerging from a devastating recession that also saw many major companies suffer public image losses almost as significant as their financial ones. So it is not surprising that strengthening brand, trust and reputation was cited as the strongest motivator of their sustainability undertakings by 72 percent of respondents to the Accenture study. In addition to repairing public image, a company’s approach to issues of climate change and social responsibility is being recognized as a key driver to attract and retain talented employees; and businesses that locate in efficient office towers experience reduced absenteeism and turnover. The chart below highlights some key factors that drive occupancy decisions.

These businesses also, according to the Green Value study developed by Cushman & Wakefield’s Valuation Group, report significantly lower energy costs, and overall operating cost reductions of anywhere from 25 to 50 percent compared to conventional buildings.

In another examination two years ago of new downtown Class “A” buildings in Toronto, Cushman & Wakefield found that new buildings that were being designed to achieve Leadership in Energy and Environmental Design (LEED) Green Building status were projecting lower operating costs than their older counterparts. With further in-depth analysis and modelling, it was determined that the lower operating costs were directly attributable to the LEED components of the buildings.

Cushman & Wakefield determined that these buildings, by aiming for LEED certification, would provide optimal energy performance through reduced energy consumption including: lower lighting

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levels, sustainable material selection, highly controllable lighting and temperature, state-of-the-art electrical and mechanical equipment and EnergyStar appliances. Water use reduction would also provide savings through recapture techniques and low-flow faucets, toilet and urinals.

With the mounting evidence of such results, businesses are increasingly recognizing that the operating and human capital costs savings generated by locating in “green space” are both real and worth investing in.

OvERvIEW OF SURvEY RESULTS This is the first year for the Cushman & Wakefield Landlord Sustainability Survey, a non-scientific survey of significant Canadian landlords to gauge both current practice of and attitudes toward sustainable practices in commercial real estate. Respondents to this survey came from the executive suites of Canadian landlords of both small (up to 2 million square feet) and large (2 million square feet or more) real estate holdings in all asset classes.

Although the sample size was small, Cushman & Wakefield believes the results of the survey accurately capture the trends and attitudes of the community as a whole, as they confirm our observations based on our interactions with tenants, landlords, developers and investors over the course of the past several years.

Cushman & Wakefield intends to conduct this survey annually so that we can report on trends and the evolution of sustainability within the commercial real estate industry.

This inaugural survey revealed interesting results that point to where sustainability issues are headed in Canadian commercial real estate, what is driving them there, and what may be holding them back.

• 91.7%ofrespondentssaidthattheirfirmswerepursuingsustainabilityinitiativesaddressingenvironmental, social or governance issues. But only 50% ranked themselves as an 8 or 9 on a scale of 1-10, where 10 indicates a high level of knowledge and expertise concerning the application of sustainability principles to commercial real estate—no respondents ranked themselves as a 10.

• Offsettingtheirlackofinternalexpertise,60%ofrespondentshadhiredengineerstoassistwiththeirsustainability related efforts, 60% had hired architects, 46.7% had hired sustainability consultants, and only 13.3% had not enlisted any external expertise.

• 50%ofrespondentssaidthathavingsustainableorgreenfeatureshadapositiveimpactonbothgross rental rates and vacancy rates, but 21.4% disagreed, saying these things had no impact. The remainder, 28.6%, were unsure.

• 33.3%oflandlordswhohaveholdingsacrossCanadasaidtheyexperienceddifferentdemandlevelsfor sustainable or green features from tenants based on region and 18.2% said demand levels varied between suburban and urban properties.

• Only18.8%oflandlordssaidtheircompanieshadpreviouslyproducedaCorporateSocialResponsibility (CSR) or sustainability report, although 40% said they plan to publish a CSR or sustainability report for either the 2010 or 2011 fiscal year.

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• 78.5%ofrespondentsfeltthateco-labellingcertificationssuchasLEEDandBOMABEStwould be more or much more important to their company’s success over the next 5 years. No respondents felt it would become less important.

• 57.1%ofrespondentsbelievedthatLEEDwouldbecometheleadingstandardagainstwhichcommercial properties will be measured in the future.

• 28.6%ofrespondentscurrentlymeasuretheircarbonemissions,butonly14.3%havesetcarbonemissions reductions targets and only 7.1% make those targets and/or results publicly available.

• 28.6%ofrespondentshadusedREALpac’sGreenLeaseguideorsomethingsimilartostructureleases; 80% said they would consider using green leases in the future.

• 71.4%ofrespondentsestimatedtheirsustainabilityrelatedcapitalexpendituresoverthenextfive years would represent 1-25% of their total portfolio capital expenditures.

Interestingly, over 40% of landlords surveyed believe that they will receive a greater than 10% internal rate of return on sustainability related investments.

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ANALYSIS OF SURvEY RESULTS It seems clear that landlords are anticipating changes in the industry with respect to sustainability over the next few years—based on their self-reported current practices and attitudes, it is also clear that these changes will need to be significant if they wish to meet the growing sustainability demands of the marketplace.

MostlandlordscurrentlyreportthattheylacktheC-suiteoron-staffknowledgerequiredtopursuesustainability initiatives. With 46.7% of respondents saying that they had engaged sustainability consultants in the past year, while 60% had retained architects and engineers for assistance with sustainability-related efforts, as a group, landlords seem to be just beginning to recognize and make use of the external expertise that is available to them. Still, these responses can be construed as an indication that those who recognize the limits of their own expertise are taking steps to close the knowledge gap within their businesses.

Meanwhile,despiterecognizingthechangesahead—fromtheincreasinguseofgreenleasesandeco-labelling to legislated public reporting—and starting to take steps in the right direction, most remain unconvinced that sustainability issues are really that important to their business.

According to the survey results, there are more landlords engaging in some form of sustainable undertaking and using these initiatives to market their properties than actually believe these initiatives are having a positive impact on vacancy or rental rates. This suggests that many of those who are “going green” are doing it because they know that to do so is becoming table stakes, but they still aren’t entirely convinced of the benefits to their bottom line, beyond putting them on a level playing field with everyone else who is doing the same thing.

This is likely to change. Although just 40% of landlords surveyed believed that sustainability issues within their portfolios will be important to the future performance of their companies, 93% of CEOs in the Accenture report stated that they believed sustainability issues would be critical to the future success of their business—based on this, it would seem that approximately 50% of companies in the future are going to be challenged to find spaces that meet their corporate sustainability standards. There is clearly a disconnect between CEOs looking to rent space and the landlords with the space to rent to them, and those landlords willing to make the knowledge and capital investments necessary to close that gap will find they have an advantage over their competitors—an advantage that will have a positive impact on their bottom line and finally convince them of the importance of sustainability to their business.

Those landlords who choose not to engage in sustainable initiatives may find it difficult to secure quality tenants for their properties—marquee tenants are looking for marquee-worthy buildings, as evidenced by Fortune 500 multinational PepsiCo’s decision in 2010 to sign on as the lead tenantatAeroCentreVinMississauga,Ontario.OwnedbytheHealthcareofOntarioPensionPlan, AeroCentre V features advanced building technologies such as under-floor air distribution to improve air quality and full height floor-to-ceiling vision glass to allow for natural light, features

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which improve occupant comfort, health and productivity. AeroCentre V also requires less than half of the energy consumed by traditional office buildings in North America, something that was critical to PepsiCo, whose environmental commitment features prominently on its public website and in its investor relations materials.

57% of landlords surveyed said that they believe government legislation to mandate standardized public disclosure of commercial building energy efficiency is less than four years away, with 35.7% expecting to see it in the next 2-3 years. Whether a company’s sustainability practices are self-reported or transparency is mandated by legislation—or enforced by a global network of Internet-enabled, self-appointed public watchdogs—they will be subjected to scrutiny, and real estate practices that don’t align with stated sustainability objectives will undermine both credibility and brand.

Inevitably, as a combination of market forces and legislation continue to push in this direction, landlords will be left with no choice but to make sustainability a part of what they offer—eventually everyone will “go green”, even if they are doing the right thing for the wrong reasons.

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This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete.

This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or develop-ments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete.

Published by Corporate Communications. For more market intelligence and research reports, visit Cushman & Wakefield’s Knowledge Center at www.cushmanwakefield.com

© 2011 Cushman & Wakefield Ltd. All rights reserved.

Cushman & Wakefield Ltd., Brokerage 33 Yonge Street, Suite 1000 Toronto, Ontar io M5E 1S9 Tel (416) 862-0611 www.cushmanwakefield.com

Cushman & Wakefield is known the world-over as an industry knowledge leader. Through the delivery of timely, accurate, high-quality research reports on the leading trends, markets around the world and business issues of the day, we aim to assist our clients in making property decisions that meet their objectives and enhance their competitive position.

In addition to producing regular reports such as global rankings and local quarterly updates available on a regular basis, Cushman & Wakefield also provides customized studies to meet specific information needs of owners, occupiers and investors.

Cushman & Wakefield is the world’s largest privately-held commercial real estate services firm. Founded in 1917, it has 230 offices in 60 countries and more than 13,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within five primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, investment banking, debt and equity financing; Client Solutions, including integrated real estate strategies for large corporations and property owners, Consulting Services, including business and real estate consulting; and Valuation & Advisory, including appraisals, highest and best use analysis, dispute resolution and litigation support, along with specialized expertise in various industry sectors. A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Center at www.cushmanwakefield.com

Cushman & Wakefield’s National Sustainability Practice

Group is comprised of industry thought-leaders in

commercial real estate sustainability initiatives, whose

objectives are to develop and lead the implementation

of programs, tools and best practices that promote

improved environmental performance. We aim to enhance

environmental efficiencies in building planning, developing,

operating and maintaining, to help our clients’ bottom line

and increase property value and tenant satisfaction.

As the world leader in real estate services, C&W provides

clients with the highest-quality services. Adding our

sustainability expertise to our service platform we are able

to support our clients’ social responsibility goals while helping

to minimize impact of business practices and operations on

the environment.

ABOUT CUSHMAN & WAKEFIELD’S SUSTAINABILITY PRACTICE GROUP

For more information, please contact:

Pierre Bergevin President & CEO 33 Yonge Street, Suite 1000 Toronto, ON, m5E 1S9 Canada (416) 359-2372 [email protected]