Dialogue about “Green Value” with CEO continued

We recently received the following email:

Dear Sir,

I read with interest your Guest Column in the July 2010 edition of “Property Investor Europe” titled “Obsolescence issues mean green real estate no longer an extra cost, but extra value”.

I am a strong believer of the sustainability approach in real estate (my company is an active member of the GRI CRESS discussions, member of the German Green Building Council (DGNB), and a founding member of the International Sustainability Alliance), however I believe it is essential to react to wisdom which is unfortunately put forward by a number of academics. 

1- The 40% number

This number has been put forward among other by the UNEP and is quotes by all the militant of the green real estate scene. My aim is not to contradict the number (I must confess that I have not seen so far any scientific justification for these numbers, I am happy to be a believer), but to highlight the danger of using this number randomly. You implicitly imply when you use this number that it should be possible to reduce greenhouse gas emission, as well as energy consumption solely by working on buildings. It is (I hope) obvious that if building contribute that much to greenhouse emission, that’s because 40% of human activity is taking place in buildings (and I have to confess that this 40% is as random as the previous one). The impact of energy consumption and greenhouse effect is as much if not more linked to the usage of the building as to its conception.

Considering that real estate ownership is heavily fragmented, that the stock owned by institutional owners (the more likely owners to react quickly) is rather low, and that moreover the timeframe of refurbishment of the existing stock is to be accounted in decades rather than years (by opposition for instance to the automotive stock), it is dangerous to pretend that global warming can be effectively addresses through sustainable real estate. At the current pace, I do not believe than more than one or two percent of the stock is renewed annually in Europe. No need to say that this is alone is far from being a solution to our problems. Putting a strong emphasis on the negative impact of real estate does not really help in that context.

2-      Green buildings create value.

In order to sustain very « firm conclusion » with regard to the value creation of green building, you rely on a very well marketed study of Mr. Piet Eichholtz. This study, in reality does not demonstrate more than the fact that a new building is worth more than an old one (whether in rental value or capital value, for more detail, please read  http://alstria.blogspot.com/2010/03/ceteris-paribus.html#more) as a matter of fact this study conclude itself on page 16 « The results suggest that the LEED rating has no statistically significant effect upon commercial rents » which you would agree does not suggest such a “firm conclusion”.

The main problem of this study and others that you also publish on your blog is that they all start from an existing conclusion (green building creates value) that they then try to sustain with statistical data. The reality cannot be further away from this conclusion. A green building does not create more value. The introduction of green building is accelerating the obsolescence of non green building, and as a consequence, reducing the latter value. It is urgent for academics to stop speaking about a theoretical green premium, and to focus on the reality of the brown discount.

The main risk you are running is that market participants will never adhere to a conclusion that all their practical experience proves wrong.  Disregarding some limited exception of “showcase” buildings (like the new planned Siemens headquarter in Munich), there is no prove for market participant of higher returns achieved on the long run from a green building. It would however be much easier to demonstrate that return on investment would be on the long run lower for a non green building

As a result of your approach a large number of real estate players are using the sustainability theme as a pure marketing tool. It is easier to raise money (especially with retail investors) if you are “green”. More and more real estate players are considering that green certification not as a tool, but as an aim (a building need to be “certified” but no one really knows why).  Two recent studies (unfortunately not available on your blog) have shown that certification does not guaranty anything (see the USGBC study, and the MIS-LEED-ING analysis). There are LEED platinium buildings that are less efficient, than poorly constructed building in the 70th … Most of the existing certification process use theoretical models which are far from reflecting the real usage of the building, therefore under or over shooting. Moreover, none of the certification system will challenge some fantasy design decisions. I am always amazed to see theses large glass building certified, under the consideration that double (and sometime triple) glaze façade is more efficient than single glaze.

3- The sustainable building can be summarized by energy efficient.

There is a growing trend which tend to translate sustainability in real estate into energy saving. More and more press articles tend to confuse energy efficient assets with sustainable assets (the webcast of Property Finance Europe on the matter being a case in point). Your own blog being also a nice illustration of what I refer to. While you are called “sustainable building” you mainly focus on energy issues. The concept of sustainability is much wider than the sole energy consideration. Houston and Dubai, to quote two non European cities are loaded with empty sustainable buildings. One should keep in mind that the most sustainable building of all is the one you did not had to build.

As far as i know none of the existing certification label does take into consideration what is in my view the primary question. Is the building needed in the first place? Neither does certification schemes considers the long term sustainability of the economics of a project. None ask whether it is best to build a new building or just refurbish an existing one. It is unfair however to question developer or property companies view on these questions as they relate more to overall planning considerations than single asset approach. A striking example of this phenomenon is the city of Frankfurt which despite having one of the highest vacancy rate in Europe have still delivered more than 800,000 sqm of building right for new office building (or round about one year of take up). Within Frankfurt itself, the new ECB headquarter, which will be without a doubt certified as sustainable building, is the paramount example of what should have never been built (for more details see  http://alstria.blogspot.com/2009/10/two-fridge-syndrome.html) 


At the end of the day, I am still convinced that we sit on the same side of the table, and that we pursue similar goals. I am on a constant dialogue with my teams, our tenants, local developers, and many other players in the German real estate industry. People interested in sustainability topic are still a minority. For many players this is above all a big marketing machine, as they can see on the ground the promises are not delivered. In order to be able to convince the majority of them of the need to focus on these issues, I believe it is of paramount importance to reflect what is happening: Sustainable real estate will sooner or later not be an option, but a necessity. There is no added value to be expected from it. There is however clearly a major risk in ignoring it.

Olivier Elamine

CEO alstria office REIT AG



We made the following reply:

“Dear Sir,

 Thank you for your assessment of the article published in “Property Investor Europe” in July 2010. It allows a fruitful dialogue on the strategic theme of sustainable real estate. I take the three parts of your argument.

1 – The famous 40%.

I mentioned in the article that in Europe, real estate represents 40% of energy consumed and 36% of greenhouse gases emitted. These figures come from the Directorate General for Energy and Transport of the European Commission and more specifically the presentation made by Michaela Holl, “EU Energy Policies for Buildings” (first slide of page 2) at a seminar in Brussels October 14, 2009, organized by the Task Group 66 “Energy and the Built Environment” of the International Council for Building (CIB) which I am the coordinator.

 I note that these figures are also valid for the U.S. if I believe the intervention “U.S. Policies and Concepts Supporting Improved Energy Efficiency in Buildings” made by Shyam Sunder (National Institute of Standards and Technology – NIST – of the Ministry of Commerce) at the same seminar (first slide of page 4). But as you pointed out, this is not essential.

 You think then that I hear as it is possible to reduce energy consumption and emissions of greenhouse gases simply by improving buildings, thereby neglecting the way they are used later. I agree with you on the fact that performance depends not only on the characteristics of buildings but also how they are managed and used. In partnership with several real estate professionals, I stated clearly in the recent article “Evaluate and ensure the green real estate value” (in French).
You indicate that finally we will not advance quickly with new buildings that represents each year 1 to 2% of the stock. I agree with you. The main issue is the ambitious renovation of existing stock.

2 – The green buildings create value.

You state that the study of Piet Eichholtz, Nils Kok and John M. Quingley merely demonstrates that new building is worth more than old building. That is incorrect, as the other two analyses that I quoted, that of Frank Fuerst and Patrick McAllister and that of Norm Miller, Jay Spivey and Andy Florance. It is interesting to note that these three studies using the same database real estate (CoStar), conclude in the same direction (an Energy Star® or LEED® office building tends to have a higher rent, occupancy rate and resale price) but differ on the figures.


 Why? Because each team built a mathematical model with “hedonic prices” which attempted, with varying success, to compare the certified buildings with uncertified buildings of similar characteristics (age of building, location, size, local market …).

 I agree with you that the green value will speak more about the (important) risk of devaluation of non green buildings than the better value of green buildings. You are right when you suggest that research must seriously analyse the future lower value of non green real estate. But recognize that it is the same valorization-devaluation phenomenon of real estate assets.

 Then I’ll join you when you say that many professionals are investing in green buildings for reasons of “marketing”, nobody “knowing really why”.

 I also agree that the certifications of buildings do not guarantee performance of operation and use. I put on my blog several studies that show, like that of O. Catarina and S. Illouz on HQE® (in French), that of G. R. Newsham, S. Mancini and B. Birt on LEED® or that of JM Zgraggen et alii on Minergie®.
I also note that the certifiers have realized and they have created the certifications “HQE® Exploitation”,  “BREEAM® in Use ” and “LEED® for Existing Building Operation & Maintenance” which relate to the operation and use.

3 –
The concept of sustainable real estate is just approaching energy.

Here you post a real danger. Although I spoke rather of quality energy-environment-health properties and I indicated that we must now also take into account the transportation of buildings users, we must pay particular attention to the socio-economic dimension of sustainable real estate.
The questions you ask are the strategic questions: Is it necessary or not to build this building? What is the economic viability in the long term? Should we build a new building or renovate an existing building? Like you, I know HQE® buildings that should never be built, particularly where they were.


As you say, ultimately we defend the same values and serve the same objectives. For us to take action, you as a professional, me as a consultant and teacher to convince market participants that, as you say, “sustainable real estate will sooner or later not be an option, but a necessity”.

Jean Carassus, consultant, Professor Ecole des Ponts ParisTech www.immobilierdurable.eu