[getsmart-l] Operating Discovery Green will generate zero net greenhouse gases - But will tenants buy in?

[John O'Gorman]

http://www.theglobeandmail.com/servlet/story/LAC.20080129.PRGREEN29/TPStory/?query=buildings
Property Report: SUSTAINABLE BUILDINGS

Green it, but will they come?
With no preleases, B.C. trust finds unusual ally - an institutional investor - to get ecobuilding off the ground
PETER MITHAM Special to The Globe and Mail January 29, 2008

Tom Douglas believed it would be the greenest commercial building that Greater Vancouver has yet seen. There was just one problem: Trying to sell it to prospective tenants in a competitive office market offering cheaper options.

Discovery Parks Trust, for which Mr. Douglas is director of leasing, envisaged a 147,000-square-foot state-of-the-art office for its Discovery Place complex in Burnaby. Planned as the crown jewel of the 80-acre campus, the Discovery Green building would boast energy costs 79 per cent lower than conventional structures, among other environmental features.

But, despite the enthusiasm for all things green these days, the building didn't attract the preleases that Discovery Parks Trust wanted before breaking ground.

As a result, the developer took a novel approach to see its project proceed - Discovery Green was sold to an institutional investor, which is bearing the risk for leasing the building, but is enthused about having a stake in an environmentally progressive development. Construction began in late December with completion planned for 2009.

While previous Discovery Parks projects were built with the confidence that they would be easily filled, the scale and expense of Discovery Green, valued by the trust at $60-million, made the trust cautious. Some persistent vacancies at its properties on the University of British Columbia campus had only just been filled, and the board was reticent to see such an expensive asset with empty space.

"[It] represented a much larger risk than that which we have taken in the past," Mr. Douglas explained.

Rising construction costs also meant lease rates per square foot would have to be in the high $20s at least, significantly above the average for the market. "While we were confident that rates would rise, this still added to the risk," Mr. Douglas said.

So much so, that the recommendation to Discovery Parks' board was to secure commitments for 75,000 to 80,000 square feet, or about half of the building, before construction started. Yet, with working drawings drafted and tendering under way, the chances of finding a tenant prior to construction were slim.

"We anticipated that it could be some time before we could achieve that and start building the building," Mr. Douglas said, adding that large tenants are difficult to secure in Vancouver, where the standard suburban lease last year averaged 6,200 square feet.

Discovery Parks turned to CB Richard Ellis Ltd. for advice.

Tony Quattrin, CBRE's executive vice-president in Vancouver, suggested that a large institutional investor with a portfolio of properties would stand a better chance of absorbing the cost of any vacant space if the building wasn't leased up when completed.

Its prominent location on Canada Way just off the Trans-Canada Highway and the building's quality would have appeal, he said. (The Discovery Place complex was set aside by British Columbia in 1979 and now encompasses 500,000 square feet of technology-oriented office space.)

Mr. Quattrin suggested that Discovery Parks sell the project to an investor rather than prelease it. It would be sold for a discount because the buyer would assume the leasing risk, but at least the project would get off the ground.

"You'll get to build it, keep your team working, not lose your [development permit] and the buyer gets ... a building," Mr. Quattrin told the Discovery Parks board. "If they lease it up a little quicker and it meets their projections, then they get, maybe, a little better yield than if it were all [leased when they acquired it]."

CBRE approached several investors; the final decision came down to a handful of strong offers, any one of which could have succeeded, Mr. Quattrin said. The successful bidder was Morguard Investments Ltd. of Toronto, which acquired the project for an undisclosed price on behalf of a private client.

This arrangement is not necessarily the wave of the future, however; Mr. Quattrin described it as a "a very unique deal."

While most of Morguard's acquisitions are finished buildings, Greg Jones, director of asset management, office and industrial properties in Morguard's Vancouver office, doesn't believe leasing will be an issue with Discovery Green.

"Otherwise, we wouldn't have gone into it with such enthusiasm," he said, adding that the location and sustainability features are points in the building's favour. He expects net lease rates to run $30 to $35 a square foot.

Quite separate from any leasing considerations, Morguard is a supporter of the Building Owners and Managers Association's Go Green initiative, and was especially keen to take on management of a ready-made green building.

Under Go Green, Morguard plans to boost the operational efficiency and reduce the environmental impact of 66 per cent of its office portfolio by mid-2008, a project affecting 25 buildings totalling 4.6 million square feet. With Discovery Green, it has a building that's green from the start.

"We look at this as a tremendous opportunity to go to the forefront of green building," Mr. Jones said.

Operating Discovery Green will generate zero net greenhouse gas emissions; it will feature high-end mechanical and electrical systems designed to regulate the interior climate. Total energy costs promise to be 79 per cent lower than in a conventional building. Natural lighting and other elements integral to green design promise to create a more enjoyable working environment.

But will tenants buy in?

Yes, according to Mr. Douglas, who argues that green buildings provide overall value to tenants. The daily operating costs of a company that locates in a green building stand to be lower, he said, because of a healthier working environment.

"Most people in our industry talk about the savings of heat, light, whatever for the building, but the savings in that respect can actually be relatively low," he said. "The biggest saving, really, is the cost to the tenant for their employees. It's been proven that in a building that works efficiently and provides a healthy environment and provides an enjoyable environment for the employees, your absenteeism goes down, your turnover goes down, productivity goes up."

It's an argument Morguard accepts. 

While landlords have taken the lead in giving tenants green buildings to choose from, Mr. Jones believes tenants are also demanding more sustainable design when they're scouting potential space to lease.

"Clearly, in the market now, landlords and tenants are more conscious of the green aspect and they're moving forward on that front," he said.
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