Green v. Brown
You might call it an Olympian tussle or at least a throwback to the old camp Color War games—Green versus Brown. And it looks more like a no contest, the way the battle is heading.
Given soft office vacancy rates across most markets, it’s pretty clear we don’t need to see new office construction, and absolutely none in most suburbs. But in some major cities like Chicago, New York and Washington building goes on and these projects should be successful, leaching prime tenants out of last generation competition. Even some impressive towers built 20 or 25 years ago, clad in seemingly impervious granite and limestone, could be vulnerable.
You see developers are now full bore on the green bandwagon since green buildings are now catching on—not because tenants want to be environmentally correct. Sure these buildings are more energy efficient and their use of more natural light and fresh air flow systems arguably create better working environments. But the new more flexible space options allow companies to cram more workers into the space they lease. They may pay more on square foot basis, but they will be able to lease less square footage and their electric and water bills will be lower. The green calling card helps recruit young talent, who don’t know from working in big offices—and the fresher air makes working at closer quarters more tolerable. But lowering carbon footprints is not driving the corporate agenda—as usual it’s all about bottom-line dollars and sense.
The new green buildings will increasingly set the high rent price point in office markets, ratcheting down what has been prime A space into somewhat lesser status. Even for relatively new, non-green buildings retrofitting brown into green is a problematic undertaking, involving expensive gutting that just may not pencil out. Sure you can put in new light fixtures and light bulbs to reduce electric bills, but companies want designs that allow moving walls or workstations without tearing down dry wall or bringing in a squad of electricians to rewire the ceiling. They want to be able to push around modular furniture in new configurations when they have a bunch of new hires, and plug and unplug data ports as needed without major sweat or expense. The game of increasing LEED points by adding bike racks in the garage just will not cut it.
Of course, many tenants will make do without green space—just they will expect to pay less for brown. As a result, owners who paid Class A prices a few years ago may have to settle for less on future trades than they had calculated on their exit cap rates going into the purchases.
Increasing demand for office space could help ameliorate the outlooks for brown owners. Strong demand always blurs the differences in space and allows landlords to command more. But office demand growth trends appear less than rosy as more companies—big and small—realize they just don’t need as much space in the new world order and the economy looks like it will be chronically compromised. And if you own a B-/C office buildings, the game looks more and more like a loser—no medals for you.