AMB's Gene Reilly

GlobeSt.com: Talk a little about AMB's history with sustainability.

Reilly: AMB's headquarters is a 1920s-era pier building right off the Embarcadero. In the late '90s we began entitling and planning its redevelopment into office space. LEED standards didn't exist, but it was a very green building for its time. We're working now to get the building certified. Just to give you a sense of the systems we incorporated, we optimized natural light by using existing windows and cutting in new ones, a big component of certification. We have a lot of ambient ventilation and a water-source building-heat exchange system that uses bay water for HVAC. There's also high-efficiency lighting and an energy-management system. Again, these things were well ahead of their time.

That's one example of a project that happens to be our headquarters, but in terms of other practices, AMB has recycled for many years, we have a zero-waste-paper policy and our employees all have their individual plastic water bottles that we refill through a reverse-osmosis system. So sustainability has been part of our culture for some time.

GlobeSt.com: Let's talk about Savannah. How will it serve as a model going forward?

Reilly: It's very exciting for us. From this point forward, all our buildings will contain LEED standards and all will be submitted for certification.

GlobeSt.com: Does the degree of LEED depend on market or building type?

Reilly: LEED is built on a scale, and you pile up points for incorporating various types of specifications. You also earn points for certain types of construction practices--how you handle waste and how you source your product. So it's a fairly broad assessment of the development overall. But LEED is geared more for office buildings, so we're working with an architect in New Jersey and with the National Association of Industrial and Office Parks to adjust the certification process so distribution buildings are assessed more accurately.

GlobeSt.com: So what's so special about Savannah?

Reilly: We'll have T5 florescent lighting with motion detectors throughout the building. These fixtures are two times as expensive as ordinary halide lights, so there's a significant increase in initial cost. But there's also about a 30% savings in electricity, and they have a life span of about 50% more than traditional lighting. In this particular building, all of that amounts to $100,000 in electricity savings. It's about the equivalent of the electricity you'd use to power 120 Savannah homes.

In terms of water usage, we have low-flow plumbing fixtures and we eliminated the irrigation system entirely. We use indigenous plants that don't require watering. It costs a bit more, and you have to be a bit more creative in terms of your landscaping. But these two measures have reduced water usage by two-thirds.

The roof is reflective TPO--thermo-plastic olefin. It's a white reflective roof that's also a bit more money but it reduces ambient temperature significantly. This has a couple of potential consequences. If it's an unconditioned warehouse, which is the likely case, you'll have a lower temperature by between 5 and 10 degrees. Secondly, in the office section of the warehouse, you're reducing what they call the heat-island effect. If there was a massive, 340,000-sf black roof surrounded by asphalt, the office pod of the warehouse would be very expensive to cool.

Also, we decided to pave the parking, truck-turning and loading areas with concrete as opposed to asphalt, which will reduce the use of oil-based products, last longer and reduce the heat-island effect.

GlobeSt.com: Anything else?

Reilly: I mentioned earlier that construction practices are important to LEED assessment. About 50% of the materials in this project are sourced from the local area, which is defined by LEED as less than 500 miles. If you're trucking product from 500 miles away, that truck is emitting fumes all the way. About 20% of our materials are made from recycled product. Finally we're handling waste much differently. We've cut back significantly on the amount of construction debris that ends up in landfills.

GlobeSt.com: Was there a ceiling on how much you'd spend on green for a spec facility?

Reilly: It's a good question. Actually, this building will cost 3% more on construction and around 2% over the entire project when you add land and soft costs.

GlobeSt.com: That's right in with the averages we've seen. But how do you expect the market to respond?

Reilly: It's all so new that there are no comparables to suggest that a Silver LEED building will get rents that are 2% or 3% higher. But here's what we do expect. There are certain tenants that are demanding LEED standards, and we expect that if you don't have those you won't even be invited to their party. Also, sophisticated tenants understand the ongoing benefits. In an industrial building, they're paying for the electricity. We have to educate them and we've got to believe that they'll make that connection and that we will in effect get more rent than we otherwise would have.

But the following point is the most important. We think that in the future--and it's the not-to-distant future--the metrics by which these facilities are judged by tenants are going to change. Whether it's Silver or just basic LEED certification, it's going to come into play for more and more tenants.

Distribution buildings are often judged on whether they're obsolete or not by their clear height. They're higher now. If I build a 30-clear rather than a 24, it'll cost me more but more tenants will consider it and I'll probably get more money. It's the same thing with incorporating LEED standards. Eventually, not having those standards will be a component of obsolescence.

GlobeSt.com: How much could the rent go up?

Reilly: That all depends on the immediate competitive environment. Theoretically, where there are no other choices, the rents may more-than offset the costs. In markets where there are many LEED choices, not as much.

But here's what I'm confident about: The investment in this building--and soon in many others--will come back to us in spades. It may not be just in rental rate. It might be that our building leases up faster than the other guy's, and carrying an empty building costs money.

GlobeSt.com: But are the green upgrades reflected in your asking?

Reilly: Our asking rate--four bucks--is reflective of that, other specifications we put in and the market. So there's a balance. We can't ever get too far out of whack with the market. In Savannah product can range from $3.50 to more than four bucks a foot, but that would be product geared for much smaller tenants. For comparable buildings we're definitely at the top end of the market.

GlobeSt.com: Will tenants go for green in this capital climate?

Reilly: We invest in more expensive industrial markets. Consequently, our tenant mix ranges from very large corporations that like working with us because we're active in 14 different countries to very local, third-party warehouse companies that are frankly less likely to adhere to green standards. So there's a continuum. Those large companies have sustainable initiatives. I'm confident we'll get a payback from those users. The local warehouser is likely to be storing product on behalf of a larger company. And these big companies are asking them to provide green buildings. So we think that, even in this challenging economic environment, there will be a lot of acceptance. There's no question that some cost-conscious tenants won't pay anything for this. Our bet is that more will pay than not.