'Green' is Good, But it Faces Challenges

SAN DIEGO—Although the industry is moving in a “green” direction, the jury is still out on whether a LEED-certified property has more value than one that's not, Vivek Sah, associate professor at the School of Business Administration at the University of San Diego and a member and faculty advisor at the Burnham-Moores Center for Real Estate, tells GlobeSt.com. Sah was recently granted tenure and has been promoted to the rank of associate professor at the SBA. We spoke exclusively with him about his areas of expertise: green real estate, REITs and the housing market.

GlobeSt.com: Tell us about some of the trends you're noticing with REITs.

Sah: As far as green REITs go, technically there are no green REITs—you have to self-declare as a green REIT. You have to show that you're buying buildings that are LEED certified or seeking LEED certification. There are some green REITs that have shown better operating performance, but it's hard to prove. If someone buys an office building that's LEED certified and they get higher rents, they can't prove that they're doing better because the building is green. The same is true for sales—some green buildings sell for higher, and some don't. Until it becomes a law that every building has to be LEED certified, builders may not have the inventive to put more dollars into construction costs because they might not see the ROI. Still, there's a big trend in that direction, but there's a lack of data on the performance of these buildings.

The perception of REITs in the last 10 years has changed drastically, and REITs themselves have changed from smaller to much bigger companies and finding themselves in the owner portfolio. In the last few years, especially during the financial crisis, REITs have performed really well. People are looking at REITs more and more as diversification, and the space they used to occupy in investor portfolios is rising.

GlobeSt.com: What do you see as the next phase of “green” real estate?

Sah: More and more buildings getting built are going in that direction. People are becoming conscious of the environment and are going for solar panels even though there's no incentive for people to have them because there's limited money from state authorities for people to move in that direction. I think investors and buyers are doing as much as they can. It's like buying a Tesla: does everyone want to buy one? Yes, but they can't all afford one. Costs come down because of supply and demand; there is supply, but not enough incentives for demand. There have to be some incentives provided by state authorities for people to be motivated. Although the benefits are high, the costs are high and that prevents people from going in that direction. Still, people are moving in that direction, and they're buying hybrid electric cars.

In California now, with the drought situation, water is a scarce commodity. People with big lawns need an incentive to reduce their use, but if it becomes a law they'll have to do it regardless. But even having it as a law, if costs are still high, people won't buy into that, and that might create some problems.

I'm seeing a lot of changes with green real estate, even at the investor level. California home developers are tend to be more conscious about being green as compared to any other state because Californians tend to be more open to those changes and to experimentation. SDG&E has a small setup in Clairemont Mesa that shows all the reasons why people should go green. The facility shows them how many ways they can save energy at home by having energy-saving appliances and measures at home.

GlobeSt.com: What are some current trends you're noticing in the housing market?

Sah: San Diego is very much an outlier. There are supply-and-demand constraints because there is hardly any supply. This is due to the time it takes in California to get things started, and people here don't like communities to develop. But San Diego will always stay a more resilient market than some of its neighbors like Vegas, where prices tend to go up and down quickly. Our supply constraints will prevent that—prices will go up, but they won't go down as much. Prices have gone up more than 10%, so there has to be a correction in the market.

You can divide San Diego into two areas: east and west. West is west of the I-5, which is different than east of the I-5. West people lobe being close to the beach, so prices will always be strong there. East, barring Poway, Rancho Bernardo and Rancho Penasquitos with their great schools, you will see a lot of fluctuation. We're seeing interest rates starting to go up, and supply is now hitting the market, so prices will adjust. Around the fourth quarter of this year, prices will be more in sync with what the markets will be.

GlobeSt.com: What else should our readers know about the current real estate market?

Sah: There are a lot more REITs now that are specialized. There are some REITs, for example, that focus on buying and selling prisons, and they are actually doing better than traditional REITs. Some just buy senior housing or healthcare assets, and this makes sense with the demographics in the US skewing more toward the elderly, so they will keep performing really well.