MAJOR APARTMENT REAL ESTATE investment trusts (REITs) open up their balance sheet for public scrutiny every three months, offering enough Sarbanes- Oxley mandated granularity into operations, income, and expenses to make the private guy (and even some of the public guys) wince and say, “no thanks.” Among the same-store NOI growth and occupancy numbers and FFO and average rents, you'd figure there's got to be a line item accounting for all of the money invested into green, right? All of those consultants and certifications and light bulbs and showerheads have to add up to something, and if green has such an awesome return on investment, why wouldn't billion dollar Wall Street companies be specifically tracking it?

The answer is simple: Multifamily sustainability initiatives and green building practices have become the de facto way of doing business and therefore aren't tracked as separate line items.

“When we embarked on the green process about six years ago, there was definitely push back on the investment side regarding added costs,” says Connie Moore, CEO of BRE Properties, a San Franciscobased REIT with a focus on West Coast markets that just celebrated the opening of Park Viridian, Anaheim's (and Orange County's) first LEED Gold-certified apartment building. “Being green and thinking about sustainability as the right thing to do [independent of incremental cost] used to be seen as progressive and now it is already simply the way of doing business. It is becoming accepted, demanded, and expected by our residents, particularly among the Gen Y cohort.”

And that's true for both REITs and smaller, regional players, all of whom are pursing green projects despite recession pressures and lack of ROI specificity.

Practice Makes Perfect

While breaking the LEED Gold barrier with Park Viridian was no easy feat, BRE's green building acumen certainly eased the process. The REIT's previous LEED projects include 6600 Wilshire in Los Angeles and Taylor 28 in Seattle. BRE executive vice president and chief investment officer Steve Dominiak says all new development in the REIT's pipeline will be built to LEED standards moving forward, even if the company isn't recording a specific sustainability spend in the general ledger.

“We don't track green as an exclusive line item on the capital budget for new development, but we think the cost as a percentage of total is in the low single digits,” Dominiak explains. “On the operational side, things such as smart irrigation, green cleaning products, and lighting changes flow into the normal cap ex of a project and are phased into the operating budget. We don't track those investments as a line item.”

AvalonBay Communities is likewise celebrating a recent LEED achievement: the Alexandria, Va.-based REIT's Mission Bay III community in San Francisco received LEED certification in January, a huge green building milestone, according to company chairman and CEO Bryce Blair. “We have made good progress and built up an impressive amount of internal knowledge in this area as a result of this LEED process and our other efforts,” Blair says.

Beyond new development, AvalonBay has gone as far as establishing an internal sustainability fund for the green retrofitting of its portfolio, and while the annual budget for that fund is not declared publicly— the word sustainability doesn't even appear in the firm's 2009 annual report—AvalonBay vice president of development Scott Dale says the firm's green buy-in is increasing every year in spite of economic conditions. “The budget for the sustainability fund has increased this year, not decreased,” Dale says. “As we have better understood the financial opportunities that exist and the returns that are achievable, we have increased the budget in recognition of that. So we will do more retrofits this year than we did last year.”

That will mean increasing common area lighting retrofits (typically in garage areas) from 1,000 fixtures in 2009 to 1,200 fixtures in 2010, as well as resuming a slow-butsteady pace of cogeneration plant upgrades, with two plant conversions last year. “Most of the sustainability fund initiatives I would say fall under the category of low hanging fruit and are really being implemented on a prioritized basis per community,” Dale says. “But the projected returns on those have been in excess of a 20 percent ROI, and we anticipate the returns on 2010 initiatives will be in the same range.”

Payback Time

Cost savings on energy consumption has been the most tangible and measurable return on green investments, but the bottom line impact from residents willing to pay more in rent or extend their typical occupancy in a green apartment promises to further extend the gains made by sustainable investments. In fact, a survey of 1,000 apartment seekers released on Earth Day by Santa Monica, Calif.-based Internet Listing site finds that 86 percent of the rental pool would prefer to live in a green apartment, and a full 42 percent would pay a $100 rent premium to do so.

But whether renters will ultimately speak with their recession-pressured dollars beyond a survey remains to be seen. “It is easy to say, ”˜Oh, of course I'd pay $25 more,' but that often changes when it comes time to sign the lease,” explains BRE's Moore. “But I think where it shows up is in increased leasing velocity and extended occupancy. Park Viridian is arguably in one of the most challenging apartment markets in the country where we are additionally competing with AvalonBay and [Englewood, Colo.-based] Archstone, and we leased up six months ahead of the pro forma, and it wasn't like we planned a slow lease-up.”

A slow transaction volume among apartment traders is making it difficult to gauge the relative premium asset buyers are willing to pay themselves for green multifamily real estate, but anticipating a near future where green is standard operating procedure would logically push non-green assets down the letter-grade hierarchy.

“I think time will tell,” Dale says. “If one makes the assumption that sustainability is here to stay, and I think that is a pretty safe assumption, there may well be some separation in the market between certified buildings and non-certified buildings. Based on that understanding, we'll continue to better position AvalonBay as a leader in the area of sustainability. We do think there will be some real financial opportunities down the road in conjunction with that focus.”