Recognized as one of the earliest founders of both the conservation and environmental movements, English naturalist and explorer Charles Waterton walked from British Guiana to Brazil barefoot; established one of the world’s first nature preserves in the 1820s at his Walton Hall estate; and in 1839, successfully sued a nearby soap company for environmental pollution. Fellow zoologist and explorer Thomas Blackiston named the Waterton Lakes in southern Alberta, Canada, for his contemporary; the area became Canada’s fourth national park in 1895. One hundred years later, struck by the park’s pristine and natural beauty during a family vacation, David Schwartz decided that if he ever started a company, he couldn’t do better than the Waterton name. In 1998, Schwartz co-founded a Chicago-based multifamily firm, and, true to his word, called it Waterton Residential. “In a way, our whole corporate DNA originally comes from the green environment,” explains Waterton executive vice president and chief operating officer Greg Lozinak. Last fall, Waterton began an ambitious 10-year redevelopment of Chicago’s iconic Presidential Towers, the 2,346-unit mega-community acquired by Schwartz and company in 2007 for $470 million. Included in the redevelopment budget is enough money to implement the sustainability initiatives necessary to pursue the U.S. Green Building Council’s Leadership in Energy Efficiency and Design (LEED) green building certification. All in, Lozinak says the Presidential Towers rehab will set Waterton back $21 million, with green-specific investments consuming 2 percent of the budget and green-related expenditures accounting for approximately 25 percent. Lozinak isn’t sure if Chicago renters realize either the heritage behind his company’s namesake or the significance of the LEED moniker, but, like most of his peers in multifamily, he’s going green anyway and expects to realize a competitive advantage for doing so.

Green in Orange: BRE Properties?? Park Viridian is the first LEED Gold multifamily building in  Anaheim, Calif.
Green in Orange: BRE Properties?? Park Viridian is the first LEED Gold multifamily building in Anaheim, Calif.

Where that advantage ultimately springs from is still somewhat uncertain, but capital benefits realized through operational cost-savings, rent and occupancy uplift, disposition premiums (see “To Be Determined” on page 38), marketable goodwill, or any combination of the above factor large in the impetus to go green. That’s why, across the board, apartment developers and operators continue to funnel cash into sustainability efforts despite the recession. Still, this commitment has not kept the green movement from looking remarkably different today than it did even three years ago—with developers eschewing costly certifications and without exception not tracking a total line item investment and ROI on green endeavors. This is largely because most firms feel that they’ve made a more basic decision to be green and that all of their decision making, in essence, is done through the lens of being a green company, making it an extremely relative and comparative process to say which dollars are “green” and which are not. “We’re still trying to get away with as much green investment as we can and still have a viable development, including working upfront with our financing partners to determine how much of their money they are willing to invest in green,” says Michael Massey, housing development manager for Irvine, Calif.-based affordable housing developer Jamboree Housing, which received its third Energy Star regional award for excellence from the U.S. Environmental Protection Agency on April 12.

Certification Uncertainty

If green building has felt any economic pressure, it has been in the area of certification application and approval, which can be an expensive proposition beyond the relatively smaller upfront premium for green building products and construction practices. Beyond upfront construction premiums, multifamily developers such as Massey say that certification and ratings endeavors can cost up to $100,000 just to jump through the hoops. Deciding what green certifications—if any—to shoot for remains a market-to-market decision, and like many developers and operators across the affordable, student, and market-rate sectors of multifamily, the Jamboree team is beginning to look at the possibility of simply applying its own set of internal green building guidelines and grabbing certifications where and when they’re appropriate and cost effective. To date, Jamboree has leveraged photovoltaic solar arrays to power common area lighting and typically employs Energy Star appliances, low-flow showerheads, dual-flush toilets, and energy-efficient light fixtures across its portfolio. In addition to the Energy Star award, the company has built Green Point-rated projects (the de facto certification of the Berkeley, Calif.-based Build It Green organization) and is about to break ground on its first LEED silver development, the 94-unit Tonner Hills Apartments in Brea, Calif.

“Deciding on what certifications to seek and when to seek them is a learning process,” Massey says. “We think that ultimately you can achieve the same level of sustainability without some of the more expensive brand-name certifications, and we might begin to leave that decision to our financial partners. Either way, the mission remains the same—we are doing the measures regardless.”

Same goes for Campus Apartments. “We’re definitely still spending significant dollars on our green initiatives associated with our university developments,” says Dan Bernstein, executive vice president and chief investment officer at the Philadelphia-based firm. “Every development is challenging in this economy. For ourselves and a lot of other developers, there is still an overarching responsibility to develop environmentally-sensitive and sustainable buildings, but if the capital expense to get to a certification is too cumbersome then yes, that could be cut. It doesn’t and shouldn’t mean that your building won’t be environmentally sensitive.”

Alexandria, Va.-based AvalonBay Communities is looking to establish an internal baseline level of sustainability in new construction, an enhanced specification that vice president of development Scott Dale says will incorporate elementary green products such as setback thermostats and low-VOC paint with another tier of more complex and expensive sustainability measures—think upgraded building envelopes, upgraded HVAC systems, and top-shelf windows—that will be decided on a case-by-case basis. “With the exception of the baseline, we do not have a specific standard that we are trying to meet,” Dale says. “If we invest in something that ultimately saves our residents costs—particularly through energy bills—we do feel that ultimately some of that will come back to us in terms of enhanced revenue.”

Dale keys in on a critical development on the multifamily green scene: utility and energy cost transparency. With preliminary laws requiring unit-level energy use specificity by 2011 already on the books in major metros including Seattle, New York, and Austin, Texas, multifamily firms are anticipating a sea change in how energy usage is disclosed in the marketing and lease-up of apartments (see “Full Disclosure” on page 40). The good news? Most firms investigating energy transparency expect a first-mover advantage in the form of increased prospect attention and even a rent-premium payback on more energy-efficient apartments. “We anticipate a return regarding energy efficiency, but the question is how much?” Dale says. “I think ultimately we get something back, but whether it is $25 in rent uplift or something else, that is the real debate to be proven out over time.”

Green in the Black

Part of the difficulty in determining sustainability payback lies in the collusion of green investments with general cap ex. Consider that major apartment real estate investment trusts (REITs) such as AvalonBay 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.” But among the same-store NOI growth and occupancy numbers and FFO and average rents, no single REIT is carrying a line item accounting for all of the money—the consultants and certifications and light bulbs and showerheads—invested into green, despite its purportedly awesome return on investment.

“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 Francisco-based REIT with a focus on West Coast markets that just celebrated the opening of Park Viridian, Anaheim, Calif.’s (and Orange County’s) first LEED Gold-certified multifamily 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.”

While no small feat, breaking the LEED Gold barrier with Park Viridian was made easier by a green building acumen developed with BRE’s previous LEED projects including 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 says. “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 is likewise celebrating a recent LEED achievement: the 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. “It’s providing a solid platform as we look to further advance additional sustainable initiatives.” 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—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-but-steady pace of cogeneration plant upgrades that saw 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.”

Talking With Dollars

While cost savings on energy consumption has been the most tangible and measurable return on green investments, 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. A survey of 1,000 apartment seekers released on Earth Day by Santa Monica, Calif.-based Internet Listing Service finds that 86 percent of the U.S. 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.”

As part of the landed aristocracy of the Victorian Era, Charles Waterton didn’t have to worry about rent or lease-ups or even the upkeep of his estates as he wandered the Amazon and championed naturalist causes. But he nevertheless took chances and looked uncannily towards a future of new possibilities. The naturalist would never know that a multifamily firm would one day bear his name—a company as committed to its cause as Waterton was when he jumped off the roof of an outhouse as a flight trial, looking to test his own personal navigation of the atmosphere.

When it comes to green, Waterton Residential has no qualms drawing a parallel to its namesake’s daunting efforts. Company leaders there believe that the green era has come, and regardless of how you shake out the counters at the end of the day, the companies that are buying in will be the ones to eventually settle up.

“I do think green becomes a differentiator in the future, even though I don’t think people will ever say, ‘Hey, I will pay more to live in Presidential Towers because the property is LEED certified,” Lozinak concludes. “What it will become for them is a discriminator: If you have a dog, you rent in a pet-friendly apartment community. If you have a strong environmental conscious, you’ll go towards a green community. Those in our industry who strive to go green will get that benefit in occupancy, and as occupancy grows, will have the corporate goodwill and the pricing power over the long term to charge for higher rents.”