The Real Deal - Has LEED lost its luster?

Press - September 1, 2018

Building under construction

As the city changes its building codes and other green certifications become available, landlords are rethinking the program’s value.

To cut its energy usage in half, JPMorgan Chase hired more than 400 construction workers to upgrade its massive Midtown East headquarters.

When the renovation was completed in 2011, the feat was a public relations coup, one that allowed the bank to tout 270 Park Avenue as the largest renovation to ever achieve LEED Platinum — the highest rating meted out by the U.S. Green Building Council (USGBC). But just six years later, the company announced it would demolish the entire building, undoing millions of dollars’ worth of work.

The decision, announced in February, drew the ire of environmentalists and others, who lamented the material waste of razing a 1.2 million-square-foot structure. The American Institute of Architects weighed in, saying that without knowing what the bank planned to build in the tower’s place, the demolition of a recently renovated building implied “that sustainable design is a low priority.” Such a message could have far-reaching consequences: Due to a zoning change approved in Midtown East last year, the city expects 6.5 million square feet of new office space to be created in the neighborhood.

Given that 270 Park Avenue is the first to take advantage of the change, it could set a precedent for how other owners in the district approach their future renovations, said Guy Geier, president of AIA’s New York chapter and managing partner of FXCollaborative. “The potential for this kind of thing happening again and again is there with the Midtown East rezoning,” he said. “The question really is: If the building is going to be demolished, what are they going to replace it with? It’s important for Chase to make that kind of information public so that the construction industry can learn from it and be sure to do the right thing for similar projects.” Representatives for the bank declined to comment.

The decision to tear down the tower also perhaps speaks to the shift in attitude toward “green” building certifications. LEED, short for Leadership in Energy and Environmental Design, is chief among the rating systems that have lost some of their luster. Since coming on the scene in 1998, the program has gone from a feature displayed prominently on marketing materials to, in many cases, little more than a footnote. That’s in part because in a progressive place like New York City, many aspects of LEED are now written into the building code. Consequently, the industry is at a turning point: Although LEED has lost curb appeal, building owners are hesitant to adopt more demanding and costly certifications such as passive house and net zero.

At the same time, city government is pushing for stricter rules surrounding energy consumption, and some investors are increasingly requiring evidence of sustainability — meaning that change on a large scale likely won’t spring from optional building certifications. “It’s not going to be elective. It’s going to be mandated,” said Michael Namer, founder of Alfa Development, which has pursued LEED Gold on many of its projects.

“So, you better get on the boat, or you’re going to sink.” Racking up points Debate over LEED largely centers around whether or not it actually cuts down on energy consumption. According to the USGBC, LEED-certified buildings use 20 percent less energy and cut carbon-dioxide emissions by 34 percent. But critics have asserted that the program is based on a point system that disproportionately rewards non-energy-related building features. For instance, projects earn points for proximity to public transit — meaning that certain buildings get credit simply by virtue of their location.

And LEED awards points for building materials ordered from domestic companies rather than international ones. Therefore, for many, there’s not much of a motivation to focus on costly energy-related building features when they can rack up points by other means. “A project being built in Manhattan has a bit of an unfair advantage because it’s so close to public transportation,” said Chris Mills, chief operating officer of Plaza Construction. “I think people started to feel that it was imbalanced.” There are 67,331 buildings in the United States that are LEED registered or certified, and just over 2,000 of those are located in New York City, according to the USGBC.

As it happens, those buildings actually performed slightly worse than New York’s other building stock when it came to average energy use per square foot per year (known as source energy use intensity, or EUI). Those structures used approximately 7 percent more raw fuel, according to a 2016 report by the U.S. affiliate of the International Building Performance Simulation Association and American Society of Heating, Refrigeration and Air-Conditioning Engineers — two organizations focused on sustainability. Meanwhile, average source EUIs were more than 30 percent higher in LEED-certified multifamily buildings than in non-certified apartment buildings.

During a panel about sustainability held by New York University in April, Jonathan Flaherty, senior director of sustainability and utilities at Tishman Speyer, noted that LEED is at a “crossroads.” He said that the USGBC needs to decide whether the rating system is intended as a “lofty goal” or as a baseline “stamp of good design.” In New York, complying with the existing energy codes basically takes building owners to LEED Silver, with LEED Gold just a “small stretch away,” Flaherty said. Achieving LEED Platinum is much more difficult and expensive, which is perhaps why only 5 percent of LEED certifications in the city reach that level.

Melissa Baker, senior vice president for technical core at the U.S. Green Building Council, said in a statement that LEED has been widely adopted not because it’s easy, but because it delivers “triple bottom line benefits.” “It is because of the success of LEED that places like New York City and others set as high of a bar as they do,” she said. Still, Evin Epstein, assistant director of sustainability at SL Green Realty, noted that while getting to Silver and Gold LEED certifications may be a matter of following the city’s building code, that’s not the case for many existing properties. “The majority of our buildings are older building stock, so it’s grandfathered in older energy codes,” she said.

"So, it takes extra effort on our part to meet energy code.” For others, it’s not an option. Since 2005, projects receiving $10 million or more in city funding, or for which the city is paying for 50 percent or more of the project’s costs, must achieve basic LEED certification. Separately, projects that receive funding from the Department of Housing Preservation and Development must comply with the Enterprise Green Communities (EGC) program, a green building framework for affordable multifamily developments. Sara Bayer, a senior associate with Magnusson Architecture and Planning, a firm that does a lot of affordable housing work, noted that projects that go through that program often don’t bother with LEED, since it would be another paperwork-heavy endeavor. She called EGC “LEED light.”

“It’s not as stringent as LEED, for sure,” she said. “But it hits a lot of the same targets.” Other programs, such as Well Certification and the Living Building Challenge, managed by the International Well Building Institute and the International Living Future Institute, respectively, are performance-based. That means that certain building operation requirements, including water use and air quality, need to be fulfilled before being certified.

For example, “Living Buildings” must net zero waste, water and energy for at least a year of occupancy. Such requirements often demand buy-ins from individual tenants. For example, last year, architecture firm Gensler announced that one of its projects, Etsy’s headquarters in Brooklyn, achieved Living Building certification. Construction management company Structure Tone’s headquarters at 330 West 34th Street received the first Well certification in the city.

“The hardest thing I’ve had to deal with in my seven and a half years at my job at Tishman Speyer, and this will shock nobody, is dealing with humans,” Flaherty said. “You build a better building, you build passive systems, you do whatever it might be to ensure those outcomes are achieved. If you have to depend on [every tenant] working together in the building to achieve that outcome, you’re going to have a mixed bag. You’re not going to get everyone to work together.”

Meeting demands

Building sustainably comes with an upfront cost, something many developers cite as a deterrent. Passive house — a method of design that can slash energy consumption by up to 90 percent through extreme insulation — can initially increase project costs by 5 to 10 percent. Well certification can add another 8 to 15 percent, said Stuart Brodsky, who teaches classes about sustainable building at NYU’s Schack Institute of Real Estate. Long-term investors, such as Cornell University, which built the world’s tallest passive house on Roosevelt Island, are willing to shell out the extra money because they will own the asset long enough to realize the cost-saving benefits.

“There’s a real risk when you are the pioneer,” said David Kramer, president of Hudson Companies, which developed the passive house at Roosevelt Island’s Cornell Tech. “It’s always better to be the seventh person to do it.” Kramer said the normalization of passive house is happening more rapidly than he anticipated, and he expects developers will increasingly consider the certification in the coming years. The developer indicated that his company is currently in the planning stages for at least two more passive house projects.

Still, certain projects aren’t likely contenders for the certification. “If you are a condo developer focused on views, you are probably not going to do passive house,” he said. “You can’t meet the passive house numbers you need to make and have a wall full of glass.” Spencer Orkus, director of affordable housing development at L&M, noted that the cost savings from passive house help increase a project’s net operating income, which can in turn lead to lenders issuing larger loans. Government agencies also offer tax credits to such projects, which can help offset some of the upfront costs.

Meanwhile, institutional investors, such as Norway’s sovereign wealth fund, are increasingly requiring evidence of sustainable practices before expending capital. All of the fund’s properties participate in the Global Real Estate Sustainability Benchmark, a program that grades real estate assets and portfolios based on their sustainability.

Last year, the fund bought a 48 percent stake in the 19-story office building at 375 Hudson Square. In 2010, the building became the city’s first existing property to achieve LEED Gold. Lenders, though, don’t seem to be taking too close a look at green-building-related certifications unless the program will put a major financial strain on a project.

“Frankly, for the most part, it’s not that lenders are looking for those types of certifications specifically, though there are clearly situations where they can impact the economics of the building,” said Ivan Frishberg, who leads Amalgamated Bank’s sustainable banking arm.

“Often, the effort in underwriting is to make sure people are insulated from disaster, not avoiding it.” But that might change, Orkus said. “As LEED got traction, you would see different lenders or different community groups saying, ‘We want to see LEED,’” he said. For its part, city government has been ramping up efforts to dramatically cut down on greenhouse gas emissions (buildings are responsible for 75 percent of those emissions in the city).

In September, Mayor Bill de Blasio announced that the city would start mandating retrofits in buildings larger than 25,000 square feet — a change that is expected to affect some 14,000 buildings. And starting in 2020, buildings of that size will also need to start posting A through F “energy grades” on front entrances in a similar fashion as restaurants. The grades will be generated using ENERGY STAR Portfolio Manager, a tool that the U.S. Environmental Protection Agency uses to track energy and water use. The city already mandates that buildings larger than 50,000 square feet and public buildings bigger than 10,000 square feet report their annual usage of both.

The City Council introduced legislation in July that would require newly constructed and renovated commercial buildings to incorporate solar panels, green roof systems and/or wind turbines. In an editorial the same month, City Comptroller Scott Stringer urged the city to restructure a property tax abatement program offered to building owners who install eco-friendly roofs. Only seven property owners were granted the abatement in the program’s nine years, meaning that only one in every 1,000 buildings citywide has a green roof. Stringer proposed offering bigger incentives to specific neighborhoods.

Last month, New York City Council member Costa Constantinides proposed legislation that aims to reduce carbon emissions in larger buildings by 20 percent between 2020 and 2030. Shortly beforehand, a group of landlords, including SL Green, Vornado Realty Trust and the Related Companies, signed on to a similar initiative. It would target the more than 50,000 buildings in the city that are 25,000 square feet or larger.

Even with the city’s efforts, Dan Nall, principal of engineering and consulting firm Syska Hennessy Group’s eastern region, said it’s important for property owners to show that they’ve gone through the trouble of making their building sustainable. A third-party certification is proof that there’s been an effort to make the building green, demonstrating that the developer actually went beyond what is legally required, Nall said. “It doesn’t work to go out and say, ‘Oh, my building is green.’ You need some evidence to that effect,” he said. “There are a lot of people who go out and claim their building is green. Greenwashing is a real thing.”