Green Commercial Real Estate in Southern California

To celebrate Earth Day, the NAI Capital Research Team took a look at the inventory of buildings with sustainability features in our local market. Our survey included office, industrial and retail buildings within Los Angeles County, Orange County, Riverside County & San Bernardino County (Inland Empire) and Ventura County that have Energy Star designation or LEED certification.

LEED, or Leadership in Energy and Environmental Design, is the most widely used green building rating system in the world and is a globally recognized symbol of sustainability achievement. Energy Star buildings are qualified annually on the basis of energy efficiency.

We found that our Southern California market area includes more than 1,000 such “green” buildings with a total inventory of more than 212.7 million square feet. Office product dominated among green buildings with 139.4 million square feet, followed by industrial at 66.6 million and retail with 6.8 million square feet.

Green CRE Inventory in Southern California

Includes LEED Certified and Energy Star buildings. Source: NAI Capital Research, CoStar

Here is a breakdown of the green CRE inventory by county

 

More Green Equals More Money

Our survey showed that buildings with LEED or Energy Star certification generally command a higher asking rent among their product type than buildings without these designations.

Though existing buildings can achieve LEED or Energy Star status, much of the green inventory is newer construction. New construction commands a higher rental rate than older construction across the board, with energy efficiency and green construction as one contributing factor.

In 1Q 2019, asking rent for office space in the five counties averaged $2.95 per square foot. In green buildings, however, that rent averaged $3.56. Retail space asked $2.14 per square foot, but green buildings averaged $2.79 over the same time. Industrial rent averaged $0.90 per square foot and green buildings averaged $0.89/SF.

The Inland Empire, where virtually all significant new industrial construction is taking place, also has the highest percentage of industrial green buildings. The built-out markets in Los Angeles County and Orange County and the slow-to-build Ventura County have little ability for new construction. Thus, the slightly lower rent for green industrial buildings can be attributed to their location in the Inland Empire, where once low rents have grown significantly over this cycle.

Both landlords and tenants can benefit from green buildings. Some of these advantages include reduced utility consumption and costs, increased occupancy, increased investment potential through higher future rent, sustainability leadership, appealing to clients ‘ or tenants’ image and reduced environmental impact.

In short, green buildings offer several benefits for commercial real estate users and owners. According to The Global Status Report 2017 report prepared by the International Energy Agency (IEA), buildings and construction together account for up to 39% of carbon dioxide emissions globally, making green buildings an essential part of future commercial real estate development.