March 21 (Bloomberg) -- The 22-story apartment tower in Portland, Oregon, has a roof garden that funnels rainwater to its public toilets. Because the water isn’t treated, state law requires “Do Not Drink” warning signs.
“Just in case your dog can read,” said Dennis Wilde, chief sustainability officer for Gerding Edlen, the Portland-based builder of the development called Indigo @ Twelve|West.
Green features, such as reusing rainwater and generating about 1 percent of the tower’s electricity with four rooftop windmills, help the Indigo’s bottom line by saving energy and attracting tenants who pay a premium to live an eco-friendly urban lifestyle, said Mark Edlen, chief executive officer of the closely held company that’s developed $5 billion of residential and commercial real estate since 1996.
As Gerding Edlen takes its Portland experiments to other cities, some of the largest U.S. multifamily owners are stepping up green development, deciding that the extra construction costs will save money on operations and give them a competitive edge. AvalonBay Communities Inc., Equity Residential, UDR Inc. and Related Cos. are among companies building projects with energy-saving insulation, solar-heated water and ventilation to improve indoor air quality as a growing number of people opt to rent rather than own homes.
Last year, developers of 23,000 U.S. multifamily housing units applied for Leadership in Energy and Environmental Design, or LEED, certification, according to the U.S. Green Building Council, which developed the standards. That’s equivalent to 14 percent of the new apartments and condos that started construction last year and almost double the 11,825 multifamily units certified from 2008 through 2011.
LEED certification awards points for energy and water efficiency, recycled construction materials, transportation access, preservation of outdoor space and indoor light and air quality.
“This is apartments’ moment and it’s a moment that’s not likely to go away quickly,” Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s Wharton School, said in a telephone interview from Philadelphia. “The green label is attractive to investors. But it’s also attractive to high-end apartment renters who are increasingly looking to quality of life and to green investments as a statement.”
Multifamily housing starts climbed to an annual pace of 233,000 in February, more than double the 112,000 rate a year earlier, the Commerce Department reported yesterday.
Construction of buildings with at least five dwellings is expected to increase 61 percent to 270,000 units this year, according to a March 6 report by Paul Diggle and Paul Dales, analysts at Capital Economics Ltd. in London. Rents will rise 3 percent both this year and next, while single-family home prices are expected to be little changed for the two-year period, the analysts estimate.
In Manhattan -- the U.S. market with the highest rents, according to Reis Inc. -- LEED-certified buildings can command about 5 percent more on monthly leases in good times and fill vacancies with fewer concessions to tenants in bad times, said Martin Dettling, senior vice president for design and construction of Albanese Organization Inc., which developed three LEED-certified towers with 798 condos and apartments in the Battery Park City neighborhood.
“I think we’re getting to that stage where it’s identified as something you need to have to be in competition,” Dettling said in a telephone interview from the Garden City, New York, offices of the closely held company. “If you don’t, you’re a thing of the past.”
Related Cos., which has nine LEED-certified residential buildings with 2,075 apartments, is planning 21 more with 9,600 housing units, said Charlotte Matthews, vice president of sustainability for the closely held New York-based company that developed Time Warner Center. While trying to cut construction costs at MiMA, a 63-floor LEED tower on West 42nd Street that opened to renters in April, Related spent extra on heating, ventilation and air-conditioning systems to qualify for a tax deduction worth 60 cents a square foot, she said.
“We invested more because energy efficiency offers a good return on investment,” Matthews said in a telephone interview.
UDR, which owned 60,465 multifamily homes as of Dec. 31, plans to add about 2,200 more LEED-certified units to its current 1,200, according to Harry Alcock, senior vice president for asset management with the Highlands Ranch, Colorado-based real estate investment trust.
AvalonBay, which operates 200 communities with 58,538 units, has three LEED-certified properties and is seeking certification for 11 others under development, according to Matthew Birenbaum, executive vice president for corporate strategy at the Arlington, Virginia-based REIT. The design of Avalon at Mission Bay III in San Francisco reduces energy use by 28 percent and water consumption by 26 percent through efficient lighting, plumbing and appliances, he said in an e-mail.
“In certain markets, residents are coming to expect green features in the community where they live, so we do believe that LEED certification gives us a marketing advantage over our competitors,” he said. “We’ve found that the hard costs to achieve LEED certification are less than 1 percent and many times less than a half percent of the total project cost.”
For such investors as pension funds and university endowments, LEED certification increases a property’s potential resale value, said Nate Kredich, the Green Building Council’s vice president of residential market development.
“They’re thinking about an exit strategy,” he said in a telephone interview from his office in Del Mar, California. “They see a premium.”
Research demonstrating the financial benefits of LEED construction is limited because the program is recent and there’s been little information on whether completed buildings met their design goals, said Matthew Kwatinetz, managing partner at QBL Partners, a New York-based consulting firm.
“We know that certain green features are the direct cause of economic gains that show up in higher asset prices,” he said in an e-mail. “If the answer were wholly non-controversial -- that is, market-accepted -- there would be a whole lot more green buildings.”
Gerding Edlen closed its Green Cities Fund I to investors on Dec. 31 after raising $183 million. It’s preparing to start a second fund as soon as April.
‘You’re From Mars’
“When we were launching our first fund, people would look at you like you’re from Mars,” Edlen, 59, said during an interview on the rooftop of the Indigo, with a view of Portland’s skyline and rain-soaked hills. “Today we know there’s a lot of demand.”
The fund has a targeted 16 percent internal rate of return and is “performing above that,” said Molly Bordonaro, Gerding Edlen’s senior vice president.
Gerding Edlen is raising money less than two years after it transferred troubled condo projects in Portland, Seattle and Los Angeles to lenders at a loss to its backers of more than $200 million, according to property records and interviews with investors.
Robert Scanlan, chairman of ScanlanKemperBard Cos., a Portland-based real estate investment firm, said he would recommend Gerding Edlen to other investors, even after he lost $54 million with them on condo projects in Portland, Seattle and Los Angeles that were returned to lenders in the wake of the 2008 real estate crash.
Would Invest Again
“A lot of money’s going to be made with apartments,” said Scanlan, whose firm has about $790 million worth of equity in 19.9 million square feet (1.85 million square meters) of commercial real estate. “We would invest with Gerding Edlen again.”
So far, the Green Cities Fund I has financed seven mixed-use projects with 760 apartment units worth about $350 million in Seattle, San Francisco, Los Angeles and Boston, Bordonaro said.
The company plans to expand to New York and Washington, cities with low vacancy rates where landlords can charge higher rents to tenants who want to live near their jobs, Edlen said.
“We’re trying to leave behind buildings that are much more responsible to their community,” Edlen said. “Both from a design perspective as well as from the perspective of their environmental footprint.”
LEED Platinum certification, the highest level, adds about 2 percent to construction costs while reducing operating expenses about 20 percent when lower energy or water use are accounted for, he said.
Covering Operating Costs
At the Indigo, a LEED Platinum building, rents average $2.40 to $2.45 a month per square foot, about 10 percent more than nearby apartments, Edlen said. It opened in October 2009, when the U.S. unemployment rate rose to 10 percent. Enough of its 273 units were leased within 10 months to cover operating and other costs, Edlen said.
Gerding Edlen markets to renters who like to shop at Whole Foods -- there’s one across the street from the Indigo -- and want to commute by bicycle or light-rail train, he said. Across the Willamette River, tenants in a 50-unit Southeast Portland building, also developed by Gerding Edlen, leased only 27 of the garage’s 30 parking spaces. The building’s bicycle locker has run out of space and its biggest maintenance problem is wet bicycle tracks on the hallway carpet, Edlen said.
The efforts to go green, such as reusing untreated so-called gray water in toilets, may veer toward the earnestness lampooned in “Portlandia,” the Independent Film Channel television show about the Pacific Northwest city’s artsy, eco-conscious hipsters, said Portland Mayor Sam Adams.
‘Dogs Can Read’
“We in Portland know not to drink out of the toilet,” Adams, who has acted in the cable television series as an assistant mayor, said in an interview at City Hall. “And why yes, our dogs can read.”
On a serious note, Gerding Edlen’s projects represent the quirky creativity and concern for the environment “in Portland’s underlying DNA,” he said.
“We act on our values and I think that’s expressed by this company,” Adams said. “They were the first to build deeply green buildings when, at the time those first sustainable buildings were constructed, everybody told them they were idiots.”
In the Los Angeles beach-front district of Venice, the Frank, a 70-apartment complex, had a waiting list two months before its scheduled April 7 opening, Edlen said. Rents start at $2,995 for a 776-square-foot one-bedroom apartment, according to the property’s website.
The Frank, where rooftop solar panels will heat an average 60 percent of the building’s water, is designed to qualify for LEED Platinum certification. It will feature a community herb and vegetable garden curated by employees of an on-site vegan restaurant, Cafe Gratitude.
“I can’t imagine a better location for what we do on Earth,” said Matthew Engelhart, co-founder of Cafe Gratitude, which will open in May and serve locally grown, non-processed, organic food. Venice residents are “interested in health, yoga and well-being. And the disposable incomes are there,” he said.
At the Indigo in Portland, amenities such as a roof garden, movie screening room and in-house gym with a personal trainer attracted Joe Vaughn, who lives with his cockapoo, Penny, in a 14th-floor, $1,525-a-month studio apartment.
Vaughn, 40, runs a business consulting company from his apartment, a short walk to such Portland landmarks as Powell’s City of Books and Jake’s Famous Crawfish restaurant. He drives his Jeep Wrangler about 4,000 miles (6,400 kilometers) a year, moving it so rarely that the battery once died from lack of use.
Before moving to the apartment in June 2010, Vaughn owned a 3,300-square-foot suburban Portland house with a $4,000 monthly mortgage.
“I have 700 square feet now, but I have the amenities of a mansion,” Vaughn said. “I have fewer things, but I have nicer things.”
Penny had no comment about the water in the toilet.
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