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TAKING THE LEED

MORE TENANTS ARE HEEDING LANDLORDS’ ENTREATIES TO ADOPT PRACTICES THAT BENEFIT THE ENVIRONMENT AND THIS, IN TURN, IS PRODUCING A NEW GENERATION OF ECOLOGICALLY FRIENDLY CENTERS

By Steve McLinden

As more shopping center blueprints become “ greenprints,” landlords face a challenge persuading tenants to implement green initiatives in their stores. The reasons are numerous, sources say. For one thing, the many parties involved in the development process — not just developers but also leasing agents, anchors, in–line shops and outparcel tenants — tend to act independently of one another. “Developers would say that they don’t control the space once it’s completed, while the tenant would say that they’d love to do it, but the shell doesn’t allow it,” said Jonathan Ratner, director of sustainability initiatives at Cleveland–based Forest City Enterprises. Further, a retailer’s budget, formulated a few years in advance, typically fails to provide for any “green” extras. “Sometimes, it’s difficult to have a conversation where you say there will be more up—front costs,” said Kimberly Hosken, director of new construction for the U.S. Green Building Council, whose LEED (Leadership in Energy and Environmental Design) point system has become a national benchmark for green construction. “A developer may want to deliver a potentially green envelope, but maybe the tenant doesn’t want to pay for that.”

But dozens of retailers have formed task forces and committees in the past year to explore the issue, says Hosken. Soon it may just be a matter of educating the intermediaries. “We’ve found that one of the big barriers has been the people who negotiate the leases,” Hosken said. “Hopefully, we can help them stress sustainability to prospective tenants without scaring them away.”

The USGBC has teamed up with Jacksonville, Fla.–based Regency Centers on a program that tracks each step of the building process from start to finish as a separate block toward LEED certification. Regency’s planned Shops of Santa Barbara (Calif.), a 67,226—square—foot center currently in the permit process, will be used to test the program. Each entity involved in the development will earn LEED points for using green methods and materials in the areas under their control. The points will be added up, and if the project accumulates a sufficient number of points to earn a LEED rating of silver, gold or platinum, each individual participant will receive the certification. Scott Wilson, Regency’s vice president of construction and chairman of the firm’s green task force, says the program is a step up from the old piecemeal approach that made it difficult to track a property’s accumulated points.

The ecologically minded city of Santa Barbara seemed an ideal place to begin the program, Wilson says. Regency approached the USGBC about the idea and was told it was the first developer to do so, he says. Regency presented its plan to about 35 big—box retailers at the 2007 Buildpoint conference, in Naples, Fla., in April.

Up—front development costs at Shops of Santa Barbara will be a little higher, Wilson concedes. “Leading means taking risks sometimes,” he said. “And at the same time, we are challenged to balance that with our responsibility to shareholders as a publicly traded REIT.” The more—tangible benefits of sustainability for tenants will come in reduced utility and water consumption, he says. “And in the case of [natural] day lighting, studies have shown it increase sales, worker productivity and it reduces absenteeism.”

Other retail properties have experimented with different approaches in coaxing tenants to go green. At the 1.2 million–square–foot Shops at Northfield Stapleton in Denver, Forest City devised a 51–point checklist of green measures, at least a third of which retail tenants would have to comply with. These included temperature control, low—volatility organic compound paints and low—heat lighting. The firm offered tenants credits on advertising and rent, cash incentives and other sweeteners. Northfield earned a silver LEED rating.

“In general, we’re seeing more of a sense of collaboration and a desire to partner among tenants,” Ratner said. “This whole notion of green and sustainable practices has become more refined, better understood and better vetted.” But many challenges remain. “Big boxes have been doing this for a while under the name of resource efficiency, but translating that practice down to a 1,000—square—foot tenant is harder, but doable. And it is happening.” Case in point: In August Ratner spoke with a retail tenant that wanted its green efforts to jibe with Forest City’s green developments in new centers starting in 2008. “Tenants are now starting to come to us instead of vice versa.”

At the 450,000—square—foot Fairlane Green, in Allen Park, Mich., built atop a former landfill owned by the Ford Motor Co., such tenants as Meijer and Target took the initiative to build LEED stores because they saw an opportunity to differentiate themselves, says Stefanie Denby, a spokeswoman for real estate arm Ford Land. The center, which features energy—saving HVAC systems, reflective roofs and a rainwater irrigation system, earned gold LEED certification last year.

Sometimes a site must be just right if a tenant is to go LEED. McDonald’s was able to build its first LEED—certified restaurant, at Abercorn Common, in Savannah, Ga., because it could strategically position a long stretch of windows on the building’s north side to illuminate 75 percent of the building. Positioning the building differently would have generated too much heat from the windows. With Abercorn, Savannah—based developer Melaver took a second—generation property and turned it into a $30 million, 175,000—square—foot center that earned a silver LEED rating last year.

This green wave can still send developers and tenants in opposite directions, though, says Randy Peacock, Melaver’s project construction manager. Many of Abercorn’s early leases were negotiated well before the center broke ground, “so a lot of them were just starting to hear about LEED but didn’t want it to impact their bottom lines,” Peacock said. In the next round of leases, tenants started adding greener elements “and engineers already knew what LEED was,” he said. “Some of them had a directive from above to go greener.”

Said Ratner: “Sometimes this comes in small steps. You might start out using low—VOC paints and better materials and be pleasantly surprised by the results, then start looking at lighting and the HVAC package and so on. The good news is that people are starting to understand the cost—benefit relationships.”

Municipal governments are becoming drivers of green retail. Such was the case with New York City–based Brown Hill Development’s planned Promenade at Lyons mixed—use complex, in the MainStreet district of Coconut Creek, Fla. Before permitting the project, which is slated for completion next year, the city mandated that all new commercial buildings along MainStreet be LEED—certified.

Last year the USGBC launched a volume—certification program allowing retailers that build multiple identical structures to earn LEED certification on any units after the first one without resubmitting all the paperwork. Pittsburgh—based PNC Financial Services Group, which has built about 50 green bank branches and plans to put up at least 80 more, pressed the USGBC to offer this program, much as Regency had pressed for a more comprehensive shopping center certification program.

The USGBC now has so many retailer requests for volume certification that it is unable to take any more until the end of this year, at the earliest, says Hosken. “There are 17 retailers on the pilot volume—certification list now, and we continue to get calls from more,” she said. Stock analysts are even starting to ask REITs during conference calls what they are doing to make centers greener, she says.

Part of the challenge facing the USGBC in creating the shopping center program is establishing how much energy and water the owners are using and how much is used by the tenants. Once this type of cost—sharing data is quantified, a more holistic certification model will emerge, says Hosken.

There are fewer than 100 green retail buildings in the U.S. now, Wilson says. But Hosken says that will soon change. “There are going to be hundreds if not thousands of LEED retail buildings in the coming years, and I say that because some of the bigger retailers are starting to tackle this aggressively.” Hosken will not divulge the names of these companies because of nondisclosure agreements. But she did say that Santiago, Chile–based department store chain Falabella intends to go LEED in a U.S. expansion, employing giant roof skylights and other energy—saving measures. “They have become familiar with sustainability much earlier than U.S. companies, because South America has faced an energy crisis for a very long time,” said Hosken. The U.S. will quickly catch up, she says. “I can safely say there will be green retail stores all over the country by the end of 2008 with LEED ratings on them.”