It’s no surprise that Austin and Seattle, two of the fastest growing cities in the United States in 2015, are both experiencing a boom in new construction. How does sustainability factor into the new development?
Executive Technical Director Brad Pease of Paladino’s Austin office, and Director Dina Belon of the Seattle office, participated in two Bisnow panels on August 27th in their respective locations to discuss the role sustainability plays in these rapidly growing cities.
The Austin Multifamily Surge Continues, along with the Demand for Tangible Sustainability
The Austin panel opened up with a look at the city’s growth, noting that a population rise of over 12% in the last four years has led to more job creation and residential development with more than 20,000 units under construction.
The market has been ideal for capital investors, with a significant interest from international investors looking for gateway cities. In fact, Austin is one of the top cities for international capital flows in the multifamily sector.
Making up 35% of Austin’s market, Millennials are driving the growth, and even altering how development is approached. Commonly, Millennials demand tangible sustainable features in their homes that align with their values.
Despite green expectations from Austin’s Millennial majority, Brad stated that Austin’s current state of sustainable development isn’t where it could be. Austin had the very first green building program in the nation, but it has since fallen behind other major cities. According to Brad, Austin will catch up quickly to other green-minded cities as more investors and developers understand the value of sustainability as a means to attract and retain longer-term leases. While a lingering perception exists that green building translates to paying more green, the reality is that codes have caught up to standards and the premium no longer exists.
Overall, panelists felt that Austin’s market is bullish, without much concern for oversupply of residential units. Brad’s optimistic view is that Austin will prioritize sustainability in its surge of multifamily development within the next 1-2 years to meet the demand of its Millennial tenants, and simply as a good return on investment.
Seattle’s Green Building Revolution
The Seattle panel faced similar concerns. The once reigning green city needs a boost in its sustainable development to keep pace.
Dina compared Seattle to other markets, noting the trend of Zero Net Energy (ZNE). With 191 ZNE projects certified or emerging in the US, only six of these are in Washington (as compared to California’s significant lead of 59 ZNE buildings). Seattle is losing its leadership role in sustainable development as developers struggle to build under the latest, most sustainable standards.
The upside is that developers are seeing and delivering more value through high performance real estate with significant increases in asset valuation and rent differential. One ZNE commercial office building in Sunnyvale, Calif. demonstrated a $240,000 net rent differential, with a 7.5% cap rate that equals over $3 million in increased asset value.
At Paladino, Dina has seen strong trends of investors incorporating Sustainable Responsible Investing (SRI) into their investment requirements. In fact, a staggering $6.5 trillion of investment capital in the market is using one or more SRI strategies. Interestingly, $2 trillion of the $6.5 is located in 450 Environmental Social Governance (ESG) mutual funds, which represents a 200% increase since 2012.
What was clear to both audiences in Austin and Seattle is that sustainability in real estate is meaningful, and it is proving its financial value. As the top line benefit becomes clearer to stakeholders, Paladino is optimistic that sustainability will once again sweep through these booming cities.