Friday, April 10, 2009

Two Pronged Approach: Bottom Up

This is the second of a three part post on my two-pronged approach for greening China’s buildings. The two-pronged approach consists of both a bottom up and a top down strategy for transforming the market for green buildings in China. The first post focused on how China achieved its success with LEED buildings thus far and what this says about market dynamics. This second post will describe the need for bottom up green leadership by real estate developers and describe some policy steps to encourage this. The third post will make the case that particularly in China, this bottom up approach is not nearly enough and introduce a top down approach to supplement the bottom up approach.

As I argued last week, LEED buildings in China’s Tier 1 Class A office markets are beginning to snowball and will continue on this path thanks to the self-reinforcing nature of this type of growth.

But where are the snowballs in the other parts of the market? Unfortunately, nowhere to be found. It’s possible that the LEED snowball will eventually trickle down from the Class A market to the broader Chinese real estate market, but almost certainly not fast enough to help solve the climate crisis in any meaningful way. So how do we create snowballs in all the other parts of the market today?

The need for demonstration projects
The positive feedback of snowballs means that we can “track” the development of these types of markets. Just as with natural ecological cycles, snowballing systems have growth and expansion. It’s almost as though each LEED building in China has spawned two more. This simple chart tracks LEED development in China, but a similar chart could be built for New York City or Portland, Oregon where LEED has really taken off.

A corollary from the snowball discussion then is that the snowball cannot start until some green projects are built. Demonstration projects like ACCORD 21 are critical to transforming the market because they activate both snowball cycles. As tenants of ACCORD 21 begin to understand the many benefits of green building occupancy, word spreads and demand for green building increases. At the same time, the design, construction and operations teams get hands-on experience with green building and knowledge about green building best practices. As this information is institutionalized and disseminated, the premium for green building comes down, further increasing demand.

The bottom up approach therefore focuses on using targeted demonstration projects to create snowballs in the still untransformed sectors which make up the bulk of China’s real estate market.

Developers must lead the way
The fundamental motive that drives real estate development and investment in China is profits. At the end of the day, most Chinese developers value profits above all, no matter how much their marketing may say otherwise.

This profit motive is one of the main reasons why developers and owners have been reluctant to build green buildings. Since most developers have been making good money building energy inefficient buildings for the past few decades, they are quite competent at making these types of buildings. Therefore, changing the process to build green looks like a needlessly risky and costly process to these developers.

In fact, in many cases, every successful project that a developer builds makes the developer that much less interested in changing their process for the next project. “Hey, I made money last project. Why fix something that ain’t broke?” The best way to make the process of building brown buildings “broke” is for leading developers to make more money by building green. Only when green is seen as the more profitable way to build will it start to snowball. And once it snowballs, it will eventually force all market participants to build green.

Leading green developers, therefore, need to step up and start building green projects across all sectors of the market and show that the economics do work (I’ll do a post on green building economics 101 next week that will show why green buildings are so financially superior to brown buildings). They’ve gotten off to a good start at the high end of the market (Pearl River Tower, Vanke Center, Linked Hybrid, Prosper Center, etc). They now need to move this down-market and expand their reach. At the end of this post, I will describe what sorts of projects should be prioritized.

Will this take a few developers to step up and take a little risk? Yes, absolutely. But the rewards could be huge, especially if they believe my snowball theory of green buildings.

Just because it’s “bottom up” doesn’t mean the government has no role to play
Government as occupant
The Chinese government must also make the commitment to greening their own buildings.The government owns and occupies a significant amount of real estate in China. Think of the many buildings occupied by central, provincial and local authorities throughout the country. Although hard statistics are not available, this has to account for a significant portion of total building energy use.

The Chinese government, through their role as an occupier of building space, should “walk the walk” and start demanding green space. ACCORD 21 was a good start, and the government should extend this target for all government buildings, both new and existing. This would have a significant effect on the green building market in China and push the private markets to start snowballing. The building professionals who green the Chinese government buildings will get hands-on experience that can be institutionalized and disseminated, lowering the costs of green building for everyone and bringing the market closer to snowball.

Ideally, the Chinese government would seek Three Star ratings and help drive the uptake of the locally-made rating system. This type of action has international precedent: the General Services Administration, the landlord of the US federal government, played a similar role in pushing LEED by requiring all new buildings to be built to LEED standards. The GSA now occupies 30 LEED certified buildings and has many more registered to seek certification.

Government as policy maker

The Chinese government should encourage their big developers to build the green demonstration projects I argued for earlier in this post. China can do this in two primary ways. The first and more obvious way is through financial incentives. Tax credits, rebates, low-interest loans, and other carrots can be given to developers to lower the cost of these demonstration projects and encourage developers to build them.

The second way is for the Chinese government should also apply subtle (or even not-so-subtle) pressure to developers to start building the demonstration projects that are so sorely needed. In some cases, this type of pressure could be enough for an already forward thinking developer to go ahead and do a cutting-edge demonstration project.

The Chinese government could also apply pressure to large state-owned enterprises to adopt policies that mandate occupying green buildings. This would help activate the tenant demand side of the snowball cycle and encourage more developers to supply green buildings in order to meet the increased demand.

What markets need snowballs?

Green workforce housing
The primary starting point for demonstration projects should be green workforce housing, or affordable housing. Given the intended market, these demonstration projects should focus on minimizing costs by using no- and low-cost green building technologies. These buildings would absolutely use passive solar design techniques, with a focus on high quality insulation, daylighting, and building orientation. These projects would probably use solar hot water heaters and combined heat and power technologies. These types of green housing projects are not meant to be a show of technical or architectural wizardry, but instead should focus on showcasing how cheap and efficient green buildings can be.

These projects will resonate with middle class Chinese consumers who appreciate the energy saving cost benefits of green buildings as well as the health and environmental benefits of green buildings. As understanding of the benefits spreads, the demand side of the snowball will be activated. Simultaneously, the building professionals responsible for putting the building together will learn low-cost green building techniques, activating the supply side of the snowball.

Sustainable communities
Given the massive rural-to-urban migration currently underway in China, sustainability will have to eventually move beyond just greening single buildings and eventually focus on delivering sustainable communities. It is therefore extremely encouraging to see projects like Dongtan Ecocity and the Tianjian eco-cities, but these projects still need to be completed and proven. Hopefully many of the other eco-cities that are currently on the drawing board (EcoBlocks, for example) will also move from plan to reality.

And we shouldn’t forget that although most Chinese will be urban residents by 2030, many will still live in the countryside. Healthy and efficient green rural housing should be pursued.

And last but certainly not least, China must start retrofitting its existing buildings. I’ve mentioned before how poor insulation is in Chinese buildings. Upgrading this insulation and performing related retrofits is a win-win-win-... strategy that provides more of what’s good and less of what’s bad. More comfort. More jobs. Less energy waste. Less coal power plants. Less air quality problems. Where does this start? Well, again, government as occupier will play a big role here. The governments existing space footprint is huge, and they should take the commitment to upgrading their buildings and using less energy. Big real estate owners should also upgrade their holdings. I recently blogged about how owners like CapitaLand and Soho could even try to pursue CDM credits to sweeten these retrofit investments. ESCOs will also play a role here.

The payoff

What will be the result? Hopefully, green snowballs in each and every real estate market in China. As leading developers and occupiers start to transform the market and increase overall environmental performance, the targets will just keep getting higher and higher.
The goal now is retrofits and green workforce housing, but if and when green eventually becomes the norm in China, these goals will ramp up further. The Chinese government and China’s leading developers should step up to the plate and take the first steps needed to make this green vision a reality.

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