Central Business District
Investment-grade properties built after 1980 and typically greater than 10 stories that command the highest rents or sale prices compared to other buildings in the same market. Such buildings are well located and provide efficient tenant layouts as well as high quality one-of-a-kind floor plans. These buildings contain modern mechanical systems, and have above-average maintenance and management as well as the best quality materials and workmanship in their trim and interior fittings. They are generally the most attractive and eagerly sought by investors willing to pay a premium for quality.
The U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED®) Green Building Rating System™ was established to encourage and accelerate global adoption of sustainable green building and development practices through the creation and implementation of universally understood and accepted tools and performance criteria. There are four types of LEED® ratings that could be applied to various types and aspects of commercial office buildings:
• LEED® for New Construction and Major Renovations is designed to guide and distinguish high-performance commercial and institutional new construction projects.• LEED® for Existing Buildings: Operations & Maintenance provides a benchmark for building owners and operators to measure operations, improvements and maintenance. The majority of green leasing activities will fall under this designation as it applies to the existing building stock.
• LEED® for Commercial Interiors is a benchmark for the tenant improvement market that allows tenants to control the certification process, realizing that they will not always have full control of other building programs and operations.
• LEED® for Core & Shell aids designers, builders, developers and new building owners in implementing sustainable design for new core and shell construction. This rating is complementary to the Commercial Interiors program and acknowledges that speculative developers will not have full control of the entire facility build out.
Within each of these ratings, there are increasing scores - Silver, Gold and Platinum - based on the degree of sustainability measures that are implemented. As of the third quarter 2008, there were approximately 409 LEED® certified commercial office buildings in the U.S., of which 55 (13%) were in California.
LEED® creates a menu of design and operations prerequisites and credits that were identified by key stakeholders as important sustainability criteria. The menu and points system are tailored by LEED® rating for various types of facilities or aspects of facilities. LEED® includes a requirement for ENERGY STAR in its LEED®-EB (Existing Buildings) rating.
ENERGY STAR is a joint program of the U.S. Environmental Protection Agency (USEPA) and the U.S. Department of Energy (USDOE). USEPA developed and manages an energy performance rating system that is used throughout the U.S. Buildings that receive a rating of 75 or more are recognized with an ENERGY STAR plaque, indicating they are among the top 25% of facilities in the country with respect to energy performance. As of 2008, there were 2,514 ENERGY STAR rated office buildings in the U.S. Of these, 848 (34%) were in California.
ENERGY STAR applies a national energy performance rating, or benchmark on a scale of 1-100, to help energy managers assess how efficiently their buildings use energy, relative to similar buildings nationwide. A rating of 50 indicates average energy performance, while a rating of 75 or better indicates top performance. ENERGY STAR includes consideration of both energy and water in its rating.
Class B properties generally realize lower rents or sale prices compared to Class A properties in the same market. Such buildings offer utilitarian space without special attractions and have ordinary design, if new or fairly new; good to excellent design if an older non-landmark building. Class B buildings typically have average to good maintenance, management and tenants. They are less appealing to tenants than Class A properties, and may be deficient in a number of respects including floor size. They lack prestige and must depend chiefly on a lower rental price to attract tenants and investors.
Generally no-frills, older buildings that offer basic space and command lower rents or sale prices compared to other buildings in the same market. Such buildings typically have below-average maintenance and management, and could have mixed or low tenant prestige, inferior elevators, and/or mechanical and electrical systems.
Green Buildings - Opportunity
California has the largest and most diverse commercial office market in the U.S. with 1.3 billion ft2 of commercial office space. Of this space, 10% is owner-occupied. The remaining 90% - about 1.17 billion ft2 - is leased.1 California’s market is comprised of several distinct sub-sectors.
- Central Business Districts (CBDs) are characterized by large Class A office towers and occur principally in the large urban areas of Sacramento, Oakland, San Francisco, San Jose, Los Angeles and San Diego.
- Suburban Office Parks. Outside of the main CBDs are dense clusters of suburban office parks, usually comprised of ”mid-rise” offices (5 to 10 story buildings) or “flex” buildings (a hybrid of research and development and office space). Silicon Valley, Orange County and the northern markets of San Diego are examples of these markets.
- Fragmented Markets. Outside CBDs and their surrounding markets, the office market is highly fragmented, consisting of various product types of all classifications.
Most Class A office space in California is clustered in large CBD markets. Lower quality or aging building stock is more prevalent in secondary and tertiary markets.
Source: CoStar Market Data, April 20092
Less than 10% of California’s office buildings are presently certified “green”. Those that are either LEED® or ENERGY STAR certified are typically premium Class A buildings concentrated in the major real estate markets. There is a severe scarcity of Class B certified buildings in secondary markets and Class C green certified buildings in all markets. This lack of inventory creates significant challenges to green-minded businesses that are not candidates for Class A buildings.
Source: CoStar Market Data, April 20092
1. Navigant Consulting using CoStar market data
2. 'Other' denotes smaller commercial office markets in California including Marin/Sonoma, Salinas, Bakersfield, San Luis Obispo/Paso Robles, Stockton/Modesto, Santa Barbara/Santa Maria/Goleta, Fresno, and Santa Cruz/Watsonville.
