Green Push - Liberty finds sustainability is good business

by Les Shaver

In May 2001, Liberty Property Trust announced that it was building a 58-story property on a site it had acquired a year earlier in downtown Philadelphia. The Malvern, Pa.-based REIT expected the more than $500 million project to be its first venture into sustainability. Right away, the project got a lot of attention. It’s easy to see why. In June 2008, the Comcast Center opened as one of the 15 largest buildings in the country and a Leadership in Energy and Environmental Design (LEED) Silver project. The building, now owned by Liberty and CommerzLeasing und Immobilien AG, a wholly owned subsidiary of German-based Commerzbank AG, is 90 percent leased by Comcast. It’s also the tallest green building in the country.

Since the 1.25-million-square-foot office tower was announced seven years ago, Liberty has built 43 buildings that meet LEED standards and has become one of the leaders of sustainable building in office and industrial space. “Liberty has taken this [green building] on as an important feature in all of their developments,” says Dewitt Peart, president of the Pittsburgh Regional Alliance, a group that markets the benefits of doing business in Southwestern Pennsylvania.

But the Comcast Center started it all. The landmark project reduces energy consumption by 20 percent to 25 percent compared to its peers. First, there’s the amount of light that’s inside—its floor-to-ceiling height ranges from 11 feet to 13 feet. (Convetional ceiling height is between 8 feet and 9 feet.) On top of that, the building’s positioning helps decrease the toll those who work in it put on the environment. Its waterless urinals and fixtures use 40 percent less water than a typical office building, while a glass curtain simultaneously allows in 70 percent of the sun’s visible light and blocks 60 percent of its heat. It’s located on top of a metro stop and has only 87 parking spots. It also has a laundry list of other energy-saving advantages, such as greywater recycling, a passive cooling system, a system that controls indoor air quality, and a 120-foot tall shared entrance for the building and rail system with a dark stone floor with radiant cooling.

“Comcast is the building where we were introduced to LEED,” says John Gattuso, Liberty’s senior vice president and director of national and urban development. “We’ve done some other things since then that have pushed the envelope further.”

And by pushing the envelope, Liberty has moved to the forefront of the sustainable movement. Of its 73 million square feet of property throughout the country, the firm boasts more than 5 million square feet of LEED-registered green space completed or under construction nationwide and in the United Kingdom.
But getting there wasn’t easy. First, Liberty, spurred by Jim Lutz, senior vice president of development, had to prove the merits of sustainable building to founder Bill Rouse. He succeeded. By the time current CEO William P. Hankowsky took over, the company knew sustainable development was good business. After there was corporate buy-in, though, there had to be customer buy-in. And now, Liberty, a company with a long history of initiating change, plans to push harder into sustainability, making every new building LEED-certified and improving the energy efficiency of its existing stock. In fact, the firm was recently named the 2008 Developer of the Year by the National Association of Industrial and Office Properties for its commitment to sustainability.

“It’s the right thing to do,” Hankowsky says. “It has been a benefit to date, and we’re not stopping here.”

SUSTAINABLE LEADER
Where Hankowsky is tasked with leading the company through its green revolution, Lutz is the man behind the scenes, advocating sustainable building in the trenches. Lutz was living in a solar panel house in the early ’80s—long before Hollywood stars and former vice presidents were warning about global warming and encouraging the public to conserve. An early pioneer, Lutz was telling anyone at
his company who would listen about the value of green building. “It’s a passion that I had and just how I had led my life,” Lutz says. “I wanted to live in a home that I could heat completely with the sun.”

In many companies, Lutz would have been politely shrugged aside—at least until everybody else jumped on the sustainable bandwagon. But that’s not what happened at Liberty. That’s because Bill Rouse, who founded the company in 1972, adhered closely to his company’s mission to “enhance people’s lives through extraordinary work environments.”

William P. Hankowsky

■ Title: Chairman, president, and CEO
■ Age: 57
■ Education: B.A. in economics from Brown University
■ First job: Director of development in Camden, N.J., at 24
■ Best advice you ever received: The best winning combination is a blend of “book smarts” and “street smarts.”
■ Leadership philosophy: Emphasize teamwork, delegate, and never stop listening and seeking new information and thinking.
■ Person you most admire: Two people who I worked for—Bill Rouse and Gov. Ed Rendell
■ Favorite quote: Carpe diem (seize the day)
■ Favorite book: The Power Broker: Robert Moses and the Fall of New York by Robert A. Caro
■ Most recent vacation: Family Trip to Costa Rica

“That is not just a clever marketing slogan,” Lutz says. “It’s a core belief of Bill Rouse’s. He believed that you should create buildings that are excellent for the people who use them. He believed that if you build a better building, it will stay full; it will lease faster and will lease at a higher rate.”

After Rouse died in 2003 and Hankowsky took the reins, Liberty found a new voice for its green movement. Hankowsky, a former president of the Philadelphia Industrial Development Corp. (PDIC) from 1989 through 2000, joined Liberty in 2001 as executive vice president and CEO. He has made greening the company’s office portfolio his top priority as CEO. At PDIC, Hankowsky worked with Liberty on high-profile projects such as the city’s sports stadiums for the Eagles and the Phillies.

Since then, Liberty has continued ramping up its green building program. “We have buildings that are healthier because they don’t have chemicals,” Lutz says. “It has better views and has more glass. It’s
a natural and comfortable evolution.”

When Hankowsky came on board, he was already behind the company’s green movement. That commitment has grown since he’s been at the helm. “We believe in it completely at this point,” he says. “Every office building we build is now going to be a [LEED]-certified office building.”

Getting executive buy-in was only the first step. Liberty also had to get its customers on board. Lutz remembers going to the head of development at Vanguard, a Valley Forge, Pa.-based investment management company, which has 1 million square feet of space leased with Liberty, and asking if they knew about sustainable development. The short answer was that they weren’t focused on it. But just a year later, Vanguard’s head of real estate came back to Liberty with a question: What could Liberty tell them about sustainable development? Vanguard was preparing to enter Phoenix, Ariz., and it wanted a
LEED-certified building. “They would not go into a new construction building that wasn’t LEED-certified,” Hankowsky says.

So, when Hankowsky says he notices the number of corporations interested in green building increasing on a quarterly basis, he means it. Another long-time client, Allentown, Pa.-based PPL, an energy provider that controls 11,000 megawatts of generating capacity in the United States, underwent a similar transformation. After learning about sustainable building, the energy provider decided that any old LEED certification wouldn’t suffice. “Th ey actually asked whether they could be Gold,” Hankowsky says.

So Liberty provided them with the Plaza at PPL Center in Allentown, Pa., one of the largest and first commercial office buildings to achieve a LEED Gold rating by the U.S. Green Building Council. It ended up being recognized by the American Institute of Architects and winning several awards, including a 2004 Green Building Award from the Northeast Sustainable Energy Association as well as Urban Land Institute’s 2004 Award for Excellence.

But Liberty’s sustainable building prowess is also stretching beyond long-time customers. JohnsonDiversey, a Racine, Wis.,-based provider of cleaning and hygiene solutions to the institutional
and industrial marketplace, wanted to build a 550,000-square-foot warehouse in nearby Sturtevant. Liberty was one of four companies vying for the job. It eventually won the bid because of its track record.

“Twenty-five percent of their RFP talked about LEED building and what we would do to guarantee a level of LEED certification,” Lutz says. “We guaranteed Silver and achieved Gold. We were able to talk about the two LEED buildings that our Wisconsin offi ce had completed at that time. No other developer had done that.”

ON THE BANDWAGON
What’s behind corporate America’s sudden desire for energy-efficient buildings? For one thing, it’s simple cost. Green buildings use less energy than conventional buildings. “We think our buildings are
at an advantage because we operate them more efficiently, and they’re less costly to run,” says Shelby Christensen, senior vice president and national director of property management for Liberty.

There’s also mounting evidence that in more energy-efficient buildings, employees are more productive. “It increases employee productivity,” Christensen says. “Tenants desire to be in buildings that are more sustainable.”

Mark Gagnon, senior project manager of Torcon, a Red Bank, N.J.-based construction management company, agrees. He’s impressed by the natural light and methods for water conservation in One Crescent Drive, a LEED-certified building in the Philadelphia Navy Yard built by Liberty. “From my personal standpoint, people are happier and a lot more easygoing [in green buildings],” he says. “You’re a
lot more attuned with the environment.”

Other Liberty tenants see this as well. Kim West, operations manager for the Virginia Health Quality Center in Glen Allen, Va., leases the Rowe Building (also in Glen Allen, Va.) from Liberty. The building features bathroom lights that turn off automatically, auto-flushing toilets, upgraded HVAC units, and a huge atrium with glass windows. “We appreciate the green [route] that Liberty has taken,” West says. “It
supported a lot of the values that we, as a company, have.”

The demand from corporations for green is certainly growing. But that doesn’t necessarily make building them profitable. Fortunately, a basic LEED-certified building isn’t that costly for Liberty to produce.
Hankowsky says meeting this standard adds no more than 3 percent to the REIT’s costs (and often less than that). “Maybe it’s the price of our experience,” Hankowsky says. “We have experience with the entire
vendor network that builds the buildings, including architects and contractors.”

Green can also make the development process faster, which ultimately also saves money. In Scottsdale, Ariz., where Liberty built the Vanguard building, the city didn’t have tax incentives but provided another
nice benefi t. “They gave us the next building permit; they moved us to the front of the class,” Hankowsky says. “It saved us a couple months of approval time.”

THE PAYOFF
Over time, Hankowsky is convinced that his LEED buildings will pay off as well. He thinks these structures will maintain higher values than those that aren’t energy-efficient. One reason is that these
buildings use less energy over time. That can chop a lot of expense off the bottom line. “To the degree you are the most efficient on the market and the costs to operate buildings keep going up, that cannot
be anything but a valuable asset over time,” he says.

But Hankowsky admits that, in some cases, the company is not getting more rent from its spec LEED buildings. That’s despite a new study by CoStar Group showing that LEED buildings achieve rent premiums of $11.33 per square foot over nongreen peers. “We believe the buildings lease sooner, get greater visibility, and will be worth more,” Hankowsky says. “But we get market rents. On build-to-suits,
we do get higher rents. And over time [on re-leasing], we believe these assets will have higher re-letting rents.”

If the tenant pays the utilities, it’s a lot easier for Liberty to make the argument sooner than re-leasing. “If a green building is competing versus a non-green building, the tenants are far more likely to take the space in the green building,” says Cedrik Lachance, who co-manages the research team covering the office property sector for Green Street Advisors, a Newport Beach, Calif.-based company that covers the REIT market.

Outside of the company’s Malvern offices, there seems to be a split on exactly how much value the LEED
buildings add to Liberty’s bottom line, or for that matter, the bottom line of Denver-based ProLogis and Columbia, Md.,-based Corporate Office Properties Trust—other commercial REITs that build sustainable buildings. But even with all of these companies crowding into the green space, Paul E. Adornato, an analyst for BMO Capital Markets in New York City, says sustainable structures are still less than 1 percent of the office buildings in the United States. This scarcity adds value. “To the extent that they [Liberty] are willing to invest in green building, that will help bring in more business,” he says.

But Lachance says the jury is still out. “Th e big unanswered question: Can you get a better value for the building ultimately?” he asks. “I don’t think we see it yet. I think most executives will admit at this point there’s no real difference from a valuation standpoint.”

Liberty may gain some benefit down the road, though. “If you are building a sustainable building that will have features that are sustainable, you should get a little better pricing,” Lachance says.

If nothing else, sustainable building certainly helps Liberty’s perception in the towns in which it builds. “I think it’s an asset,” Hankowsky says. “In many of our markets, we’re one of the first to build any LEED building. In almost every case, it has generated market interest—not just in the real estate community,
but in the general community.

We had guys on radio shows and TV interviews. It’s all free advertising.” And that’s why Hankowsky will soon be pushing Liberty’s sustainable operation into its more than 73 million square feet of existing building space over the next five years. Th e company is currently establishing metrics for the program.
“We’re going to do everything we can to make it the most efficient portfolio in the industry,” he says.

Liberty Property Trust
■ Founded: 1972
■ Headquarters: Malvern, Pa.
■ Employees: 488 (in 2007)
■ 2007 Revenues: $699 million
■ Portfolio size: 73 million square feet of office and industrial space
■ Notable projects: The 58-story, 1.25-million- square-foot Comcast Center in Philadelphia is one of the country’s 15 largest buildings and the tallest green building in the United States.

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Managing for Sustainability
Liberty decides that greening its portfolio means looking at existing office space.

Shelby Christensen, senior vice president and national director of property management for Liberty Property Trust in Malvern, Pa., knows there’s a perception that sustainability is only for new construction. But she thinks it fits into property management as well.

“Everybody is excited about new construction that’s LEED-certified,” Christensen says. “That’s great, but the place to make an impact is in the existing portfolio.” Liberty has about 73 million square feet of office and industrial space, and Christensen is determined to save as many resources as possible in those buildings. Some of these mechanisms are quite basic—for instance, using less toxic chemicals in cleaning, using vacuums with HEPA filters, doing cleaning during the day (when lights are on), having full recycling (including paper, plastic, batteries, and computers), and using low- or no-VOC paints. She believes Liberty can save 8 percent to 10 percent of its operating costs by simply adjusting the thermostat. And, she’s looking for even more efficiencies.

“We’re doing energy audits in all office buildings,” Christensen says. “Our goal is to get specific recommendations on how to operate buildings in more efficient ways. There are a number of things that you have to do. We put together a small committee of property managers from the field and discussed what it would take to convert to green cleaning, and we worked with a contractor to write green cleaning specs.”

But it takes time to get tenants to go along with this approach. Kim West admits that her company, Glen Allen, Va.-based Virginia Health Quality Center, which leases space from Liberty’s Rowe Plaza, had doubts when a new timed HVAC system left their building warm over the weekend. “In the summer, it can get toasty if you’re going to come to work on the weekends. When working on proposals, a lot of times
we have to be in on weekends. But if we let them know, they make adjustments.”

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Overall Strategy
Liberty works to expand its portfolio and maintain an above-average leasing record.

Four years ago, Liberty Property Trust in Malvern, Pa., was in only two of the 10 biggest cities in the
United States. Now, the REIT has properties in Phoenix, Chicago, Houston, Philadelphia, and Washington, D.C. Eventually, it would like 15 percent to 20 percent of its portfolio to be in urban areas, according to John Gattuso, senior vice president and director of national and urban development for the company.

Despite this desire, some analysts see Liberty as a company that prefers to be in low barrier-to-entry
markets—with more than 90 percent of its portfolio currently in the suburbs. “From a leasing standpoint, Liberty is in low barrier-to-entry markets with more supply,” says Cedrik Lachance, who co-manages the research team covering the office property sector for Green Street Advisors, a Newport Beach, Calif.-based company that covers the REIT market. “Liberty has a harder time keeping its occupancy
up. At the same time, Liberty is generally a good company in leasing.”

Lachance says Liberty generally holds its occupancy rates at 500 basis points above its competitors in a
market. Paul E. Adornato, an analyst for BMO Capital Markets in New York City, says once people lease from Liberty, they tend to stay put. In the first quarter of 2008, Liberty renewed 67.6 percent of its expiring space. “This is a very healthy renewal ratio, which indicates its tenants are satisfied with the service Liberty provides,” Adornato says.

Liberty’s leasing success is especially beneficial considering the large amount of spec buildings the company builds. Only about 25 percent of the firm’s properties are built to suit, meaning it has to actively recruit companies to lease the rest of the properties it builds. “They do take leasing risks on the development side,” Lachance says. “Historically, they’ve done a really good job of delivering spec projects as fully leased. They’re taking some risks, but they’re not taking risks that are so big
they can’t be managed.”

While Liberty may take a few development risks, it keeps its debt down. Its ratio of debt-plus-preferred
to total market cap is 46.3 percent, which is in line with its office and industrial REIT peers, Adornato says. Lachance agrees. “Liberty has always been a bit more conservative,” he says. “From the way they’re run, I can’t see them ever being in trouble [with leverage].”