Reaching for Sustainability in the Next Real Estate Cycle

Economists predict the real estate market will begin to rebound sometime in 2010 as the economy turns. However, real estate experts say the next round will look markedly different from the last one, with the industry adopting practices aimed at creating a sustainable marketplace.

Unlike the last housing cycle when developers aimed higher and higher, ultimately pricing out middle-income workers, home products in a sustainable market would target a mix of incomes, suggests Henry Cisneros, the former secretary of the U.S. Department of Housing and Urban Development (HUD) and chairman of CityView, a national real estate investment and pension fund manager based in Los Angeles.

Cisneros notes that the majority of housing would be priced to attract the largest group of consumers, those earning about 150% of area median income.

Project success would be measured by the "triple bottom line," its impact on society and the environment, as well as profitability.

Affordable Housing Close to Work

California public pension funds managed by CityView already invest in projects that increase the stock of workforce housing in urban centers, says CityView Vice Chair David Martin.

This allows teachers, firemen, police officers and other middle-income workers to live in communities where they work, improving worker quality of life and reducing pollution by eliminating long commutes. It also improves community safety by reducing response time for emergency personnel in a crisis, Martin points out, noting that the majority of Beverly Hills police and fire officers live in the San Fernando Valley, which often is an hour drive in rush-hour traffic.

Similarly, school districts, colleges and universities are creating onsite housing for faculty and staff, notes Jim Dixon, a principal at Los Angeles-based Nadel Architects, some of which are being funded with money allocated for neighborhood stabilization programs by the American Recovery and Reinvestment Act of 2009.

A partnership of San Mateo County Community College District and Santa Clara Unified School District (SCUSD), for instance, has completed two teacher housing projects on campus parking lots, and another one is under way. The below-market rents at the three projects, which provide a total of 174 units, have helped the districts recruit and retain quality teachers, SCUSD says.

Restore, Renovate, Retrofit, Revitalize

Economic activities designed to address more than one need create efficiencies that make them the most successful and resilient, according to Storm Cunningham, author of The Restoration Economy and reWealth.

Working for Water, an anti-crime program established in post-apartheid South Africa, is one example that has been extremely successful because it was designed to address multiple issues. The program trained high-risk young adults to identify and remove invasive plant species growing in drainage ditches and waterways to sell on the biofuel market. The program reduced the number of youths on the streets, decreasing crime and unemployment while benefiting the environment and saving taxpayers money.

With real estate, Cunningham contends that restoration work is already the predominant force in the rebounding economy, with increasing construction activity impacting regional and local economies both directly and indirectly. He notes, however, that restoration activities are not generating the level of confidence in the economy that new construction does, because the government does not measure restoration projects properly, at least not in terms well understood like "new housing starts."

Cunningham predicts that more than 50% of development activity in Europe and America in the next cycle will be restoration projects that involve a combination of built real estate assets and natural resources. He contends, in fact, that projects that start with "re" — restore, revitalize, rejuvenate, renovate, retrofit, repair, remediate — will dominate the worldwide economy for the rest of 21st Century and beyond.

The 3 Crises: Constraint, Corrosion, Contamination

Cunningham explains that over the last 20 to 30 years, the world has been hit with three global crises, bringing about a turning point in civilization's 5,000-year history in which the primary motivation of humanity will shift from developing raw land and extracting virgin resources to restoring existing assets and repairing damage to natural resources.

"We are running out of expansion room due to over population," he explains in describing the constraint crisis. "Every time we develop a property to a new use, we lose some other vital service. Wars and legal conflicts over territory and related natural resources are now epidemic."

Cunningham notes that most of the built environment is aging or decrepit; wearing out faster than expected; or based on old, wasteful, dysfunction designs — a corrosion crisis. And then there is the contamination crisis:

"The ecosystems that produce our air, soil, food and water — fueled centuries of unbridled new development — are under great stress, as are the immune systems of both human beings and wildlife," he says. "Industrial, agricultural and military contamination is largely to blame, but the damage is compounded in a vicious cycle by the reduced capacity of damaged and destroyed ecosystems to cleanse the environment."

Cunningham says a cap-and-trade policy has a tremendous potential to accelerate the restoration economy, but government agencies must take a rigorous approach to ensure funds go into restoration activities. He says the measure must call for identification of places already damaged and allocate direct funding to restore agriculture, water and the ecological health of the environment.

The 1998 Report Card on America's Infrastructure, by the American Society of Civil Engineers, documented a $1.3-trillion backlog of deferred maintenance, renovation and replacement.

"The report revealed, for the time, that our bridges, roads, sewage plants, solid- and hazardous-handling facilities, and educational institutions are crumbling before our eyes," Cunningham notes.

ASCE's 2009 report card put the cost of needed infrastructure improvements today at $2.2 trillion.

Paying for Much-Needed Improvements

Noting overlap in efforts to improve the environment and infrastructure, Cunningham suggests that federal agencies could be more effective and get the greatest bang for the buck with a flexible, integrated approach to create efficiencies, rather than operating in silos.

Congress is getting ready to reauthorize the Surface Transportation Law, which will provide $250 billion in matching funds for highways, transit and related infrastructure. Meanwhile, the recovery act provided $111 billion for infrastructure improvements, including highway and bridge construction and repair, building and repair of public buildings; and clean drinking water projects.

Additionally, about 75% of the Environmental Protection Agency's $7.143 billion budget in 2009 was allocated to clean up or restoration drinking water, land and ecosystems; the US Army Corps of Engineers budget allocates funding for ecological, infrastructure and watershed restoration; and the Department of Energy is spending billions of dollars cleaning up the petrochemical and radioactive mess created throughout the nation during the first half of the 20th Century.

Attorney Elizabeth Watson, a partner at the Los Angeles law firm Greenberg Luster specializing in land use, suggests that local governments may play a more significant role in accelerating restoration work.

She notes that Los Angeles only imposed Leadership in Energy and Environmental Design (LEED) certification on the private sector after building public buildings to LEED standards to determine if it would be too much to ask. She predicts that local governments will eventually require existing buildings to be upgraded to sustainable standards before changing hands, similar to the requirement for owners of brownfield properties.

 

See also:

LEED No Longer Stops at Construction: Version 3 Checks Up on Efficiency

Oh, Those Sexy Building Codes: More Effective Than 100 Nuclear Plants

High-Tech Green Building Materials Are Transforming Construction

How Green Retrofits Could Save the World

Katrina Sparks a Revolution in Green Modular Housing

Incentivizing the Green Build Up

 

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