Commercial Real Estate Blog

Palo Alto has announced that any commercial construction greater than 25,000 square feet will require Green Building Council verification. That move makes it the first south bay city to codify green building. While many new projects coming out of the ground today seek LEED certification, the fact is that ultimately the increased expense of LEED building, at least for the first few years, will be something which will affect the land costs a developer can afford to build. Ultimately, it is the tenants which much demand LEED buildings, otherwise the only difference to a developer is that they are delivering a building at a higher cost. If tenant’s do not demand LEED space and are prepared to pay for it, then mandating LEED does nothing more than reduce the land cost a developer can pay.

The mandate however is not something that will bring commercial construction to a halt. It will simply take a few years to work out as ultimately the tenant demand for LEED space will materialize one way or another; whether voluntary or driven by market forces. Until then, developers will continue to build but it will just take more to make a deal to pencil.

Over the past several weeks, construction prices have climbed about 10% as the combination of a weak dollar and high crude oil prices filter their way through the economy. The weak dollar and global demand has caused base materials products to increase thereby causing an upswing in building material prices. High fuel prices further compound the problem by naturally increasing the cost to transport the goods.

The San Francisco Building Inspections Commission voted in favor on enacting new green building requirements. The requirements would require almost all commercial buildings (those bigger than 5,000 square feet) to comply with LEED standards. In addition, residential structures exceeding 75 feet in height and other buildings in excess of 25,000 square feet must also comply with LEED standards.

The new guidelines will need to be signed into law by the Mayor, but he has indicated that if they are passed by the Board he would do so. It should be noted that the new building requirements would not be fully implemented until 2012.

These requirements will likely become codified in more and more cities over the next several years.