Greening Industrial Properties

This issue is focused on sustainability and industrial properties—the antithesis of the high-rent office building, the upscale commercial retail center and posh residential development. Industrial property is the backbone of old America, the ugly stepchild, the soot-stained, smokestack-bellowing, gritty structures that housed noisy operations, where people made what America wanted out of commodities and chemicals. These were the workhorse properties that created jobs and produced consistent cash flow and reliable returns for investors.

Lands originally developed for industrial use are often deemed brownfields because of the chemicals used in operations and the mismanagement of byproducts from associated processes. Industrial properties vary greatly in size, location, building materials, and price. And they may be used for factory/office multi-use; factory/warehouse multi-use; heavy/light manufacturing; industrial parks; and research and development parks.

It’s time to take that dirty side of the real estate market and green it up. But to do that we need to understand the economics of redevelopment. The profitable redevelopment of a former residential property is largely dependent on the amount of cleanup and demolition that is required and the price the market will pay to lease or purchase the final product. Pricing is highly dependent on the supply of product and local market demand, and can vary greatly across the country and even within a local market.

For example, Chicago’s metropolitan industrial market is the largest in the country. With more than a billion square feet of industrial product under roof, net rental rates can range from $1.50 sq. ft. to $20 sq. ft., with sales that range from $20 to $80 sq. ft. Factors that contribute to this range include location, ratio of office space, type of building, and functionality (i.e., ceiling height, loading docks, parking, etc.).

The challenge to profitably redeveloping an industrial brownfield property to a new industrial development is in balancing the economics. Much of the upside potential in any brownfield redevelopment is realized when a property is repositioned to a new best use, which will often increase land value by a minimum of 50 percent. Industrial-to-industrial redevelopments lack the added value created from an upgrade in zoning and therefore typically have less capital to allocate for environmental cleanup and demolition costs.

And with today’s focus on cleaner emissions and sustainability, and stricter adherence to government regulations, the economic decision to recycle industrial properties bears greater consideration. While there are financial mechanisms that can ease the burden of industrial brownfield redevelopment, what practical green initiatives can be implemented to reduce an operation’s footprint on the environment in an economical manner?

One answer is upfront planning and government incentives. Ten to 15 years ago, the first brownfields were purchased with little thought of an exit strategy. Today, real estate market analyses help determine highest and best use of a new development prior to acquisition, and remediation is tailored to that use.

It’s time for the market to evolve again by integrating green building design into the due diligence and feasibility analysis phase. Costs for green design and construction materials can then worked into a pro forma. Options for funding green development can include a reduction in purchase price or the use of government incentives that are becoming available to offset the cost of sustainable initiatives.

I propose that we go on step further, that the brownfield industry develop a Green TIF that can finance sustainability initiatives by making them an allocable cost under a TIF redevelopment agreement. With this incentive, the brownfield industry could easily become a leader in green redevelopment, even in the industrial market.

Cost-efficient and cost-saving solutions might include the implementation of bioswales for stormwater retention; the creation of green roofs for energy efficiency; and the use of solar photovoltaic panels to generate electrical energy for lighting.

It’s time we stop turning a blind eye to alternative energy sources and try to apply creative technologies that might prove cost effective for producing the power required to operate heavy industrial operations.

The options and opportunities are limited only by our creativity. So, just when you thought brownfields were getting old, going green can make it new again. Let’s have a lengthier discussion this fall at The Big Deal: NBA Brownfields 2007, Oct. 16-17, in Chicago.

Enjoy the read!

Robert Colangelo
Publisher
robertc@brownfieldnews.com