Beyond LEED: Exploring the Front Edge of Sustainable and Profitable Developments in Washington State

Beyond LEED: Exploring the Front Edge of Sustainable and Profitable Developments in Washington State

What is the first thing many developers or investors think when they hear the words “sustainable” or “green” as their architects describe their building design? For decades, the common perception has been that it is difficult (if not impossible) to make a deeply green building pencil financially. However, by definition “sustainability” is the nexus of environmental, social and economic progress.

As part of NAIOP Washington State’s annual Night of the Stars awards recognizing commercial real estate innovation, the chapter’s Sustainable Development Committee took a closer look at the two nominees, each of whom have elected to be on the front edge of sustainable real estate development. The committee interviewed key participants who were both recognized with Sustainable Development of the Year awards, Watershed and Inspire at the Russell W. Young Building, to learn how they overcame perception to create these very special properties – and are already meeting their projected ROI numbers in less than one year of operation.

Sustainable projects are an investment in our environment and our community, and they are also becoming more and more achievable. Watershed uses 25% less energy and 75% less water. Tenants are seeking out these types of developments. Inspire leased to 97% in the midst of Washington Governor Jay Inslee’s “Stay Home, Stay Healthy” initiative. Jurisdictions are finding creative ways to incentivize sustainable development with things like greater FAR bonuses and additional building height. Sustainable projects are becoming normal and expected. These two projects highlight why.

A key takeaway from both interviews was the depth to which all of the players have immersed themselves on a permanent path to demystifying sustainability. Inspire was “inspired” by the desire to create a family legacy here at home and by the Paris Agreement on climate action. Watershed is a continuation of the entire project team’s collaboration that began in 2008. Neither project is a “one-off” and it is clear that was integral to their success.

The Inspiration behind INSPIRE

In mid-October members of the NAIOP Washington State Sustainable Development Committee sat down with Brett and Larry Phillips to explore the background behind their Living Building Challenge project, Inspire at the Russell W. Young Building, located in Seattle’s Fremont neighborhood.

Brett and Larry helped their family corporation develop the property and sought to create a building that was deeply green. During the project’s conception, Brett and Larry had just returned from Paris where they were delegates to the Paris Agreement climate convention and knew that they wanted to implement its de-carbonization ambitions in our community as part of a family legacy. What better way to do this than to aim high and seek to develop a carbon-positive building using only private equity to demonstrate that it can be done and be profitable?

Once it was decided that a dense, urban and affordable apartment project was in line with what the community needed, their next step was entering into the Living Building Pilot Program (LBPP) with the City of Seattle. The LBPP is a partnership between the International Living Future Institute (ILFI) and the City of Seattle. The current density incentives in that program, which allow for an additional floor of height or up to 25% more developable area, offset the extra costs inherent in developing to a Living Building standard. Inspire was completed under a previous version of the LBPP and only received a 15% increase in FAR.

The ILFI Energy Petal for carbon positive energy was a way to set a benchmark for multifamily projects in Seattle and the country, as we progress towards the 2030 Challenge. In fact, the building’s main feature is its solar energy array which extends over a majority of the roof and becomes an iconic beacon beckoning for others to follow suit. The solar energy system actually produces 105% of the building’s energy and as such, its residents do not have to pay electric bills, which helps residents save money or have more of their budget available to cover rent or other essentials.

When it comes to economics, Inspire also provides inspiration for developers considering the deep green route for their own developments. Its costs were reportedly 10-15% more than conventional construction but the project leased up quickly and has stabilized with a development yield north of 6%. And consider this: Inspire opened its doors in the spring of 2020, right when the world shut down due to the pandemic! That is a testament to the market demand for a well-executed and innovative sustainable building.

One of the biggest lessons the team learned was around water usage. The City of Seattle part of the LBPP required using grey water for toilet flushing and irrigating. But the project team encountered hurdles with King County Public Health officials who were understandably focused on public health issues and who were simultaneously going through a plumbing code change. While the designed grey water treatment system did not get implemented, Inspire was still able to achieve 43% potable water savings beyond code requirements with advanced water reduction design and strategies. At the end of the day, the project presented issues to these regulatory bodies that they had not yet encountered, and it will likely help inform how local governments think about and update codes in the future.  

WATERSHED: Community Impact at a Grand Scale

In mid-October, members of the NAIOP Washington State Sustainable Development Committee also sat down with Joanna Callahan, Kristen Scott and Myer Harrell to explore the background behind the Living Building Pilot Project (LBPP), Watershed, located in Seattle’s Fremont neighborhood.

Great projects always come with great partnership and Watershed is not an exception. The project is a collaboration among Hess Callahan Partners, Stephen C. Grey & Associates, Spear Street Capital and Weber Thompson. This partnership started a decade ago at the highly sustainable Terry Thomas Building, which was one of the first buildings in Seattle to achieve LEED Gold certification and remained fully occupied through the financial crisis. Since then, this partnership continued for Data One, Cedar Speedster (also a NAIOP Washington State Night of the Stars 2020 finalist) and mostly recently Watershed. Watershed is the only building to pursue the 2014 version of Seattle’s Living Building Pilot Program and is pursuing the Materials, Place and Beauty Petal Recognition from the International Living Future Institute (ILFI).

What turned out to be an amazing surprise is how a simple decision to commit to clean water translated into an elegant design that has a major impact on cleaning millions of gallons of water that goes directly into salmon spawning waters. By looking beyond the boundaries of this property and cleaning water from the Aurora Bridge, Troll Avenue and an alley, Watershed has impacted an entire community and the environment in a lasting way. In addition, this Salmon Safe Certified project collects and reuses most of the water needed to flush the toilets from the roof. Watershed is truly water conservation at every level.

Project location is another important factor that contributes to the project success and a broader sustainability goal. Located in the heart of Fremont, surrounded by vibrant businesses and close to residential areas, this project contributes to the “15-minute neighborhood” concept. The adjacency to the Burke-Gilman Trail enables a true trail-oriented development. The project has 100 bike stalls with on-site shower facilities and only 14 parking stalls.

Deeply sustainable buildings do cost more, perhaps 10-15% more, but the lease rates at the higher end of market help with that. The current returns are comparable to any other successful commercial project. For this team of long-term holders, the long-term benefits of tenant retention and reduced operating costs are a definite financial advantage. Yet still the satisfaction of doing the right thing and creating a healthier building is a clear market differentiator. Companies are competing with the comfort of people’s homes to create environments where employees want to spend their time. And the “cool” factor doesn’t hurt, either. Investors, tenants and occupants all are attracted to the reputational return on investment.

Watershed was completed under the third (2014) version of the Living Building Pilot and only received a 15% increase in FAR which proved to be an insufficient incentive. The current version of the program boosts that to 25% increase in Floor Area Ratio, but simultaneously increases the requirements. Watershed has a 20,000-gallon cistern that collects a minimum of 50% of the roof storm water to be used for toilet flushing and irrigation. The current version requires rainwater collection for all non-potable uses year-round. This results in as much as 10 times the amount of water storage capacity on-site. Energy reduction stays at 25%; however, the new 2018 Energy Code will make hitting that target more difficult.

From the policy standpoint, the team appreciates the City having the LBPP program to encourage deep green buildings, but also would like to see more incentives because of the expanded benefits a project like this could bring to the community. At the same time, it would be easier to obtain a more diverse tenant pool if the program could modify the requirements for tenant improvements and only require core and shell compliance.

When asked what could be done to further the conversation of sustainable development, project team member Joanna Callahan said that employees signaling the need for sustainable features to their employer or landlord would give owners and developers increased confidence to go the extra mile of achieving higher sustainability measures and developing more sustainable projects.

Featured image of Watershed by Kilograph.