5 Major Risks to Green Building Market Growth

greenbuilding4The growth of the green building market has been widely celebrated recently, spurred largely by government policies and rising recognition that such structures are more economical to operate. The forces behind the industry are so strong now that research firm McGraw-Hill Construction predicts green buildings will represent 20-25 percent of new commercial and institutional construction starts by 2013, from about 10-12 percent today.

But while the benefits of designing buildings to use energy, water and other natural resources more efficiently are clear, that doesn’t mean the industry’s growth is free from risk. A number of hurdles will need to be overcome in the coming years that, if not corrected, could significantly slow the market. Below is a list of five pressing issues we’ve compiled from interviews and research reports:

Financial Risk: The biggest concern to building owners, contractors and design firms is financial risk, New York-based insurance broker and risk adviser Marsh found in a study published in May. Participants in the study voiced worry about how constructing green buildings will effect overall profitability, cost of the project, and the ability to complete projects on a given budget. They said there is still uncertainty about the availability of affordable insurance solutions, volatility of commodity prices, and the lack of understanding by lenders and financial institutions about the green building environment.

Legal Risk: What if an architectural firm is contracted to build a green-certified building, such as through LEED, or promises a certain level of performance in terms of energy or water use but isn’t able to deliver? The legal world is still working out who carries what liability and what the compensation should be for not meeting those goals. Currently, most of the risk is borne by the architects, who include these requirements in their contracts with building developers, says Paula Vaughan, associate principal and co-director of the sustainable design initiative at architectural firm Perkins+Will.

But there are problems with this arrangement, she says. The design team (architects, engineers and other professionals) are only responsible for about two-thirds of the LEED points needed to get a building certified; the rest are dependent on the actions of the building contractors and owners. And even the most well-designed buildings can eventually be energy or water hogs if they aren’t properly operated, say if lights or cooling systems are kept on when they aren’t needed.

Green-washed Building Materials: This isn’t as much of a problem as it was five years ago, but it’s still a concern, says Vaughan. As the green building sector has gained steam, manufacturers of materials like paint, flooring and lumber rushed to bring green products to market. But many of these products didn’t live up to the manufacturers’ promises and were often of inferior quality compared with the conventional materials they were meant to replace. Vaughan says architects and other designers have now become savvier about the products that they specify, but there is still the need to be vigilant.

Driving Energy Retrofits: While green buildings are becoming more common for new construction, the vast majority of existing structures use energy inefficiently. That’s why reducing the built environment’s total impact on energy use over the next several decades hinges most crucially on retrofitting existing buildings. But persuading owners to spend tens of thousands, or even hundreds of thousands, of dollars to retrofit their buildings, even if the investments pay for themselves in three to five years, is often difficult, says Dave Leathers, senior vice president at Pittsburgh-based Limbach Facility Services, a mechanical contractor.

Building owners are often hesitant to spend limited resources on projects outside their core businesses, and in today’s economic environment accessing debt through financial institutions is difficult. Add to this the fact that many buildings are not owner occupied, so the benefits of more energy-efficient buildings go more directly to the tenants rather than the owners who have to pony up the cash. Perhaps the bigger problem is that there is no uniform, national legislation requiring existing buildings to be more energy efficient, says Leathers. Instead, there is a limited patchwork of municipalities around the country that promote or require certain standards to be met.

Regulatory Risk: The Marsh report also identified uncertainty about how the regulatory environment might evolve with respect to green buildings as a prime concern for the construction industry. Changes in government regulations could lead to significant punitive damages if green performance standards aren’t met. That might drive owners to seek warranties and guarantees to recapture costs from contractors.