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In less than a decade, green has created the biggest transformation of the U.S. commercial real estate market since the invention of the skyscraper.

McGraw-Hill Construction’s "2006 Green Building SmartMarket Report" predicts that green non-residential construction starts will grow from 2% in 2005 to up to 10% by 2010. "That is actually a very conservative figure," says Rick Fedrizzi, president and CEO of the U.S. Green Building Council (USGBC).

Indeed. In 2006, 21%-or $1.8 billion-of Turner Construction’s $8.5 billion projects worldwide were green.

"You also have to look at the existing buildings market," Mr. Fedrizzi continues. "There are far more existing buildings in the U.S. than new buildings being constructed, basically an 80-20 ratio. Green will probably comprise 80% to 90% of the renovation/redevelopment market."

In November 2006, when Richard M. Rosan, president of the Urban Land Institute (ULI), met with the top real estate brokers in New York to talk about green buildings, one broker told him, "In New York, I don’t think that our tenants care about green, they just want to get into space as quickly as possible." In May 2007, just six months later, that same broker met him at a conference and said, "You won’t believe what’s happened. Today, none of the leading companies will look at a space in New York unless it’s green. They won’t look at it."

As Mr. Rosan puts it, "All of a sudden, green hit."

What has caused this dramatic shift in U.S. commercial real estate markets? The combined impact of two powerful forces.

Green Driver: The Market

The commercial market is demanding green, because more and more companies-as property owners and tenants-have been reaping the many bottom-line benefits of high-performance green workplaces.

In its first year of operation, energy usage at the LEED-Platinum 12-story Genzyme Center (the Cambridge, Mass., headquarters of the Genzyme Corporation) was 42% less than a comparable standard building’s, its water usage was 34% less, employee sick time was 5% lower than for all of Genzyme’s other non-green Massachusetts facilities combined, and 58% of the 900 employees reported increased productivity compared to their experience at Genzyme’s former headquarters building.

Blue-collar workplaces, not just office buildings, are reporting similar benefits. Toyota Logistics Services’ LEED-Gold 85-acre Port of Portland Vehicle Distribution Center (VDC), in Portland, Ore.-which is used for on-site import vehicle staging, processing and logistics functions-consumes 33% less energy and 77% less potable water than a comparable standard facility.

Green Driver: Public Policy

Many companies and developers are lured to green by a wealth of incentives offered by cities, states, the federal government and utility companies for green commercial buildings and energy-efficiency features. The much-publicized LEED-Platinum Bank of America Tower in Manhattan qualified for a $7 million New York State tax credit because of its green features. The Federal Energy Policy Act of 2005 provides a tax deduction of up to $1.80 per square foot for commercial buildings that reduce heating and cooling energy consumption by 50% or more.

More and more companies are also choosing high-performance green buildings to stay ahead of the regulatory curve.

The first generation of green regulations in the U.S. targeted public buildings. Now, driven in part by concerns about global climate change and energy independence, a mounting number of cities and counties are mandating green construction and green renovations of privately owned commercial buildings.

Green Trends

Green is spurring a number of significant changes in commercial real estate. What should companies, developers and investors plan for?

First, companies must respond to the growing public and shareholder demand that they help combat global climate change and national dependence on foreign oil. Green buildings are a very dramatic, public and successful solution.

Second, look for a green renovation boom. With existing conventional buildings threatened with obsolescence, they must either undergo green renovations or lose value and market share.

Third, cities, states and utility companies will stop providing energy-efficiency and green building incentives as more and more jurisdictions mandate green, and as green becomes the market standard. Companies need to take advantage of those incentives before they disappear.

Fourth, companies will need smaller, not larger, buildings, which will reduce their physical and carbon dioxide footprint, both major green goals.

Fifth, companies will change where they locate their workplaces. According to the EPA, congestion caused by employee commutes to and from work costs U.S. employers 3.7 billion hours of lost productivity a year and $63.1 billion in wasted time and fuel annually. U.S. commuters are also responsible for generating 1.3 billion tons of carbon dioxide a year. Addressing "external mobility" has become a corporate responsibility.

Thus, locations with strong public transportation infrastructure will become the locations of choice for corporations. Boeing and United Airlines, for example, have moved their headquarters into downtown Chicago where their employees have immediate access to public transportation options, and a myriad of services and amenities within walking distance.

Finally, our sprawling development patterns will be changing. "We need a huge amount of new buildings to accommodate the 60 to 90 million people who will be added to the American population over the next few decades," says the ULI’s Mr. Rosan. "We have to lay out new towns and subdivisions based on energy efficiency and environmental considerations, make them more dense, build in transit and preserve open space if we are going to achieve energy independence and stop global warming."