Analysis: Can green construction beat the building blues?

BANGALORE Tue Jan 11, 2011 2:22pm EST

BANGALORE (Reuters) - After a 2-year slump in the construction market, U.S. building materials firms hope a trend to so-called green -- or energy efficient -- building will steer them back to growth.

The U.S. market for new, non-residential 'green buildings' -- such as offices and factories -- is forecast to more than double to as much as $145 billion in five years, according to industry researcher McGraw-Hill Construction.

Building materials firms are using ecological, non-hazardous and recyclable methods to make more affordable wood, plastic and glass composites, cement and roofing materials to improve energy efficiency.

Trex Co Inc, for example, claims to recycle 1.5 billion grocery bags a year to manufacture its building products, and Apogee Enterprises Inc says its spectrally-selective coated glass can reduce lighting and heating, ventilation and air-conditioning energy consumption by more than a quarter.

Other companies make electrical controls and solar systems.

"Controls make buildings smarter ... turning systems off when no one is in the room. These are the areas where investments are going," said Brian Kremer at Roth Capital.

Building products makers looking to capitalize on the green drive include Trex, Apogee Enterprises Inc and Beacon Roofing. Contractors such as URS Corp, Aecom and Tutor Perini are also positioned to gain from the trend.

Johnson Controls, Cree -- which was picked by retail giant Wal-Mart to supply light emitting diode (LED) lighting in more than 600 of its stores, motor makers Baldor Electric and AO Smith, Lime Energy and distributor Wesco International have more exposure to green building.

Building owners, themselves going through a lean patch, are investing more in green projects to exploit lower costs and government incentives such as tax credits.

Green building legislation and initiatives have been adopted at a dozen federal agencies and in 33 states.

The push for more energy efficient buildings is also helping as a marketing tool.

"If they can add value, they can resell at a higher price or command better rent," said Michele Russo of McGraw-Hill Construction Research & Analytics.

The U.S. Green Building Council (USGBC), a non-profit organization, reckons sale prices for energy efficient buildings are as much as 10 percent higher per square foot than conventional buildings.

GREEN PREMIUM

For design firms, revenue from green projects rose 17 percent to $3.3 billion in 2009, though their overall revenue fell 12 percent. For contractors, green project revenue rose 11 percent, but total revenue dropped 14 percent.

"The companies developing green building products are trying to price their products at a premium," Piper Jaffray analyst Thomas Hayes said.

Green building gained momentum during the recession when energy efficient office buildings helped cash-strapped companies trim their costs and bolster cashflow.

"Energy efficiency measures typically had the shortest payback period. They would be the lowest hanging fruit," said Kremer at Roth Capital.

U.S. homebuilders, who used to flaunt their environmental credentials, are now basing their promotions more on energy efficiency.

Meritage Homes is building entire energy efficient communities, while Toll Brothers gives buyers in The Preserve in Vista Del Verde, southeast of Los Angeles, an option to rent solar panels.

RETROFIT FOR BUSINESS

Investment in retrofit and renovation for existing buildings will add to the projected growth in green building.

"As the credit market loosens, retrofits are likely to be the top agenda item for real estate owners ... as they seek ways to recapture equity value lost in the commercial real estate downturn," Canaccord Genuity analyst Eric Prouty said.

Analysts consider LED lighting products as an attractive area in green building as clients retrofit to beat rising utility costs.

"Major industrial buildings are being retrofitted; we're seeing major street lighting upgrades around the world," said Dale Pfau, an analyst with Cantor Fitzgerald.

To help the green building drive, the USGBC has developed a Leadership in Energy & Environmental Design (LEED) standard to evaluate the quality of the green methods used.

"Certainly, when a building meets a certain level of LEED certification, they use it as a marketing tool. Companies are proud they met the gold or silver level of LEED," Kremer said.

The Bank of America Tower was last year awarded the USGBC's highest rating for environmental performance and sustainability, making New York City's second-tallest building its greenest.

The city's tallest building, the Empire State Building, is being retrofitted by Johnson Controls to cut its energy use.

(Reporting by Bijoy Koyitty and Divya Sharma in BANGALORE; Editing by Ian Geoghegan)

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