Resource Competition Escalates, Highlighting Imperative for Sustainability Strategies to Look Beyond Energy

Number Eight on our CRE hit parade of the “Top Ten Issues Defining the Future of the Real Estate Industry” in 2012 was sustainability. Much of the attention to sustainability in the real estate realm centers on energy efficiency and the efficient use of materials and resources that comprise a particular piece of real estate, a development or a community. LEED certification requirements, corporate sustainability initiatives, government regulation and mandates have focused mainly on doing more with resources onsite and nearby.

However, an environment of resource conflict continues to emerge across the country as population bases grow, pitting municipalities against each other, private owners versus public interests, commercial versus residential real estate, cats versus dogs, and so on. What is emerging is an environment where strategy and planning for real estate interests increasingly involve projections of costs and obligations associated with essential resources tied to, but not directly controlled by, the real estate itself.

After scores of years where wise and efficient use of water and waste disposal resources was not encouraged, and long term societal costs of water and waste use were not properly included, waste and water issues have become critical variables adding cost and uncertainty to project developments. Current water and waste management examples highlight some of the problems we see arising.

Water Accessibility

“Water moratorium limits housing development” – Bismarck Tribune, August 28, 2012

• Much press has been given to the rise of the Bakken Shale oil and gas patch around Williston, North Dakota. An energy industry has arisen from the energy resources of this rural area, simultaneously creating both a need for resources and for workers. The speed of development has been a bit of an anomaly, but the resulting competitive pressure for other finite resources, like water, is not a new issue.A major water supplier, R&T Water Supply, initiated its own water moratorium on serving new housing developments in order to meet its existing commercial customer demands. The availability of water provided by R&T got so tight last summer that two large man camp developments for employees were shut off for a period of time. The underlying issue is not R&T’s ability to run the water lines needed; it is that it bumped up against a ground water allocation of about 1.2 million gallons per day under its State Water Commission permit. As a major water supplier, R&T continues to weigh the profitability of servicing private versus public customers from one common resource. Existing commercial customers are taking precedent over potential new residential developments. Without changes to its permit allocation, this is likely to remain unchanged. The broader issue for the area will be the allocation of its water rights between all potential resource users. The resulting supply/demand conditions will become factors in all future development in the area.

“Georgia pols ramp up campaign to shift Tennessee border, siphon water supply” – Foxnews.com, February 17, 2013

• In the current “mother of all water fights”, although some in California may argue this point, the state of Georgia is reigniting an 1818, pre-Civil War era boundary dispute in an attempt to gain direct water access to the Tennessee River, gaining a bit of land and approximately 30,000 new Georgia residents in the process. As one might guess, Tennessee is rigorously refuting Georgia’s claim. This time, water access is the culprit. The Georgia House of Representatives voted 171-2 to adopt a resolution seeking a thin strip of land linking to the Tennessee River. In this area of Georgia, any future population growth is heavily dependent upon water access. For real estate in the area, increased water costs and rationing can be expected in the future and there is concern that this will erode the viability of future development and increase the cost of existing ownership.

Waste Management

While waste is not a resource, the ability to dispose of it has much the same impact as access to an essential resource like water for a piece of real estate. The following example highlights the potential impact on disposal costs for real estate of the struggle between an area’s sustainability and environmental initiatives and the need for cost effective waste management.

“Operator wants to ‘disconnect’ its landfill site from Chicago and attach to Dolton” – Suntimes.com, March 23, 2012

• The City of Chicago has a 30-year ban on any new or expanded landfills. The neighboring City of Dolton, Illinois does not and it has supported attempts by landfill owner, Land and Lakes Company, to essentially transfer or annex an existing 84-acre landfill to Dolton. The loss of existing disposal fees are at risk for Chicago and the city is fighting the annexation attempt. Land and Lakes has also begun to charge Dolton for disposal of residential waste to the tune of about $1.9 million in new costs. The company has historically allowed free disposal by Dolton, but in light of the statewide moratorium on new or expanded landfills, Land and Lakes, along with other landfill owners, is seeking to maximize the profitability of existing operations. Dolton stands to negotiate its most favorable rates by being supportive of the switch from Chicago to Dolton by the landfill site.

  In a supply-constrained environment, demand drives up price. The result is for companies to seek out the highest paying customers for limited landfill capacity. The struggle here between an area’s own sustainability and environmental initiatives and the necessity of waste disposal is resulting in increased disposal costs. This was anticipated by most, but the city and state constraints are creating a longer-term sustainability issue for the state of Illinois relative to where disposal can occur, pitting neighboring towns against one another.

Conclusion

There have always been resource struggles impacting real estate and associated costs and use. However, examples like those presented highlight that stakes are increasing relative to access and use of resources by communities and real estate owners and users. Forecasting cost assumes access, but as these examples underscore, access cannot always be assumed and scenario planning and sensitivity analysis must also extend to these more non-traditional elements of real estate.

While the emphasis of new sustainability initiatives by governments and companies promises more efficient use of water and waste resources, reducing the costs of purely capital budget oriented solutions, developers and real estate owners will face growing uncertainty—and costs—related to these issues and should plan accordingly.

 

The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.