WEBVTT 00:00:00.000 --> 00:00:02.435 align:middle line:90% [SQUEAKING] 00:00:02.435 --> 00:00:04.383 align:middle line:90% [RUSTLING] 00:00:04.383 --> 00:00:05.844 align:middle line:90% [CLICKING] 00:00:05.844 --> 00:00:10.240 align:middle line:90% 00:00:10.240 --> 00:00:12.260 align:middle line:84% SIQI ZHENG: OK, let's get started. 00:00:12.260 --> 00:00:15.100 align:middle line:84% So today is the second class and also 00:00:15.100 --> 00:00:21.110 align:middle line:84% the first session of the economics in this class. 00:00:21.110 --> 00:00:25.965 align:middle line:84% So we are going to use two classes, today's and also next-- 00:00:25.965 --> 00:00:29.860 align:middle line:90% 00:00:29.860 --> 00:00:31.205 align:middle line:90% today's Thursday, right? 00:00:31.205 --> 00:00:35.740 align:middle line:84% OK, next Tuesday-- we will have two sessions on the economics 00:00:35.740 --> 00:00:36.880 align:middle line:90% of green buildings. 00:00:36.880 --> 00:00:37.970 align:middle line:90% Today is the first one. 00:00:37.970 --> 00:00:40.870 align:middle line:90% 00:00:40.870 --> 00:00:44.210 align:middle line:90% So a little bit of recap-- 00:00:44.210 --> 00:00:46.640 align:middle line:84% in our intro session, we talked about why 00:00:46.640 --> 00:00:48.560 align:middle line:84% we're going to start at green buildings 00:00:48.560 --> 00:00:52.340 align:middle line:84% and what's a unique feature of this class compared 00:00:52.340 --> 00:00:55.170 align:middle line:90% to other sustainability classes. 00:00:55.170 --> 00:00:58.960 align:middle line:84% And remember, we talked about the triple bottom lines. 00:00:58.960 --> 00:01:03.510 align:middle line:84% So when we talk about climate change and sustainability, 00:01:03.510 --> 00:01:06.990 align:middle line:84% we care about the planet, which is carbon emission, how 00:01:06.990 --> 00:01:09.600 align:middle line:84% to reduce carbon emission, and how 00:01:09.600 --> 00:01:13.230 align:middle line:84% to better improve the quality of life, for example, 00:01:13.230 --> 00:01:17.600 align:middle line:84% healthy buildings and all these people's well-being. 00:01:17.600 --> 00:01:21.690 align:middle line:84% But then we also have the third bubble here, the PPP. 00:01:21.690 --> 00:01:23.580 align:middle line:90% The third bubble is profit. 00:01:23.580 --> 00:01:25.530 align:middle line:90% This is important. 00:01:25.530 --> 00:01:28.680 align:middle line:84% Because we cannot just say we are going to do good things 00:01:28.680 --> 00:01:30.630 align:middle line:84% for the planet and for the people, 00:01:30.630 --> 00:01:33.340 align:middle line:90% but we are keeping losing money. 00:01:33.340 --> 00:01:35.170 align:middle line:90% So that doesn't work. 00:01:35.170 --> 00:01:38.700 align:middle line:84% And especially, it won't work for the private sector. 00:01:38.700 --> 00:01:42.930 align:middle line:84% It's very clear for all the building stock in cities. 00:01:42.930 --> 00:01:46.560 align:middle line:84% More than 80% of the buildings, they 00:01:46.560 --> 00:01:48.480 align:middle line:84% are supplied by the private sector. 00:01:48.480 --> 00:01:50.700 align:middle line:84% So you must remember that we need 00:01:50.700 --> 00:01:53.040 align:middle line:84% to incentivize the private sector 00:01:53.040 --> 00:01:56.990 align:middle line:84% to supply those sustainable buildings in the cities. 00:01:56.990 --> 00:02:01.420 align:middle line:84% So then this is basically our focus or our perspective 00:02:01.420 --> 00:02:04.420 align:middle line:84% for today's lecture, how to make a business 00:02:04.420 --> 00:02:06.940 align:middle line:90% case for the green buildings. 00:02:06.940 --> 00:02:10.520 align:middle line:84% That will be, remember, the big picture. 00:02:10.520 --> 00:02:15.400 align:middle line:84% I have this big picture for the entire course, so 00:02:15.400 --> 00:02:20.560 align:middle line:84% the fundamental driving forces of this sustainable real estate 00:02:20.560 --> 00:02:24.760 align:middle line:84% from these end users of us, of end 00:02:24.760 --> 00:02:30.970 align:middle line:84% users, these blue individuals, from the user's perspective, 00:02:30.970 --> 00:02:33.580 align:middle line:84% from the space market, and then also 00:02:33.580 --> 00:02:36.940 align:middle line:84% from this individual investors, also all of us 00:02:36.940 --> 00:02:38.630 align:middle line:90% from the capital market. 00:02:38.630 --> 00:02:40.150 align:middle line:90% So this is the money. 00:02:40.150 --> 00:02:41.810 align:middle line:90% That is the people. 00:02:41.810 --> 00:02:46.570 align:middle line:84% And basically, the point is, if they want to live and use 00:02:46.570 --> 00:02:48.790 align:middle line:84% and if they will have a higher willingness 00:02:48.790 --> 00:02:53.080 align:middle line:84% to pay for green buildings from the user's perspective, 00:02:53.080 --> 00:02:55.990 align:middle line:84% either office or residential, then 00:02:55.990 --> 00:02:57.800 align:middle line:90% you have a better cash flow. 00:02:57.800 --> 00:02:58.880 align:middle line:90% That's a cash flow. 00:02:58.880 --> 00:03:01.310 align:middle line:84% Remember, the pro forma is a cash flow. 00:03:01.310 --> 00:03:04.120 align:middle line:90% Then you have higher this, NOI. 00:03:04.120 --> 00:03:06.040 align:middle line:90% And then you have a higher NPV. 00:03:06.040 --> 00:03:08.890 align:middle line:90% That makes sense for a business. 00:03:08.890 --> 00:03:12.130 align:middle line:84% Or from the capital market, if those individuals, 00:03:12.130 --> 00:03:14.530 align:middle line:84% they really want to make impact investment, 00:03:14.530 --> 00:03:19.210 align:middle line:84% they want to invest in ESG, which aligns with their value, 00:03:19.210 --> 00:03:20.710 align:middle line:90% then they will push. 00:03:20.710 --> 00:03:23.990 align:middle line:84% They put their money in a pension fund and insurance. 00:03:23.990 --> 00:03:27.460 align:middle line:84% Then they will push those institutional investors 00:03:27.460 --> 00:03:30.490 align:middle line:84% to put money in greener areas investment. 00:03:30.490 --> 00:03:35.860 align:middle line:84% And then they will further push those market key 00:03:35.860 --> 00:03:40.670 align:middle line:84% players to invest in those green real estate. 00:03:40.670 --> 00:03:44.800 align:middle line:84% So that's the idea of the sandwich story, the sandwich. 00:03:44.800 --> 00:03:47.320 align:middle line:84% We have the upper level of individuals, 00:03:47.320 --> 00:03:48.920 align:middle line:90% lower level of individuals. 00:03:48.920 --> 00:03:54.640 align:middle line:84% They push the middle layer, which are those developers 00:03:54.640 --> 00:03:56.620 align:middle line:90% and investors, to go green. 00:03:56.620 --> 00:04:00.900 align:middle line:84% And today, we are going to start from the upper level. 00:04:00.900 --> 00:04:03.900 align:middle line:84% The upper level means those buildings, right? 00:04:03.900 --> 00:04:07.230 align:middle line:84% So today's focus will be a building 00:04:07.230 --> 00:04:10.380 align:middle line:84% because a building is a fundamental basic element 00:04:10.380 --> 00:04:11.590 align:middle line:90% of the entire thing. 00:04:11.590 --> 00:04:14.340 align:middle line:84% So we look at the building, and we look at the cash flow. 00:04:14.340 --> 00:04:17.310 align:middle line:90% So that's the position. 00:04:17.310 --> 00:04:21.360 align:middle line:84% So when we look at building last session, in the intro session, 00:04:21.360 --> 00:04:25.200 align:middle line:84% remember Zhengzhen provided some examples at the beginning 00:04:25.200 --> 00:04:26.700 align:middle line:90% as a motivation. 00:04:26.700 --> 00:04:29.850 align:middle line:84% So several database companies, they build some buildings. 00:04:29.850 --> 00:04:31.590 align:middle line:90% Some are not green at all. 00:04:31.590 --> 00:04:34.290 align:middle line:90% Some are less LEED Platinum. 00:04:34.290 --> 00:04:36.120 align:middle line:90% Some are LEED Gold, like that. 00:04:36.120 --> 00:04:42.480 align:middle line:84% And that's a very good story, that even for one developer, 00:04:42.480 --> 00:04:44.790 align:middle line:90% not always from the heart, see? 00:04:44.790 --> 00:04:47.670 align:middle line:84% All the buildings I'm going to build will be green buildings, 00:04:47.670 --> 00:04:51.760 align:middle line:84% will be the perfect LEED Platinum. 00:04:51.760 --> 00:04:54.940 align:middle line:84% They always have their own considerations. 00:04:54.940 --> 00:04:57.190 align:middle line:84% Those considerations will be changing 00:04:57.190 --> 00:05:01.150 align:middle line:84% over time and in different market context. 00:05:01.150 --> 00:05:06.440 align:middle line:84% So I'm going to tell a similar story of this big developer 00:05:06.440 --> 00:05:07.030 align:middle line:90% here. 00:05:07.030 --> 00:05:09.070 align:middle line:90% It's Millennium Partners. 00:05:09.070 --> 00:05:12.800 align:middle line:84% So this Millennium Partners is a big developer. 00:05:12.800 --> 00:05:14.140 align:middle line:90% I'm not sure. 00:05:14.140 --> 00:05:16.660 align:middle line:84% Maybe some of you know this developer. 00:05:16.660 --> 00:05:21.000 align:middle line:90% Anyone know this developer? 00:05:21.000 --> 00:05:21.510 align:middle line:90% Please. 00:05:21.510 --> 00:05:24.760 align:middle line:84% AUDIENCE: Millennium Tower [INAUDIBLE] high school. 00:05:24.760 --> 00:05:26.600 align:middle line:84% SIQI ZHENG: Yes, Millennium Tower. 00:05:26.600 --> 00:05:27.436 align:middle line:90% Where? 00:05:27.436 --> 00:05:28.350 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:05:28.350 --> 00:05:29.550 align:middle line:90% SIQI ZHENG: Boston, right? 00:05:29.550 --> 00:05:31.200 align:middle line:90% Yes. 00:05:31.200 --> 00:05:35.371 align:middle line:84% Anyone else who knows this developer? 00:05:35.371 --> 00:05:36.100 align:middle line:90% Oh, please. 00:05:36.100 --> 00:05:37.385 align:middle line:90% Go ahead, Andy. 00:05:37.385 --> 00:05:39.010 align:middle line:84% AUDIENCE: Yeah, they're a big developer 00:05:39.010 --> 00:05:40.240 align:middle line:90% across the country in Boston. 00:05:40.240 --> 00:05:43.795 align:middle line:84% They have a number of high profile luxury condominium 00:05:43.795 --> 00:05:45.170 align:middle line:84% projects and some other projects. 00:05:45.170 --> 00:05:49.330 align:middle line:84% The big one right now is their Passive House building downtown. 00:05:49.330 --> 00:05:53.230 align:middle line:84% SIQI ZHENG: Yes, what's the name of that building? 00:05:53.230 --> 00:05:55.050 align:middle line:90% AUDIENCE: Winthrop Square? 00:05:55.050 --> 00:05:57.180 align:middle line:84% SIQI ZHENG: I think it's a Winthrop Center. 00:05:57.180 --> 00:05:58.890 align:middle line:90% OK, good. 00:05:58.890 --> 00:06:04.920 align:middle line:84% So as just now some of you know, this is a very big developer. 00:06:04.920 --> 00:06:09.270 align:middle line:84% And they build luxury condos in gateway cities, 00:06:09.270 --> 00:06:11.410 align:middle line:90% luxury condos for rich people. 00:06:11.410 --> 00:06:13.280 align:middle line:90% So that's their key. 00:06:13.280 --> 00:06:17.340 align:middle line:84% Their competitive expertise advantage 00:06:17.340 --> 00:06:21.510 align:middle line:84% is building luxury condos at very, very good locations, 00:06:21.510 --> 00:06:25.440 align:middle line:84% always in the center of the city in some gateway city, big cities 00:06:25.440 --> 00:06:28.050 align:middle line:84% and many buildings here in Boston. 00:06:28.050 --> 00:06:30.570 align:middle line:90% And this is a private company. 00:06:30.570 --> 00:06:32.700 align:middle line:90% This is not public. 00:06:32.700 --> 00:06:35.740 align:middle line:90% Private company, now they have-- 00:06:35.740 --> 00:06:42.200 align:middle line:84% they already built 2,900 condo units all over those big cities. 00:06:42.200 --> 00:06:45.250 align:middle line:84% And they also build luxury hotels, hotels, 00:06:45.250 --> 00:06:48.520 align:middle line:84% and office buildings, and retail, et cetera. 00:06:48.520 --> 00:06:50.830 align:middle line:90% So this is three partners. 00:06:50.830 --> 00:06:53.300 align:middle line:84% Three founding partners and then later partners, 00:06:53.300 --> 00:06:57.050 align:middle line:84% they have this $4 billion money in hold, assets in hold. 00:06:57.050 --> 00:07:02.872 align:middle line:90% 00:07:02.872 --> 00:07:04.570 align:middle line:90% So this, I just want-- 00:07:04.570 --> 00:07:05.780 align:middle line:90% I have four buildings here. 00:07:05.780 --> 00:07:07.530 align:middle line:84% As you can see, I will have four buildings 00:07:07.530 --> 00:07:09.070 align:middle line:90% of Millennium Partners. 00:07:09.070 --> 00:07:13.090 align:middle line:84% So the first one is this one in San Francisco. 00:07:13.090 --> 00:07:15.880 align:middle line:84% Do you know the story of this building? 00:07:15.880 --> 00:07:17.030 align:middle line:90% Please. 00:07:17.030 --> 00:07:18.780 align:middle line:84% AUDIENCE: Is this the one that was falling 00:07:18.780 --> 00:07:21.097 align:middle line:84% for-- the foundation [INAUDIBLE] have failed, 00:07:21.097 --> 00:07:23.680 align:middle line:84% and so there's been differential settlement in the foundation, 00:07:23.680 --> 00:07:25.572 align:middle line:84% and the building has completely shifted, 00:07:25.572 --> 00:07:27.280 align:middle line:84% and it's tied up in all kinds of lawsuits 00:07:27.280 --> 00:07:30.628 align:middle line:84% right now by the individual condo owners, [INAUDIBLE], 00:07:30.628 --> 00:07:32.120 align:middle line:90% developer? 00:07:32.120 --> 00:07:32.900 align:middle line:90% SIQI ZHENG: Yes. 00:07:32.900 --> 00:07:36.850 align:middle line:90% So basically-- very correct. 00:07:36.850 --> 00:07:39.830 align:middle line:84% Although this Millennium Partners, now, 00:07:39.830 --> 00:07:42.930 align:middle line:84% they are building very green, passive house building here. 00:07:42.930 --> 00:07:46.670 align:middle line:84% But back to 2008, they built a Millennium Tower 00:07:46.670 --> 00:07:50.900 align:middle line:84% as a signature asset of their company. 00:07:50.900 --> 00:07:54.560 align:middle line:84% At that time, they never thought about sustainability. 00:07:54.560 --> 00:07:58.070 align:middle line:84% Instead, they just focused on luxury condos 00:07:58.070 --> 00:08:00.900 align:middle line:84% because they can sell to the rich buyers. 00:08:00.900 --> 00:08:03.800 align:middle line:84% And even-- it's very, very bad news 00:08:03.800 --> 00:08:06.420 align:middle line:84% of this building, not good news of this company. 00:08:06.420 --> 00:08:10.070 align:middle line:84% As Andy just mentioned, they didn't do a very good design 00:08:10.070 --> 00:08:11.910 align:middle line:90% and structural design. 00:08:11.910 --> 00:08:14.750 align:middle line:84% And later, because the foundation has some flaws, 00:08:14.750 --> 00:08:18.320 align:middle line:84% it started to tilt and sink into the ground. 00:08:18.320 --> 00:08:20.010 align:middle line:90% There's a structural problem. 00:08:20.010 --> 00:08:23.370 align:middle line:84% But they sold because they are developer. 00:08:23.370 --> 00:08:26.190 align:middle line:90% They sold this in 2013, I think. 00:08:26.190 --> 00:08:28.310 align:middle line:84% But this problem still continued, 00:08:28.310 --> 00:08:31.770 align:middle line:84% and they cannot get away from this. 00:08:31.770 --> 00:08:34.020 align:middle line:84% Hence, the lawsuit-- and all go to the court, 00:08:34.020 --> 00:08:35.880 align:middle line:90% try to resolve this issue. 00:08:35.880 --> 00:08:39.690 align:middle line:84% So basically, this developer had, at the beginning, 00:08:39.690 --> 00:08:41.429 align:middle line:84% nothing to do with sustainability. 00:08:41.429 --> 00:08:44.410 align:middle line:84% And they even got into a big trouble of this, 00:08:44.410 --> 00:08:46.860 align:middle line:84% just wanted to make money, then got big trouble. 00:08:46.860 --> 00:08:51.120 align:middle line:90% And then another one is this. 00:08:51.120 --> 00:08:52.530 align:middle line:90% Some of you, you know this. 00:08:52.530 --> 00:08:55.650 align:middle line:84% They have some luxury condo buildings. 00:08:55.650 --> 00:08:59.250 align:middle line:84% And here in the 2013, they came to Boston. 00:08:59.250 --> 00:09:01.860 align:middle line:84% They built this Millennium Place. 00:09:01.860 --> 00:09:06.670 align:middle line:90% And so this is another one. 00:09:06.670 --> 00:09:07.640 align:middle line:90% Could you guess? 00:09:07.640 --> 00:09:08.712 align:middle line:90% It's also like a game. 00:09:08.712 --> 00:09:10.420 align:middle line:84% Could you guess at that time whether they 00:09:10.420 --> 00:09:13.150 align:middle line:84% said they are going to build sustainable or green 00:09:13.150 --> 00:09:16.490 align:middle line:84% or something like that, this building? 00:09:16.490 --> 00:09:17.780 align:middle line:90% You have some idea? 00:09:17.780 --> 00:09:19.052 align:middle line:90% AUDIENCE: I don't think so. 00:09:19.052 --> 00:09:19.677 align:middle line:90% SIQI ZHENG: OK. 00:09:19.677 --> 00:09:24.238 align:middle line:84% So what do you think at that time they marketed this building 00:09:24.238 --> 00:09:25.530 align:middle line:90% or they promoted this building? 00:09:25.530 --> 00:09:30.200 align:middle line:84% What was the selling point, do you think, at that time will be? 00:09:30.200 --> 00:09:31.865 align:middle line:84% AUDIENCE: I would say the same as when 00:09:31.865 --> 00:09:34.928 align:middle line:90% they built the luxury condos. 00:09:34.928 --> 00:09:35.595 align:middle line:90% SIQI ZHENG: Yes. 00:09:35.595 --> 00:09:38.820 align:middle line:84% AUDIENCE: If there was even [INAUDIBLE]. 00:09:38.820 --> 00:09:39.720 align:middle line:90% SIQI ZHENG: Right. 00:09:39.720 --> 00:09:44.010 align:middle line:84% So that's why when a developer-- they are very rational. 00:09:44.010 --> 00:09:46.670 align:middle line:84% They're not going to-- just for society. 00:09:46.670 --> 00:09:48.010 align:middle line:90% Yes, that's true. 00:09:48.010 --> 00:09:50.760 align:middle line:84% But always, they need to be very, very clear 00:09:50.760 --> 00:09:53.910 align:middle line:84% about their own profit, the P bubble. 00:09:53.910 --> 00:09:56.250 align:middle line:90% And then at that time-- 00:09:56.250 --> 00:10:00.520 align:middle line:84% of course, luxury condo always their selling point. 00:10:00.520 --> 00:10:04.090 align:middle line:84% But at that time, they need to get this permit from the city, 00:10:04.090 --> 00:10:05.580 align:middle line:90% this Boston city. 00:10:05.580 --> 00:10:09.390 align:middle line:84% At that time, the mayor Boston city is Menino. 00:10:09.390 --> 00:10:12.450 align:middle line:84% Do you know Mayor Menino for 10 years of Boston? 00:10:12.450 --> 00:10:16.650 align:middle line:84% And our very beloved Professor Kairos Shen, 00:10:16.650 --> 00:10:19.530 align:middle line:84% he was the chief planner of Boston 00:10:19.530 --> 00:10:23.740 align:middle line:90% for Mayor Menino for 10 years. 00:10:23.740 --> 00:10:26.910 align:middle line:84% So basically, Kairos, our Kairos, and that mayor 00:10:26.910 --> 00:10:29.010 align:middle line:84% worked together for 10 years and built 00:10:29.010 --> 00:10:33.930 align:middle line:84% this seaport area and those places, all the permits. 00:10:33.930 --> 00:10:35.950 align:middle line:90% If Kairos said yes, then yes. 00:10:35.950 --> 00:10:38.080 align:middle line:84% They can get the permit at that time. 00:10:38.080 --> 00:10:40.250 align:middle line:90% But how can they get permit? 00:10:40.250 --> 00:10:42.980 align:middle line:84% They cannot say, oh, we are going to build luxury condos. 00:10:42.980 --> 00:10:45.470 align:middle line:84% Then the city say, that's nothing to do with me. 00:10:45.470 --> 00:10:47.090 align:middle line:90% You want to make money. 00:10:47.090 --> 00:10:50.680 align:middle line:84% And at that time, this Mayor Menino, 00:10:50.680 --> 00:10:53.350 align:middle line:84% he really care about job opportunities 00:10:53.350 --> 00:10:57.550 align:middle line:84% because that's still after some recession. 00:10:57.550 --> 00:11:02.090 align:middle line:84% This was finished in 2013 but started several years before. 00:11:02.090 --> 00:11:05.350 align:middle line:84% So it's just the financial crisis and the loss 00:11:05.350 --> 00:11:07.270 align:middle line:90% of jobs and the recession. 00:11:07.270 --> 00:11:09.430 align:middle line:90% So they pitched to the city. 00:11:09.430 --> 00:11:15.050 align:middle line:84% They say focus on job creation and the downtown revitalization. 00:11:15.050 --> 00:11:17.620 align:middle line:84% So that was really needed at that time 00:11:17.620 --> 00:11:19.460 align:middle line:90% after the financial crisis. 00:11:19.460 --> 00:11:22.630 align:middle line:84% And the mayor was happy, and Kairos was happy. 00:11:22.630 --> 00:11:25.070 align:middle line:84% And they got the permit and start to build this. 00:11:25.070 --> 00:11:28.720 align:middle line:84% So that's nothing to do with sustainability of this company. 00:11:28.720 --> 00:11:33.040 align:middle line:84% And then another-- then they got so successful, 00:11:33.040 --> 00:11:34.700 align:middle line:90% they made a lot of money. 00:11:34.700 --> 00:11:38.830 align:middle line:84% Then they start to build this Millennium Tower in Boston 00:11:38.830 --> 00:11:41.830 align:middle line:90% and finished in 2017. 00:11:41.830 --> 00:11:45.970 align:middle line:84% Again, condo, luxury condo, but how 00:11:45.970 --> 00:11:51.790 align:middle line:84% they pitch to the market and also the city at that time? 00:11:51.790 --> 00:11:56.050 align:middle line:84% It's not about job creation, but another idea. 00:11:56.050 --> 00:11:57.330 align:middle line:90% Anyone? 00:11:57.330 --> 00:11:59.710 align:middle line:84% Anyone knows some background of this? 00:11:59.710 --> 00:12:02.420 align:middle line:90% It's a huge building. 00:12:02.420 --> 00:12:04.700 align:middle line:84% AUDIENCE: I guess they're marketing it 00:12:04.700 --> 00:12:07.506 align:middle line:84% as the landmark of the city, and they have the best view 00:12:07.506 --> 00:12:12.160 align:middle line:90% and the best condo in Boston. 00:12:12.160 --> 00:12:14.270 align:middle line:84% SIQI ZHENG: OK, so you know some story about this? 00:12:14.270 --> 00:12:14.770 align:middle line:90% No? 00:12:14.770 --> 00:12:15.255 align:middle line:90% You guess. 00:12:15.255 --> 00:12:16.922 align:middle line:84% AUDIENCE: I've heard something about it. 00:12:16.922 --> 00:12:17.950 align:middle line:90% SIQI ZHENG: OK, yes. 00:12:17.950 --> 00:12:19.000 align:middle line:90% That's very good. 00:12:19.000 --> 00:12:19.690 align:middle line:90% Yes. 00:12:19.690 --> 00:12:22.720 align:middle line:84% So basically, at that time, I think 00:12:22.720 --> 00:12:26.470 align:middle line:84% the permit was issued still by that mayor, the same mayor. 00:12:26.470 --> 00:12:28.420 align:middle line:84% And at that time, the mayor really 00:12:28.420 --> 00:12:30.350 align:middle line:84% worried about the big hole there. 00:12:30.350 --> 00:12:32.590 align:middle line:84% Before the building, there was a very big hole, 00:12:32.590 --> 00:12:36.460 align:middle line:84% nothing and abandoned the area in a very good location 00:12:36.460 --> 00:12:37.130 align:middle line:90% in Boston. 00:12:37.130 --> 00:12:40.460 align:middle line:84% Nobody can really build something significant there. 00:12:40.460 --> 00:12:44.770 align:middle line:84% And then the mayor said this is perhaps 00:12:44.770 --> 00:12:47.530 align:middle line:84% his number one development priority 00:12:47.530 --> 00:12:49.610 align:middle line:90% to solve this big hole area. 00:12:49.610 --> 00:12:52.810 align:middle line:84% Who can build a good thing and fill in this place 00:12:52.810 --> 00:12:55.640 align:middle line:84% and make this a better place of the Boston? 00:12:55.640 --> 00:12:59.930 align:middle line:84% And that's how they pitched to the city. 00:12:59.930 --> 00:13:03.910 align:middle line:84% And then you cannot just have the city and also the buyers, 00:13:03.910 --> 00:13:08.950 align:middle line:84% they want to get people to buy in and pay money. 00:13:08.950 --> 00:13:12.480 align:middle line:84% And then at that time, it's about health and wellness. 00:13:12.480 --> 00:13:17.990 align:middle line:84% So this is the largest at that time for the entire Boston city, 00:13:17.990 --> 00:13:20.120 align:middle line:90% largest only residence-only. 00:13:20.120 --> 00:13:23.480 align:middle line:84% Only those luxury condo owners, they 00:13:23.480 --> 00:13:25.760 align:middle line:90% can use this fitness facility. 00:13:25.760 --> 00:13:31.550 align:middle line:84% And the fitness center is the ground floor of this building. 00:13:31.550 --> 00:13:34.250 align:middle line:84% So at that time, they understand. 00:13:34.250 --> 00:13:35.960 align:middle line:84% I think at that time they understood 00:13:35.960 --> 00:13:38.180 align:middle line:84% a very good selling point to the buyers 00:13:38.180 --> 00:13:41.120 align:middle line:84% will be this health and the lifestyle. 00:13:41.120 --> 00:13:43.800 align:middle line:90% And they say wellness. 00:13:43.800 --> 00:13:46.610 align:middle line:84% And for the city, they just went to the city, 00:13:46.610 --> 00:13:49.230 align:middle line:84% say, we can help you solve this big hole problem. 00:13:49.230 --> 00:13:51.320 align:middle line:84% The mayor got happy, and they got this. 00:13:51.320 --> 00:13:53.430 align:middle line:90% So that's different stories. 00:13:53.430 --> 00:13:58.490 align:middle line:84% And then the last one is the ongoing one. 00:13:58.490 --> 00:14:00.390 align:middle line:90% Andy just mentioned this. 00:14:00.390 --> 00:14:02.240 align:middle line:90% This is the Winthrop Center. 00:14:02.240 --> 00:14:04.140 align:middle line:84% So it's still under construction. 00:14:04.140 --> 00:14:06.120 align:middle line:84% I think they will finish very soon this year. 00:14:06.120 --> 00:14:08.480 align:middle line:84% And this will be Zhengzhen 's first case 00:14:08.480 --> 00:14:10.830 align:middle line:90% that she will teach next week. 00:14:10.830 --> 00:14:12.630 align:middle line:90% So that's the Winthrop Center. 00:14:12.630 --> 00:14:19.750 align:middle line:84% And at that time, suddenly, they became such an advocate 00:14:19.750 --> 00:14:24.800 align:middle line:84% for sustainability, for green buildings. 00:14:24.800 --> 00:14:28.690 align:middle line:84% So this one is different from this health 00:14:28.690 --> 00:14:32.080 align:middle line:84% or wellness is different from this, have job description. 00:14:32.080 --> 00:14:34.580 align:middle line:84% Of course, it is different from this, from a problem. 00:14:34.580 --> 00:14:40.000 align:middle line:84% And their important selling point is sustainability. 00:14:40.000 --> 00:14:42.730 align:middle line:84% And they got all kinds of certificates, 00:14:42.730 --> 00:14:47.440 align:middle line:84% as many as they can and the very top level of those certificates. 00:14:47.440 --> 00:14:49.210 align:middle line:90% This is a passive house. 00:14:49.210 --> 00:14:52.840 align:middle line:84% For the office, this lower part is the office. 00:14:52.840 --> 00:14:56.860 align:middle line:84% The higher part is a condo and [INAUDIBLE] and the Gold, 00:14:56.860 --> 00:14:58.330 align:middle line:84% the LEED Platinum, all the things 00:14:58.330 --> 00:15:00.990 align:middle line:84% they can get because they understand, 00:15:00.990 --> 00:15:05.940 align:middle line:84% at this time, sustainability, climate change is so important 00:15:05.940 --> 00:15:10.750 align:middle line:84% and especially for their customers, who are rich people. 00:15:10.750 --> 00:15:13.230 align:middle line:84% For rich people, they always have-- 00:15:13.230 --> 00:15:14.890 align:middle line:90% many of them, they really care. 00:15:14.890 --> 00:15:17.840 align:middle line:84% And they also have the ability to pay for that. 00:15:17.840 --> 00:15:20.010 align:middle line:90% So this is what they are doing. 00:15:20.010 --> 00:15:24.560 align:middle line:84% So this storyline told us it's not 00:15:24.560 --> 00:15:26.840 align:middle line:84% like the developer from the beginning to the end 00:15:26.840 --> 00:15:29.720 align:middle line:84% always put sustainability as the first priority. 00:15:29.720 --> 00:15:30.248 align:middle line:90% See? 00:15:30.248 --> 00:15:31.790 align:middle line:84% No matter what, I'm going to do this. 00:15:31.790 --> 00:15:33.990 align:middle line:90% No, they are very rational. 00:15:33.990 --> 00:15:36.150 align:middle line:84% That's why we need to understand economics. 00:15:36.150 --> 00:15:37.220 align:middle line:90% They are very rational. 00:15:37.220 --> 00:15:42.940 align:middle line:84% And they understand fitness center is important for this. 00:15:42.940 --> 00:15:45.760 align:middle line:84% Now, the sustainability important for that. 00:15:45.760 --> 00:15:49.500 align:middle line:84% And jobs-- important for the city for them to get the permit. 00:15:49.500 --> 00:15:53.290 align:middle line:84% So that's the main takeaway message 00:15:53.290 --> 00:15:57.130 align:middle line:84% I want to you to learn from the Millennium Partners. 00:15:57.130 --> 00:16:00.770 align:middle line:84% And then last week, we have critical thinking. 00:16:00.770 --> 00:16:02.800 align:middle line:84% The critical thinking is, for example, 00:16:02.800 --> 00:16:06.010 align:middle line:84% if we invite guest speakers from this 00:16:06.010 --> 00:16:10.780 align:middle line:84% to our classroom-- we will from Millennium Partners, 00:16:10.780 --> 00:16:12.470 align:middle line:90% who are the developer of this. 00:16:12.470 --> 00:16:17.140 align:middle line:84% And if they give you a talk, of course, they will say why. 00:16:17.140 --> 00:16:19.640 align:middle line:84% It will have different story, like me. 00:16:19.640 --> 00:16:21.610 align:middle line:84% But he will say always sustainability 00:16:21.610 --> 00:16:22.810 align:middle line:90% is so important for them. 00:16:22.810 --> 00:16:25.300 align:middle line:84% From the very beginning, they put this in their heart. 00:16:25.300 --> 00:16:28.710 align:middle line:84% And it's so important for their company and business. 00:16:28.710 --> 00:16:30.150 align:middle line:90% That's partially true. 00:16:30.150 --> 00:16:31.580 align:middle line:90% Yes, it's important. 00:16:31.580 --> 00:16:33.980 align:middle line:84% But then we need to have a critical thinking. 00:16:33.980 --> 00:16:36.790 align:middle line:84% I hope you can ask questions to our guest speaker 00:16:36.790 --> 00:16:38.710 align:middle line:90% when he is here why. 00:16:38.710 --> 00:16:41.920 align:middle line:84% And why in the past buildings you didn't say that? 00:16:41.920 --> 00:16:43.785 align:middle line:90% And why you are now saying that? 00:16:43.785 --> 00:16:44.660 align:middle line:90% What's the rationale? 00:16:44.660 --> 00:16:49.310 align:middle line:84% And how you align your social value and your business value 00:16:49.310 --> 00:16:50.270 align:middle line:90% together? 00:16:50.270 --> 00:16:53.510 align:middle line:84% If there is any misalignment, what you are going to choose?-- 00:16:53.510 --> 00:16:55.910 align:middle line:90% these kind of questions. 00:16:55.910 --> 00:17:00.440 align:middle line:84% OK, so that's motivation of today's class, which 00:17:00.440 --> 00:17:03.890 align:middle line:84% means we really need this critical thinking instead of we 00:17:03.890 --> 00:17:08.150 align:middle line:84% just blindly accept this is such a good thing 00:17:08.150 --> 00:17:09.859 align:middle line:90% and everyone need to do that. 00:17:09.859 --> 00:17:11.210 align:middle line:90% That's nonsense. 00:17:11.210 --> 00:17:15.890 align:middle line:84% And then the structure of today's lecture-- 00:17:15.890 --> 00:17:17.910 align:middle line:90% two parts. 00:17:17.910 --> 00:17:21.060 align:middle line:90% One is how market may work. 00:17:21.060 --> 00:17:24.750 align:middle line:84% Since I always advocate for market, that's true. 00:17:24.750 --> 00:17:28.440 align:middle line:84% Because in this classroom, in this MSRE real estate program, 00:17:28.440 --> 00:17:32.430 align:middle line:84% we emphasize the market force, the invisible hands make things 00:17:32.430 --> 00:17:33.690 align:middle line:90% happen, the invisible hand. 00:17:33.690 --> 00:17:37.500 align:middle line:84% Demand, supply, the invisible hands make things happen. 00:17:37.500 --> 00:17:40.350 align:middle line:84% But we also have this critical thinking 00:17:40.350 --> 00:17:42.420 align:middle line:90% that market has limitations. 00:17:42.420 --> 00:17:43.740 align:middle line:90% Market has failures. 00:17:43.740 --> 00:17:45.970 align:middle line:90% Market failure is always exist. 00:17:45.970 --> 00:17:48.780 align:middle line:84% So I structure this session so that you 00:17:48.780 --> 00:17:54.480 align:middle line:84% have this very clear memory that sometimes the market may work. 00:17:54.480 --> 00:17:58.140 align:middle line:84% Sometimes the market may not work, market failure. 00:17:58.140 --> 00:18:02.580 align:middle line:84% So first, let's be a little bit optimistic about the market 00:18:02.580 --> 00:18:04.660 align:middle line:84% and then say how market can work. 00:18:04.660 --> 00:18:06.870 align:middle line:90% What's the market mechanism-- 00:18:06.870 --> 00:18:09.550 align:middle line:84% to be optimistic of the entire thing. 00:18:09.550 --> 00:18:13.270 align:middle line:84% And then we will talk about several aspects 00:18:13.270 --> 00:18:18.110 align:middle line:84% the market may not work and how we can address those issues. 00:18:18.110 --> 00:18:21.770 align:middle line:90% So that's the structure. 00:18:21.770 --> 00:18:25.220 align:middle line:90% Now, again-- some questions. 00:18:25.220 --> 00:18:27.710 align:middle line:84% So basically, when we talk about market now, 00:18:27.710 --> 00:18:31.950 align:middle line:90% we are all market advocates. 00:18:31.950 --> 00:18:35.240 align:middle line:84% Market, so let's think about market mechanisms. 00:18:35.240 --> 00:18:37.110 align:middle line:90% That's market [INAUDIBLE]. 00:18:37.110 --> 00:18:39.780 align:middle line:90% There's no free-lunch incentive. 00:18:39.780 --> 00:18:43.040 align:middle line:84% Always you need to understand every player's incentive 00:18:43.040 --> 00:18:44.420 align:middle line:90% and the behavior. 00:18:44.420 --> 00:18:48.350 align:middle line:84% So then we look at the three key stakeholders. 00:18:48.350 --> 00:18:52.110 align:middle line:84% Now, we have three bubbles, another three bubbles. 00:18:52.110 --> 00:18:54.540 align:middle line:84% And let's think about-- hypothetically, 00:18:54.540 --> 00:18:56.210 align:middle line:84% let's say this is the office building. 00:18:56.210 --> 00:18:58.170 align:middle line:90% This is the office building. 00:18:58.170 --> 00:19:01.170 align:middle line:84% And office building is an income producing property. 00:19:01.170 --> 00:19:03.780 align:middle line:84% You have a hold period, holding period. 00:19:03.780 --> 00:19:08.540 align:middle line:84% So we have three key stakeholders-- developer, 00:19:08.540 --> 00:19:10.910 align:middle line:90% which develop and then sell. 00:19:10.910 --> 00:19:12.860 align:middle line:84% And the owner, maybe an investor, 00:19:12.860 --> 00:19:15.920 align:middle line:84% who holds that office building for many, many years. 00:19:15.920 --> 00:19:18.470 align:middle line:84% And then tenants, some companies, 00:19:18.470 --> 00:19:21.050 align:middle line:90% they come to rent the space. 00:19:21.050 --> 00:19:23.660 align:middle line:84% So if we think about, oh, all three, 00:19:23.660 --> 00:19:25.290 align:middle line:84% they are all the three stakeholders. 00:19:25.290 --> 00:19:29.180 align:middle line:84% They are thinking, "Green buildings, good. 00:19:29.180 --> 00:19:31.430 align:middle line:84% I'm going to pursue green building." 00:19:31.430 --> 00:19:36.300 align:middle line:84% And what are the benefits they can think of for each bubble? 00:19:36.300 --> 00:19:38.390 align:middle line:90% Some may be intersection. 00:19:38.390 --> 00:19:41.180 align:middle line:84% Can you just randomly come up with some idea 00:19:41.180 --> 00:19:45.590 align:middle line:84% of these many elements in different bubbles? 00:19:45.590 --> 00:19:46.820 align:middle line:90% Any idea? 00:19:46.820 --> 00:19:50.240 align:middle line:84% Because there are different from different perspectives. 00:19:50.240 --> 00:19:50.860 align:middle line:90% Any idea? 00:19:50.860 --> 00:19:53.499 align:middle line:90% 00:19:53.499 --> 00:19:55.166 align:middle line:84% AUDIENCE: The owners want to [INAUDIBLE] 00:19:55.166 --> 00:19:59.170 align:middle line:84% building will have lower cost to operate and to maintain it. 00:19:59.170 --> 00:20:02.185 align:middle line:84% SIQI ZHENG: Lower cost of maintenance, operational cost, 00:20:02.185 --> 00:20:02.685 align:middle line:90% right? 00:20:02.685 --> 00:20:06.360 align:middle line:84% So do you think that also matters for tenant? 00:20:06.360 --> 00:20:08.560 align:middle line:84% Yes, if I need to pay some bills, right. 00:20:08.560 --> 00:20:16.380 align:middle line:84% So let's see, operational cost, lower. 00:20:16.380 --> 00:20:18.360 align:middle line:84% So that may be in the intersection 00:20:18.360 --> 00:20:21.180 align:middle line:90% of the owner and the tenant. 00:20:21.180 --> 00:20:22.240 align:middle line:90% What else? 00:20:22.240 --> 00:20:23.730 align:middle line:90% Yeah, please, Carlos. 00:20:23.730 --> 00:20:25.590 align:middle line:84% AUDIENCE: For the developer-- access 00:20:25.590 --> 00:20:29.720 align:middle line:84% to a different [INAUDIBLE] vehicles that-- for example, 00:20:29.720 --> 00:20:31.910 align:middle line:84% institutional investors that may have mandates 00:20:31.910 --> 00:20:37.550 align:middle line:84% of investing part of their endowment in green development 00:20:37.550 --> 00:20:40.170 align:middle line:84% or green efficiencies, something related to sustainability, 00:20:40.170 --> 00:20:41.990 align:middle line:90% which is very [INAUDIBLE]. 00:20:41.990 --> 00:20:45.850 align:middle line:84% SIQI ZHENG: Good, so lower financing cost 00:20:45.850 --> 00:20:46.820 align:middle line:90% you are saying, right? 00:20:46.820 --> 00:20:50.550 align:middle line:84% If you're a normal building, maybe get a loan of 5%. 00:20:50.550 --> 00:20:54.860 align:middle line:84% And if this is green, maybe get a loan about 4.5% like that. 00:20:54.860 --> 00:20:58.400 align:middle line:84% Those things that you mentioned, that matters for developers. 00:20:58.400 --> 00:21:00.270 align:middle line:90% That also matters for owner. 00:21:00.270 --> 00:21:02.120 align:middle line:90% Yeah, right, intersection. 00:21:02.120 --> 00:21:04.310 align:middle line:84% Because developer need to borrow loans. 00:21:04.310 --> 00:21:07.800 align:middle line:84% And then the owner later also need to borrow a debt. 00:21:07.800 --> 00:21:13.450 align:middle line:84% So that will be lower financing cost, lower. 00:21:13.450 --> 00:21:15.340 align:middle line:90% Any other things? 00:21:15.340 --> 00:21:16.870 align:middle line:90% Christopher. 00:21:16.870 --> 00:21:19.593 align:middle line:84% AUDIENCE: Easier permit for developer? 00:21:19.593 --> 00:21:20.510 align:middle line:90% SIQI ZHENG: I'm sorry? 00:21:20.510 --> 00:21:21.510 align:middle line:90% AUDIENCE: Easier permit. 00:21:21.510 --> 00:21:23.980 align:middle line:84% SIQI ZHENG: Easier permit, OK, that's maybe 00:21:23.980 --> 00:21:26.945 align:middle line:84% the story of the Winthrop Center. 00:21:26.945 --> 00:21:27.730 align:middle line:90% Oh, this is green. 00:21:27.730 --> 00:21:29.740 align:middle line:84% And the current mayor is so happy, 00:21:29.740 --> 00:21:30.980 align:middle line:90% and they give them permit. 00:21:30.980 --> 00:21:32.980 align:middle line:90% So this permit, that's good. 00:21:32.980 --> 00:21:37.580 align:middle line:84% Permit, I think mainly the developers see, permit. 00:21:37.580 --> 00:21:38.600 align:middle line:90% And here? 00:21:38.600 --> 00:21:40.890 align:middle line:84% AUDIENCE: [INAUDIBLE] also lower health costs. 00:21:40.890 --> 00:21:42.800 align:middle line:84% So maybe someone living in a green building, 00:21:42.800 --> 00:21:45.960 align:middle line:84% they might have to incur lower health costs in the future. 00:21:45.960 --> 00:21:47.180 align:middle line:90% SIQI ZHENG: Health, right? 00:21:47.180 --> 00:21:49.412 align:middle line:84% The health, so in which bubble it will be in? 00:21:49.412 --> 00:21:51.620 align:middle line:84% AUDIENCE: I mean, it depends both on owner and tenant 00:21:51.620 --> 00:21:53.570 align:middle line:90% who are living there. 00:21:53.570 --> 00:21:56.100 align:middle line:84% SIQI ZHENG: Yeah, mainly this owner won't live there. 00:21:56.100 --> 00:21:59.070 align:middle line:84% This is just a remote investors, for example. 00:21:59.070 --> 00:22:00.290 align:middle line:90% So it will be tenants. 00:22:00.290 --> 00:22:02.872 align:middle line:84% If the tenants, they really care about their-- 00:22:02.872 --> 00:22:04.580 align:middle line:84% for example, their companies, they really 00:22:04.580 --> 00:22:06.770 align:middle line:84% care about their employees' health. 00:22:06.770 --> 00:22:09.650 align:middle line:84% And in such a building, they're healthier and happier 00:22:09.650 --> 00:22:10.950 align:middle line:90% and work so hard. 00:22:10.950 --> 00:22:14.360 align:middle line:90% So that will be health, good. 00:22:14.360 --> 00:22:17.690 align:middle line:84% And similarly, maybe also productivity, right? 00:22:17.690 --> 00:22:24.510 align:middle line:84% So anyways, less sick days, for example, productivity, 00:22:24.510 --> 00:22:27.070 align:middle line:90% all increase. 00:22:27.070 --> 00:22:28.395 align:middle line:90% Please, you. 00:22:28.395 --> 00:22:30.520 align:middle line:84% AUDIENCE: To build off that last point about health 00:22:30.520 --> 00:22:33.730 align:middle line:84% and productivity, from the tenants' perspective, 00:22:33.730 --> 00:22:36.730 align:middle line:84% it could be employee recruitment and employee retention. 00:22:36.730 --> 00:22:39.340 align:middle line:84% Because employees are happier, and they feel more comfortable 00:22:39.340 --> 00:22:39.640 align:middle line:90% and-- 00:22:39.640 --> 00:22:40.390 align:middle line:84% SIQI ZHENG: And that's very important. 00:22:40.390 --> 00:22:41.682 align:middle line:90% AUDIENCE: --safe in the office. 00:22:41.682 --> 00:22:44.070 align:middle line:84% SIQI ZHENG: Yeah, talent retention. 00:22:44.070 --> 00:22:44.820 align:middle line:90% Rohid. 00:22:44.820 --> 00:22:48.710 align:middle line:84% AUDIENCE: Higher valuation on rent prices 00:22:48.710 --> 00:22:51.050 align:middle line:84% that the owner or developer provides. 00:22:51.050 --> 00:22:53.572 align:middle line:84% SIQI ZHENG: Please be clearer, in which bubble? 00:22:53.572 --> 00:22:56.072 align:middle line:84% AUDIENCE: High valuation for the owner. 00:22:56.072 --> 00:22:57.030 align:middle line:90% SIQI ZHENG: Evaluation? 00:22:57.030 --> 00:22:58.140 align:middle line:90% The market value, right? 00:22:58.140 --> 00:22:58.470 align:middle line:90% AUDIENCE: Yeah. 00:22:58.470 --> 00:22:59.512 align:middle line:90% SIQI ZHENG: Market value. 00:22:59.512 --> 00:23:03.060 align:middle line:84% And why the market value will be higher? 00:23:03.060 --> 00:23:05.670 align:middle line:84% AUDIENCE: It would be a more desirable product because 00:23:05.670 --> 00:23:07.740 align:middle line:84% of the benefits to the [INAUDIBLE]. 00:23:07.740 --> 00:23:10.115 align:middle line:84% SIQI ZHENG: Yeah, tenants have higher willingness to pay. 00:23:10.115 --> 00:23:13.590 align:middle line:84% So that means higher rent, so higher rent, then higher market 00:23:13.590 --> 00:23:14.300 align:middle line:90% value. 00:23:14.300 --> 00:23:16.110 align:middle line:90% And another-- why? 00:23:16.110 --> 00:23:18.190 align:middle line:84% Because higher rent per square feet. 00:23:18.190 --> 00:23:23.470 align:middle line:84% But other things that can lead to a higher NOI? 00:23:23.470 --> 00:23:24.710 align:middle line:90% AUDIENCE: Lower occupancy? 00:23:24.710 --> 00:23:27.000 align:middle line:84% SIQI ZHENG: Higher occupancy, lower vacancy. 00:23:27.000 --> 00:23:28.450 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:23:28.450 --> 00:23:30.110 align:middle line:90% SIQI ZHENG: Yes, that's right. 00:23:30.110 --> 00:23:37.210 align:middle line:84% So vacancy go down because you are very popular and higher 00:23:37.210 --> 00:23:38.320 align:middle line:90% occupancy. 00:23:38.320 --> 00:23:40.500 align:middle line:90% And the rent maybe go up. 00:23:40.500 --> 00:23:43.350 align:middle line:90% So all this NOI will go up. 00:23:43.350 --> 00:23:45.740 align:middle line:84% And then market value will go up. 00:23:45.740 --> 00:23:48.250 align:middle line:84% Market value will go up good for the owner 00:23:48.250 --> 00:23:52.350 align:middle line:90% and also good for the developer. 00:23:52.350 --> 00:23:54.900 align:middle line:90% So market value go up. 00:23:54.900 --> 00:23:57.720 align:middle line:90% Anything else? 00:23:57.720 --> 00:24:00.278 align:middle line:90% Please. 00:24:00.278 --> 00:24:07.026 align:middle line:84% AUDIENCE: Just [INAUDIBLE] I think they also care 00:24:07.026 --> 00:24:08.862 align:middle line:90% about the maintenance cost. 00:24:08.862 --> 00:24:09.570 align:middle line:90% SIQI ZHENG: Yeah. 00:24:09.570 --> 00:24:13.550 align:middle line:84% AUDIENCE: It's also by classic [INAUDIBLE]. 00:24:13.550 --> 00:24:14.510 align:middle line:90% SIQI ZHENG: Yes, yes. 00:24:14.510 --> 00:24:16.550 align:middle line:84% Maintenance costs, let's say operational costs 00:24:16.550 --> 00:24:19.170 align:middle line:84% is both the utility costs and the maintenance cost. 00:24:19.170 --> 00:24:20.900 align:middle line:84% Wilson, you want to say something? 00:24:20.900 --> 00:24:23.540 align:middle line:84% AUDIENCE: Just I'll add a little bit about market value. 00:24:23.540 --> 00:24:26.480 align:middle line:84% Nowadays, people are being able to recognize 00:24:26.480 --> 00:24:28.850 align:middle line:84% the sustainable and green [INAUDIBLE] 00:24:28.850 --> 00:24:33.020 align:middle line:84% ESG factors as an important [INAUDIBLE] to invest 00:24:33.020 --> 00:24:35.600 align:middle line:90% or [INAUDIBLE]. 00:24:35.600 --> 00:24:37.730 align:middle line:84% Tenant may want to live in this building 00:24:37.730 --> 00:24:39.440 align:middle line:84% because they do value [INAUDIBLE]. 00:24:39.440 --> 00:24:43.238 align:middle line:84% SIQI ZHENG: ESG in the heart, so those in ESG we put where? 00:24:43.238 --> 00:24:44.280 align:middle line:90% This bubble, that bubble? 00:24:44.280 --> 00:24:45.080 align:middle line:90% That bubble? 00:24:45.080 --> 00:24:45.955 align:middle line:90% Or in the middle? 00:24:45.955 --> 00:24:47.090 align:middle line:90% AUDIENCE: I think in the middle. 00:24:47.090 --> 00:24:48.507 align:middle line:84% SIQI ZHENG: In the middle-- so OK. 00:24:48.507 --> 00:24:49.390 align:middle line:90% Good, ESG. 00:24:49.390 --> 00:24:53.330 align:middle line:90% 00:24:53.330 --> 00:24:54.600 align:middle line:90% And what else? 00:24:54.600 --> 00:24:55.280 align:middle line:90% Yes? 00:24:55.280 --> 00:24:55.805 align:middle line:90% Yeah. 00:24:55.805 --> 00:24:57.680 align:middle line:84% AUDIENCE: Similar to the Millennium Partners, 00:24:57.680 --> 00:25:00.300 align:middle line:84% the marketability, like the branding 00:25:00.300 --> 00:25:02.520 align:middle line:90% of the developer [INAUDIBLE]. 00:25:02.520 --> 00:25:04.410 align:middle line:90% SIQI ZHENG: Reputation thing? 00:25:04.410 --> 00:25:05.670 align:middle line:90% Reputation thing? 00:25:05.670 --> 00:25:06.875 align:middle line:90% Is that a reputation thing? 00:25:06.875 --> 00:25:07.750 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:25:07.750 --> 00:25:10.590 align:middle line:84% SIQI ZHENG: But also, that also matters for owner, for example. 00:25:10.590 --> 00:25:14.950 align:middle line:84% I own the greenest building in the city. 00:25:14.950 --> 00:25:15.450 align:middle line:90% Yeah. 00:25:15.450 --> 00:25:16.530 align:middle line:84% AUDIENCE: It's also good for the tenant. 00:25:16.530 --> 00:25:17.697 align:middle line:90% SIQI ZHENG: Good for tenant. 00:25:17.697 --> 00:25:19.545 align:middle line:84% OK, so maybe that's a ESG and reputation. 00:25:19.545 --> 00:25:21.670 align:middle line:84% AUDIENCE: Longevity of the building, so a lifetime, 00:25:21.670 --> 00:25:23.950 align:middle line:84% I think that's good for the developer's reputation. 00:25:23.950 --> 00:25:26.670 align:middle line:84% The owner who's holding the building is also a tenant. 00:25:26.670 --> 00:25:27.390 align:middle line:90% SIQI ZHENG: Yes. 00:25:27.390 --> 00:25:29.880 align:middle line:84% So that's still in the middle, the reputation 00:25:29.880 --> 00:25:32.700 align:middle line:90% and the long-term value. 00:25:32.700 --> 00:25:35.070 align:middle line:90% And do you think for developers? 00:25:35.070 --> 00:25:39.160 align:middle line:84% Developer's circle still a little bit not so full. 00:25:39.160 --> 00:25:39.808 align:middle line:90% Yeah? 00:25:39.808 --> 00:25:41.350 align:middle line:84% AUDIENCE: I think it's easier to sell 00:25:41.350 --> 00:25:42.610 align:middle line:90% when you want to [INAUDIBLE]. 00:25:42.610 --> 00:25:45.070 align:middle line:84% SIQI ZHENG: Yeah, easier to sell or sell faster, right? 00:25:45.070 --> 00:25:46.630 align:middle line:90% Faster and easier sell-- 00:25:46.630 --> 00:25:51.220 align:middle line:90% 00:25:51.220 --> 00:25:52.960 align:middle line:90% OK almost there. 00:25:52.960 --> 00:25:56.310 align:middle line:84% AUDIENCE: [INAUDIBLE] for the owner faster sell? 00:25:56.310 --> 00:25:57.960 align:middle line:84% SIQI ZHENG: Faster sell, yes, yes 00:25:57.960 --> 00:26:01.680 align:middle line:84% because the owner may be later sell to another one, resell. 00:26:01.680 --> 00:26:04.170 align:middle line:84% And also, another thing is when you 00:26:04.170 --> 00:26:07.290 align:middle line:84% resell the market value means now and not later, 00:26:07.290 --> 00:26:11.230 align:middle line:84% so which means depreciation lower, slower depreciation. 00:26:11.230 --> 00:26:13.860 align:middle line:90% It won't depreciate that much. 00:26:13.860 --> 00:26:16.260 align:middle line:84% So depreciation is lower, et cetera. 00:26:16.260 --> 00:26:17.230 align:middle line:90% OK, good. 00:26:17.230 --> 00:26:19.480 align:middle line:90% So overall, it's almost there. 00:26:19.480 --> 00:26:21.060 align:middle line:90% I have some small things. 00:26:21.060 --> 00:26:23.140 align:middle line:84% And we covered almost all of them. 00:26:23.140 --> 00:26:27.480 align:middle line:84% So still remember, now we are in a very optimistic state. 00:26:27.480 --> 00:26:30.460 align:middle line:84% We think, oh, to the very, very best scenario. 00:26:30.460 --> 00:26:32.580 align:middle line:84% The best case scenario will be like this. 00:26:32.580 --> 00:26:36.090 align:middle line:84% So now, we are going to dive into all those items 00:26:36.090 --> 00:26:39.570 align:middle line:84% and see what will happen and some empirical evidence, 00:26:39.570 --> 00:26:40.780 align:middle line:90% whether it will be true. 00:26:40.780 --> 00:26:43.470 align:middle line:84% We cannot just say higher or lower like that-- 00:26:43.470 --> 00:26:46.350 align:middle line:90% empirical evidence. 00:26:46.350 --> 00:26:51.750 align:middle line:84% So first of all, will be this cost benefit analysis. 00:26:51.750 --> 00:26:53.800 align:middle line:84% And this I don't need to go through, 00:26:53.800 --> 00:26:57.630 align:middle line:84% but you learn all this in the basic finance course 00:26:57.630 --> 00:26:59.020 align:middle line:90% or economics course. 00:26:59.020 --> 00:27:02.120 align:middle line:84% That's still this no free lunch thing. 00:27:02.120 --> 00:27:03.870 align:middle line:84% Benefit, cost, and then you decide 00:27:03.870 --> 00:27:06.180 align:middle line:90% whether to go ahead or not. 00:27:06.180 --> 00:27:09.310 align:middle line:84% And so that's basically the methodology. 00:27:09.310 --> 00:27:14.910 align:middle line:84% The key thing is it's not static view, but it's dynamic view. 00:27:14.910 --> 00:27:19.410 align:middle line:84% Because always the building, we have a holding period 00:27:19.410 --> 00:27:20.490 align:middle line:90% of many, many years. 00:27:20.490 --> 00:27:22.720 align:middle line:84% That's different from the other products. 00:27:22.720 --> 00:27:27.250 align:middle line:84% So you have year t 50 years, from 0 year to 50 year. 00:27:27.250 --> 00:27:29.410 align:middle line:90% So you always need to discount. 00:27:29.410 --> 00:27:32.160 align:middle line:84% So that's a unique feature of the real estate discount 00:27:32.160 --> 00:27:35.310 align:middle line:84% because you need to discount for many, many years 00:27:35.310 --> 00:27:39.990 align:middle line:84% cash flow using discount rate r, which is the cost of capital 00:27:39.990 --> 00:27:40.690 align:middle line:90% to discount. 00:27:40.690 --> 00:27:46.191 align:middle line:84% So that's why you need to understand this dynamic view. 00:27:46.191 --> 00:27:50.660 align:middle line:84% To have a very, very precise way to show, 00:27:50.660 --> 00:27:53.630 align:middle line:84% I use a hypothetical office building. 00:27:53.630 --> 00:27:57.690 align:middle line:84% This is totally hypothetical, but not so fake. 00:27:57.690 --> 00:28:01.220 align:middle line:84% We still use the numbers relatively real. 00:28:01.220 --> 00:28:06.320 align:middle line:84% And relatively real I mean for those rent and the vacancy rate 00:28:06.320 --> 00:28:08.540 align:middle line:84% and net operating income, et cetera. 00:28:08.540 --> 00:28:13.650 align:middle line:84% But it's easier for us, first, to look at a hypothetical thing. 00:28:13.650 --> 00:28:18.110 align:middle line:84% See, recap a little bit of your finance class 00:28:18.110 --> 00:28:21.110 align:middle line:84% or any of this cash flow analysis, engineering, economics 00:28:21.110 --> 00:28:23.430 align:middle line:90% class. 00:28:23.430 --> 00:28:27.300 align:middle line:84% Let's first look at the-- because the owner will hold 00:28:27.300 --> 00:28:28.510 align:middle line:90% the building for many years. 00:28:28.510 --> 00:28:30.220 align:middle line:90% I say 10 years. 00:28:30.220 --> 00:28:33.152 align:middle line:84% So 10 years, then always you have 00:28:33.152 --> 00:28:34.360 align:middle line:90% a pro forma like in this way. 00:28:34.360 --> 00:28:36.160 align:middle line:90% Remember Excel like in this way? 00:28:36.160 --> 00:28:38.800 align:middle line:90% We have year zero that you buy. 00:28:38.800 --> 00:28:42.260 align:middle line:84% In year zero, you invest and buy that from a developer. 00:28:42.260 --> 00:28:43.900 align:middle line:90% That's your year zero. 00:28:43.900 --> 00:28:46.850 align:middle line:84% And year one, you start to operate the building. 00:28:46.850 --> 00:28:48.370 align:middle line:84% You start to operate the building. 00:28:48.370 --> 00:28:53.030 align:middle line:84% Then now, for example, you have a potential gross income. 00:28:53.030 --> 00:28:56.110 align:middle line:84% Let's assume that you lease out all the space. 00:28:56.110 --> 00:28:57.670 align:middle line:90% That's 50,000. 00:28:57.670 --> 00:29:00.220 align:middle line:84% And then, of course, you have some vacancy, 00:29:00.220 --> 00:29:02.020 align:middle line:90% then minus some vacancy. 00:29:02.020 --> 00:29:04.570 align:middle line:84% Then you get effective gross income. 00:29:04.570 --> 00:29:05.840 align:middle line:90% That's your income. 00:29:05.840 --> 00:29:07.370 align:middle line:90% Then you need to operate. 00:29:07.370 --> 00:29:08.590 align:middle line:90% So you spend money. 00:29:08.590 --> 00:29:12.080 align:middle line:84% You spend money on this operational expense, 00:29:12.080 --> 00:29:14.440 align:middle line:84% for example, some bills, energy bills. 00:29:14.440 --> 00:29:17.830 align:middle line:84% And you hire some labor to operate 00:29:17.830 --> 00:29:20.600 align:middle line:90% the building and et cetera. 00:29:20.600 --> 00:29:24.280 align:middle line:84% And then you have NOI, your Net Operating Income of this 00:29:24.280 --> 00:29:27.560 align:middle line:90% $28,500. 00:29:27.560 --> 00:29:29.840 align:middle line:84% So that's the very traditional way. 00:29:29.840 --> 00:29:32.300 align:middle line:84% And then you have a capital improvement expenditure. 00:29:32.300 --> 00:29:34.370 align:middle line:84% For example, the elevator you need 00:29:34.370 --> 00:29:38.120 align:middle line:84% to really change to a new elevator, all this capital 00:29:38.120 --> 00:29:40.740 align:middle line:90% reinvestment, capex. 00:29:40.740 --> 00:29:42.640 align:middle line:84% And then you have a nice cash flow. 00:29:42.640 --> 00:29:47.010 align:middle line:84% That's NOI minus a capex, so that you have this. 00:29:47.010 --> 00:29:50.590 align:middle line:84% And then you repeat this over and over for 10 years, 00:29:50.590 --> 00:29:52.800 align:middle line:90% then after 10 years, you sell. 00:29:52.800 --> 00:29:54.060 align:middle line:90% You sell. 00:29:54.060 --> 00:29:59.550 align:middle line:84% And always, we know how we decide on the resale price is 00:29:59.550 --> 00:30:03.540 align:middle line:84% assume another owner, the subsequent owner, 00:30:03.540 --> 00:30:06.370 align:middle line:90% the 11th year's cash flow. 00:30:06.370 --> 00:30:09.850 align:middle line:84% And you see last year, 11 year's cash flow. 00:30:09.850 --> 00:30:14.820 align:middle line:84% And these two, divide by the cap rate at that time. 00:30:14.820 --> 00:30:18.690 align:middle line:84% That's a willingness to pay for the subsequent owner to you 00:30:18.690 --> 00:30:20.140 align:middle line:90% as a resale price. 00:30:20.140 --> 00:30:22.470 align:middle line:90% So you get this resale price. 00:30:22.470 --> 00:30:25.860 align:middle line:84% And then you have all the cash flows you discount. 00:30:25.860 --> 00:30:28.310 align:middle line:84% Then you decide on discount rate. 00:30:28.310 --> 00:30:30.030 align:middle line:90% Now, we assume 8%. 00:30:30.030 --> 00:30:31.320 align:middle line:90% So that's the discount rate. 00:30:31.320 --> 00:30:35.140 align:middle line:84% Because you evaluate the risk, and that's your cost of capital. 00:30:35.140 --> 00:30:36.990 align:middle line:90% Then you get this NPV. 00:30:36.990 --> 00:30:38.670 align:middle line:90% So this is NPV. 00:30:38.670 --> 00:30:43.420 align:middle line:84% So this NPV helps the owner to understand 00:30:43.420 --> 00:30:46.210 align:middle line:84% if they want to buy the building and how much they 00:30:46.210 --> 00:30:49.670 align:middle line:84% are willing to pay to buy this building from the developer. 00:30:49.670 --> 00:30:54.400 align:middle line:84% So if this NPV is higher than the developer's 00:30:54.400 --> 00:30:57.740 align:middle line:84% willing to accept, then they will just buy. 00:30:57.740 --> 00:30:59.050 align:middle line:90% Otherwise, they won't buy. 00:30:59.050 --> 00:31:00.710 align:middle line:90% So that's the basic idea. 00:31:00.710 --> 00:31:03.160 align:middle line:90% Now, the point is the following. 00:31:03.160 --> 00:31:04.840 align:middle line:90% This is like a baseline. 00:31:04.840 --> 00:31:06.740 align:middle line:84% This is not a green building at all. 00:31:06.740 --> 00:31:11.650 align:middle line:84% So if this is a green building and which sells, 00:31:11.650 --> 00:31:14.410 align:middle line:84% all this pro forma will be affected. 00:31:14.410 --> 00:31:18.350 align:middle line:90% And to which direction? 00:31:18.350 --> 00:31:20.210 align:middle line:84% Just now, we discussed the three bubbles 00:31:20.210 --> 00:31:24.050 align:middle line:84% and how these quantitative ideas will 00:31:24.050 --> 00:31:27.385 align:middle line:84% affect these quantitative numbers on this pro forma. 00:31:27.385 --> 00:31:30.040 align:middle line:90% 00:31:30.040 --> 00:31:32.370 align:middle line:84% AUDIENCE: [INAUDIBLE] there may be a couple of ways. 00:31:32.370 --> 00:31:34.358 align:middle line:84% One, maybe the cap rate at the end, 00:31:34.358 --> 00:31:35.900 align:middle line:84% there could be a cap rate compression 00:31:35.900 --> 00:31:38.750 align:middle line:84% considering you have a green building if you retrofit it. 00:31:38.750 --> 00:31:41.690 align:middle line:84% So you have higher value at the end compared 00:31:41.690 --> 00:31:44.430 align:middle line:90% to the assets on the market. 00:31:44.430 --> 00:31:49.880 align:middle line:84% And also, your opex might not go at a higher rate 00:31:49.880 --> 00:31:53.460 align:middle line:84% as you have been at this pro forma. 00:31:53.460 --> 00:31:59.730 align:middle line:84% SIQI ZHENG: OK, so you pointed out that this opex may go down. 00:31:59.730 --> 00:32:04.260 align:middle line:84% Because you have a smaller bills, for example. 00:32:04.260 --> 00:32:06.270 align:middle line:90% You use less energy. 00:32:06.270 --> 00:32:10.200 align:middle line:84% And then you said this retail price may go up. 00:32:10.200 --> 00:32:13.840 align:middle line:84% But could you be clear why it will go up? 00:32:13.840 --> 00:32:17.220 align:middle line:84% Which number will go up or go down? 00:32:17.220 --> 00:32:19.472 align:middle line:84% AUDIENCE: The sale price at year 10? 00:32:19.472 --> 00:32:20.805 align:middle line:90% SIQI ZHENG: Yes, the sale price. 00:32:20.805 --> 00:32:23.160 align:middle line:84% AUDIENCE: [INAUDIBLE] the year 11's cash flow. 00:32:23.160 --> 00:32:26.520 align:middle line:84% And you'll divide it for, well, a more compressed cap 00:32:26.520 --> 00:32:29.760 align:middle line:84% rate, maybe not 6%, but maybe 250 base 00:32:29.760 --> 00:32:31.620 align:middle line:90% points, 500 base points even. 00:32:31.620 --> 00:32:32.370 align:middle line:90% SIQI ZHENG: Right. 00:32:32.370 --> 00:32:35.295 align:middle line:84% AUDIENCE: Just because you have a premium on sustainability, 00:32:35.295 --> 00:32:35.795 align:middle line:90% ESG. 00:32:35.795 --> 00:32:36.503 align:middle line:90% SIQI ZHENG: Good. 00:32:36.503 --> 00:32:39.720 align:middle line:84% So the cap rate may go down a little bit because lower risk. 00:32:39.720 --> 00:32:41.910 align:middle line:84% And it's more favored by the market, et cetera, 00:32:41.910 --> 00:32:44.760 align:middle line:84% although it has a lower cap rate. 00:32:44.760 --> 00:32:45.270 align:middle line:90% Please. 00:32:45.270 --> 00:32:47.958 align:middle line:84% AUDIENCE: For the potential growth, 00:32:47.958 --> 00:32:52.893 align:middle line:84% income will be increased because of the red price in [INAUDIBLE]. 00:32:52.893 --> 00:32:53.810 align:middle line:90% SIQI ZHENG: Very good. 00:32:53.810 --> 00:32:58.857 align:middle line:84% AUDIENCE: So [INAUDIBLE] go down. 00:32:58.857 --> 00:32:59.690 align:middle line:90% SIQI ZHENG: Go down. 00:32:59.690 --> 00:33:00.315 align:middle line:90% AUDIENCE: Yeah. 00:33:00.315 --> 00:33:02.155 align:middle line:84% SIQI ZHENG: Yes, because it's more popular, 00:33:02.155 --> 00:33:04.365 align:middle line:90% as this has a lower vacancy. 00:33:04.365 --> 00:33:05.890 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:33:05.890 --> 00:33:07.398 align:middle line:90% SIQI ZHENG: Yeah, last one. 00:33:07.398 --> 00:33:09.190 align:middle line:84% AUDIENCE: [INAUDIBLE] capex would increase. 00:33:09.190 --> 00:33:13.250 align:middle line:84% But I would guess maybe because you would have more equipment. 00:33:13.250 --> 00:33:14.912 align:middle line:90% Let's say, solar panels. 00:33:14.912 --> 00:33:15.620 align:middle line:90% SIQI ZHENG: Yeah. 00:33:15.620 --> 00:33:17.180 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:33:17.180 --> 00:33:19.800 align:middle line:90% SIQI ZHENG: Don't know, right? 00:33:19.800 --> 00:33:24.290 align:middle line:84% And how about this, this cap rate for now? 00:33:24.290 --> 00:33:28.490 align:middle line:84% This discount rate may also go down if lower risk. 00:33:28.490 --> 00:33:31.030 align:middle line:84% If this building is in Boston city, 00:33:31.030 --> 00:33:34.090 align:middle line:84% for example, or in New York City-- let's say New York City. 00:33:34.090 --> 00:33:37.120 align:middle line:84% Because last session, we talked about New York City's Local Law 00:33:37.120 --> 00:33:38.120 align:middle line:90% 97. 00:33:38.120 --> 00:33:39.680 align:middle line:90% They are so stringent. 00:33:39.680 --> 00:33:42.160 align:middle line:84% And then if you have green building later, you know, 00:33:42.160 --> 00:33:44.320 align:middle line:84% you will pay less penalty to the city. 00:33:44.320 --> 00:33:45.790 align:middle line:90% Or you will pay zero penalty. 00:33:45.790 --> 00:33:49.390 align:middle line:84% But you are bronze building, then you need to pay penalty. 00:33:49.390 --> 00:33:52.010 align:middle line:84% So the owner understand the risk. 00:33:52.010 --> 00:33:53.180 align:middle line:90% And this is green. 00:33:53.180 --> 00:34:00.560 align:middle line:84% So they have a lower risk and, thus, a lower cost of capital. 00:34:00.560 --> 00:34:01.910 align:middle line:90% So I think we covered all. 00:34:01.910 --> 00:34:10.719 align:middle line:84% So we talked about this increase of the potential gross income 00:34:10.719 --> 00:34:14.120 align:middle line:84% and decrease of vacancy and decrease operational, opex. 00:34:14.120 --> 00:34:17.560 align:middle line:84% And here, I'm more optimistic that 00:34:17.560 --> 00:34:20.080 align:middle line:84% will be a lower capital improvement expenditure. 00:34:20.080 --> 00:34:22.239 align:middle line:84% Later, we will explain a little bit on this. 00:34:22.239 --> 00:34:28.980 align:middle line:84% And also-- lower risk, then you have, too, lower discount rate. 00:34:28.980 --> 00:34:35.030 align:middle line:84% So that's how we materialize these impacts 00:34:35.030 --> 00:34:38.030 align:middle line:84% of the green building benefit and cost onto the cells 00:34:38.030 --> 00:34:40.219 align:middle line:84% and numbers on the pro forma, so you 00:34:40.219 --> 00:34:42.260 align:middle line:90% understand how this work out. 00:34:42.260 --> 00:34:45.530 align:middle line:84% Because of this, then, finally, because you 00:34:45.530 --> 00:34:49.310 align:middle line:84% are calculating your NPV, then will be higher NPV. 00:34:49.310 --> 00:34:50.929 align:middle line:90% This one will go up. 00:34:50.929 --> 00:34:54.139 align:middle line:84% Because all of these changes, this NPV will go up. 00:34:54.139 --> 00:34:57.840 align:middle line:84% The NPV goes up, and thus higher willingness to pay. 00:34:57.840 --> 00:35:02.040 align:middle line:84% The owner will say, OK, I'm so happy with this green building. 00:35:02.040 --> 00:35:04.940 align:middle line:84% I have a higher Willingness To Pay, or WTP, 00:35:04.940 --> 00:35:07.680 align:middle line:90% for the green building. 00:35:07.680 --> 00:35:14.210 align:middle line:84% So that's basically the point of this entire circle. 00:35:14.210 --> 00:35:17.790 align:middle line:84% So now, we have a very, very good diagram here. 00:35:17.790 --> 00:35:20.760 align:middle line:84% It's a cash flow, conceptual level cash flow. 00:35:20.760 --> 00:35:24.820 align:middle line:84% This conceptual level cash flow will always show up later. 00:35:24.820 --> 00:35:27.360 align:middle line:84% So I just want to every time reiterate and reiterate 00:35:27.360 --> 00:35:29.190 align:middle line:90% so that you understand this. 00:35:29.190 --> 00:35:32.970 align:middle line:90% So we know three stakeholders. 00:35:32.970 --> 00:35:35.740 align:middle line:84% I always like to call this a chain process. 00:35:35.740 --> 00:35:37.110 align:middle line:90% It's a chain. 00:35:37.110 --> 00:35:37.920 align:middle line:90% They're connected. 00:35:37.920 --> 00:35:41.250 align:middle line:84% They're a chain process, these three stakeholders. 00:35:41.250 --> 00:35:44.610 align:middle line:90% We have the developer. 00:35:44.610 --> 00:35:48.420 align:middle line:84% Then we have the investor, who is the owner. 00:35:48.420 --> 00:35:50.380 align:middle line:90% Then we have the tenants. 00:35:50.380 --> 00:35:52.600 align:middle line:90% Just now, I use a pro forma. 00:35:52.600 --> 00:35:55.840 align:middle line:84% Then you understand the most, most important guy, 00:35:55.840 --> 00:35:59.460 align:middle line:84% the investor's point, the owner's point of the pro forma. 00:35:59.460 --> 00:36:02.560 align:middle line:84% And then let's look at-- just now, 00:36:02.560 --> 00:36:04.540 align:middle line:84% we're still showing numbers, numbers, numbers. 00:36:04.540 --> 00:36:07.110 align:middle line:90% But let's look at the behaviors. 00:36:07.110 --> 00:36:11.020 align:middle line:84% When we talk about behaviors, we will use a way. 00:36:11.020 --> 00:36:12.820 align:middle line:90% We will reverse the thing. 00:36:12.820 --> 00:36:14.980 align:middle line:84% And we will first look at tenant. 00:36:14.980 --> 00:36:19.930 align:middle line:84% Because, remember, in my big picture, 00:36:19.930 --> 00:36:23.440 align:middle line:84% the green individuals in top are users. 00:36:23.440 --> 00:36:26.920 align:middle line:84% From the very, very end, those end users, 00:36:26.920 --> 00:36:29.230 align:middle line:84% they are happy, the green building. 00:36:29.230 --> 00:36:32.120 align:middle line:84% So they have a higher willingness to pay. 00:36:32.120 --> 00:36:36.220 align:middle line:84% If they have a higher willingness to pay-- 00:36:36.220 --> 00:36:38.440 align:middle line:84% this is the high willingness to pay-- 00:36:38.440 --> 00:36:43.750 align:middle line:84% then that will be translated to the higher rent 00:36:43.750 --> 00:36:45.410 align:middle line:90% that the owner can charge. 00:36:45.410 --> 00:36:48.280 align:middle line:90% So this is symmetric. 00:36:48.280 --> 00:36:50.000 align:middle line:90% This is owner. 00:36:50.000 --> 00:36:51.470 align:middle line:90% So this is owner. 00:36:51.470 --> 00:36:54.410 align:middle line:90% This part is owner. 00:36:54.410 --> 00:36:56.870 align:middle line:90% This part is a developer. 00:36:56.870 --> 00:36:58.910 align:middle line:90% This part is the tenant. 00:36:58.910 --> 00:37:04.090 align:middle line:84% So the tenant's cash flow out will be the owner's cash flow 00:37:04.090 --> 00:37:04.590 align:middle line:90% in. 00:37:04.590 --> 00:37:05.240 align:middle line:90% Is that right? 00:37:05.240 --> 00:37:07.070 align:middle line:84% Because the tenants pay the rent, 00:37:07.070 --> 00:37:09.210 align:middle line:84% and the owner will receive that rent. 00:37:09.210 --> 00:37:11.510 align:middle line:90% So the logic is the following. 00:37:11.510 --> 00:37:14.270 align:middle line:84% If the tenant has a higher willingness to pay for rent, 00:37:14.270 --> 00:37:18.830 align:middle line:84% then the owner will get more, higher, rent revenue 00:37:18.830 --> 00:37:20.270 align:middle line:90% from the tenants. 00:37:20.270 --> 00:37:22.387 align:middle line:84% So that's why we start from the end. 00:37:22.387 --> 00:37:24.220 align:middle line:84% AUDIENCE: What was that last thing you said? 00:37:24.220 --> 00:37:27.310 align:middle line:90% You said tenants have the what? 00:37:27.310 --> 00:37:29.790 align:middle line:84% SIQI ZHENG: The tenants have a higher willingness 00:37:29.790 --> 00:37:30.623 align:middle line:90% to pay for the rent. 00:37:30.623 --> 00:37:31.665 align:middle line:90% AUDIENCE: Willing to pay. 00:37:31.665 --> 00:37:33.100 align:middle line:90% SIQI ZHENG: Yes, we call it WTP. 00:37:33.100 --> 00:37:34.590 align:middle line:90% That's the terminology. 00:37:34.590 --> 00:37:36.660 align:middle line:84% Later, maybe I will just say WTP. 00:37:36.660 --> 00:37:38.580 align:middle line:90% There's a willingness to pay. 00:37:38.580 --> 00:37:42.670 align:middle line:84% You are willing to pay how much money. 00:37:42.670 --> 00:37:45.090 align:middle line:84% Yes, so this is the willingness to pay. 00:37:45.090 --> 00:37:48.730 align:middle line:84% So this is chain, a chain process. 00:37:48.730 --> 00:37:52.010 align:middle line:84% If this is longer, then that one will be longer. 00:37:52.010 --> 00:37:54.430 align:middle line:84% And then, later, that will be further translated 00:37:54.430 --> 00:37:55.460 align:middle line:90% to the developer. 00:37:55.460 --> 00:37:57.650 align:middle line:90% But let's look at the end user. 00:37:57.650 --> 00:38:00.340 align:middle line:84% If this won't happen, if this story is fake, 00:38:00.340 --> 00:38:02.720 align:middle line:84% if this won't happen, nothing will happen. 00:38:02.720 --> 00:38:04.340 align:middle line:90% This won't work. 00:38:04.340 --> 00:38:08.260 align:middle line:84% This is the fundamental driving force. 00:38:08.260 --> 00:38:09.400 align:middle line:90% OK, let's look at it. 00:38:09.400 --> 00:38:14.980 align:middle line:84% So here is like then just now we discussed 00:38:14.980 --> 00:38:19.000 align:middle line:84% the potential benefits are higher productivity, better 00:38:19.000 --> 00:38:21.760 align:middle line:90% health benefit, and easier-- 00:38:21.760 --> 00:38:24.940 align:middle line:84% the retention of your employees' talents. 00:38:24.940 --> 00:38:27.820 align:middle line:84% And also, if you need to pay energy bills, 00:38:27.820 --> 00:38:30.460 align:middle line:84% maybe some lower operational cost. 00:38:30.460 --> 00:38:35.320 align:middle line:84% So here, let's look at every atom. 00:38:35.320 --> 00:38:39.780 align:middle line:84% First, operational cost, so you can see 00:38:39.780 --> 00:38:42.917 align:middle line:90% that this is from the reading. 00:38:42.917 --> 00:38:44.500 align:middle line:84% I think this is also from the reading. 00:38:44.500 --> 00:38:46.230 align:middle line:84% I just need to emphasize again, you 00:38:46.230 --> 00:38:49.230 align:middle line:84% need to read the readings before you come to the class. 00:38:49.230 --> 00:38:51.030 align:middle line:84% I already simplified the readings. 00:38:51.030 --> 00:38:52.530 align:middle line:90% Last year, we had more readings. 00:38:52.530 --> 00:38:54.900 align:middle line:84% Each session, we had two or three. 00:38:54.900 --> 00:38:56.400 align:middle line:90% Akrisht will remember that. 00:38:56.400 --> 00:38:57.900 align:middle line:90% Now, we understand. 00:38:57.900 --> 00:39:00.540 align:middle line:84% I became more and more realistic of you. 00:39:00.540 --> 00:39:03.220 align:middle line:84% So OK, if I put three, you will read zero. 00:39:03.220 --> 00:39:04.980 align:middle line:90% No, I put one. 00:39:04.980 --> 00:39:07.390 align:middle line:84% So at each session, I have one reading. 00:39:07.390 --> 00:39:08.550 align:middle line:90% Please read, OK? 00:39:08.550 --> 00:39:10.020 align:middle line:90% Please read that. 00:39:10.020 --> 00:39:11.830 align:middle line:84% Then you say, oh, the report is so long. 00:39:11.830 --> 00:39:13.650 align:middle line:84% Oh, so it's one reading, this 100 page. 00:39:13.650 --> 00:39:14.620 align:middle line:90% It's no problem. 00:39:14.620 --> 00:39:16.180 align:middle line:90% Glance over that, right? 00:39:16.180 --> 00:39:18.060 align:middle line:84% Grasp the meaningful information from that 00:39:18.060 --> 00:39:20.230 align:middle line:84% report because our report is very important. 00:39:20.230 --> 00:39:22.020 align:middle line:90% They show up in that report. 00:39:22.020 --> 00:39:26.410 align:middle line:84% So it says, the green buildings have smaller operational costs. 00:39:26.410 --> 00:39:29.620 align:middle line:84% And they use some data of all this data 00:39:29.620 --> 00:39:31.090 align:middle line:90% of many, many buildings. 00:39:31.090 --> 00:39:34.780 align:middle line:84% They show you the maintenance and operational cost, 00:39:34.780 --> 00:39:37.420 align:middle line:90% operations that will save money. 00:39:37.420 --> 00:39:38.870 align:middle line:90% So we will save money. 00:39:38.870 --> 00:39:44.290 align:middle line:84% And it's easier to understand that energy and resource 00:39:44.290 --> 00:39:44.800 align:middle line:90% savings. 00:39:44.800 --> 00:39:47.380 align:middle line:84% For example, you use less electricity. 00:39:47.380 --> 00:39:53.530 align:middle line:84% You use less gas, et cetera, and better insulation. 00:39:53.530 --> 00:39:58.330 align:middle line:84% And for the maintenance cost reduction from the statistics, 00:39:58.330 --> 00:39:59.900 align:middle line:90% not all buildings are like that. 00:39:59.900 --> 00:40:01.540 align:middle line:90% Statistics is also lower. 00:40:01.540 --> 00:40:05.230 align:middle line:84% Do you have any intuition why the maintenance costs may also 00:40:05.230 --> 00:40:09.180 align:middle line:90% be lower for green buildings? 00:40:09.180 --> 00:40:09.935 align:middle line:90% Any idea? 00:40:09.935 --> 00:40:12.545 align:middle line:90% 00:40:12.545 --> 00:40:17.792 align:middle line:84% AUDIENCE: [INAUDIBLE] total depend 00:40:17.792 --> 00:40:21.590 align:middle line:84% on the tenant's need of higher rent. 00:40:21.590 --> 00:40:24.740 align:middle line:84% Also, the tenants every year maybe 00:40:24.740 --> 00:40:31.220 align:middle line:84% pay more payment about the early [INAUDIBLE]. 00:40:31.220 --> 00:40:32.630 align:middle line:90% SIQI ZHENG: Yeah. 00:40:32.630 --> 00:40:36.500 align:middle line:84% AUDIENCE: That actually in some developing countries, 00:40:36.500 --> 00:40:41.676 align:middle line:84% especially in China, we also know [INAUDIBLE] developer 00:40:41.676 --> 00:40:46.230 align:middle line:84% as one who lacks motivation to build the current building-- 00:40:46.230 --> 00:40:48.740 align:middle line:84% SIQI ZHENG: Market failure, later, I will touch on that. 00:40:48.740 --> 00:40:50.730 align:middle line:84% Let's now believe in market for now. 00:40:50.730 --> 00:40:52.250 align:middle line:90% And later, I will discuss China. 00:40:52.250 --> 00:40:55.370 align:middle line:84% I have two papers of China, why this won't work. 00:40:55.370 --> 00:40:56.800 align:middle line:84% Then we will answer your question. 00:40:56.800 --> 00:40:59.460 align:middle line:84% But for now, let's still believe in China-- 00:40:59.460 --> 00:41:01.560 align:middle line:90% not-- believe in market. 00:41:01.560 --> 00:41:07.110 align:middle line:84% Now, why is the maintenance cost may be lower in some cases? 00:41:07.110 --> 00:41:09.750 align:middle line:84% AUDIENCE: If there's more electrical systems than gas 00:41:09.750 --> 00:41:11.752 align:middle line:84% or oil heated, there's fewer moving parts 00:41:11.752 --> 00:41:13.710 align:middle line:84% that could eventually fail, just like in a car. 00:41:13.710 --> 00:41:16.510 align:middle line:84% An electric car is less maintenance than gas. 00:41:16.510 --> 00:41:17.710 align:middle line:90% SIQI ZHENG: Good, yes. 00:41:17.710 --> 00:41:23.800 align:middle line:84% So basically, the system, this building management system 00:41:23.800 --> 00:41:26.710 align:middle line:84% or green building system, they have better monitoring 00:41:26.710 --> 00:41:29.050 align:middle line:84% technologies or sometimes smarter. 00:41:29.050 --> 00:41:31.390 align:middle line:84% Because there's new technology, and they 00:41:31.390 --> 00:41:34.610 align:middle line:84% run more efficiently and with less hiccups. 00:41:34.610 --> 00:41:36.380 align:middle line:90% So that's one possibility. 00:41:36.380 --> 00:41:37.780 align:middle line:90% And they can hire less people. 00:41:37.780 --> 00:41:39.405 align:middle line:84% For example, this building, to operate, 00:41:39.405 --> 00:41:40.580 align:middle line:90% we need a team of 10 people. 00:41:40.580 --> 00:41:42.205 align:middle line:84% Now, we may need a team of three people 00:41:42.205 --> 00:41:44.930 align:middle line:84% because it's more efficient and smarter. 00:41:44.930 --> 00:41:48.380 align:middle line:90% So you can reduce your salary. 00:41:48.380 --> 00:41:51.100 align:middle line:84% And also, because the lifespan always 00:41:51.100 --> 00:41:53.140 align:middle line:84% will be longer for these green buildings. 00:41:53.140 --> 00:41:54.970 align:middle line:90% Because they depreciate less. 00:41:54.970 --> 00:41:58.480 align:middle line:84% And then they have less wear and tear over time. 00:41:58.480 --> 00:42:02.020 align:middle line:84% Every five years or every several years, you need to-- 00:42:02.020 --> 00:42:04.300 align:middle line:90% there's capital investment. 00:42:04.300 --> 00:42:06.950 align:middle line:90% And then think about this. 00:42:06.950 --> 00:42:09.070 align:middle line:90% Think about this. 00:42:09.070 --> 00:42:11.380 align:middle line:90% Who will pay the bills? 00:42:11.380 --> 00:42:12.710 align:middle line:90% Who will pay? 00:42:12.710 --> 00:42:13.760 align:middle line:90% Yes, of course. 00:42:13.760 --> 00:42:16.290 align:middle line:84% When we look at physical building, yes, it will be less. 00:42:16.290 --> 00:42:18.000 align:middle line:90% But who are going to pay that? 00:42:18.000 --> 00:42:18.960 align:middle line:90% Who will benefit? 00:42:18.960 --> 00:42:22.880 align:middle line:84% Who will recoup that benefit of reduced energy bills? 00:42:22.880 --> 00:42:25.670 align:middle line:84% So that's a little bit complicated. 00:42:25.670 --> 00:42:28.130 align:middle line:84% It's a little bit complicated because that 00:42:28.130 --> 00:42:30.270 align:middle line:90% depends on the lease structure. 00:42:30.270 --> 00:42:34.280 align:middle line:84% Then next session, we will touch on this lease structure. 00:42:34.280 --> 00:42:36.510 align:middle line:84% Who will pay which part of the energy? 00:42:36.510 --> 00:42:38.600 align:middle line:90% So that's different types. 00:42:38.600 --> 00:42:39.660 align:middle line:90% But let's see. 00:42:39.660 --> 00:42:41.930 align:middle line:84% Now, without going into the details, 00:42:41.930 --> 00:42:45.800 align:middle line:84% let's say they split some part of a common part. 00:42:45.800 --> 00:42:47.930 align:middle line:84% Like lobby and those common space, 00:42:47.930 --> 00:42:52.860 align:middle line:84% owner need to pay because it's so hard to attribute to tenants. 00:42:52.860 --> 00:42:54.650 align:middle line:84% But for tenants, maybe tenants also 00:42:54.650 --> 00:42:56.900 align:middle line:84% need to pay the inside of the space. 00:42:56.900 --> 00:43:00.980 align:middle line:84% OK, so then you will see I have 01 and 02. 00:43:00.980 --> 00:43:06.890 align:middle line:84% If you observe, if you look at my cash flow carefully, 00:43:06.890 --> 00:43:08.330 align:middle line:90% I have a 01. 00:43:08.330 --> 00:43:11.640 align:middle line:90% That's owner's operational cost. 00:43:11.640 --> 00:43:13.050 align:middle line:90% We have 02. 00:43:13.050 --> 00:43:14.940 align:middle line:84% That's tenants' operational cost. 00:43:14.940 --> 00:43:18.140 align:middle line:84% So that's why we have the subscript of 1 and 2. 00:43:18.140 --> 00:43:22.670 align:middle line:84% So the owner have this 01, reduce maybe. 00:43:22.670 --> 00:43:24.690 align:middle line:90% And tenants have a 02. 00:43:24.690 --> 00:43:29.130 align:middle line:84% So the 02 will not directly reflect into the owner's cash 00:43:29.130 --> 00:43:29.630 align:middle line:90% flow. 00:43:29.630 --> 00:43:32.180 align:middle line:84% But because 02 will become smaller, 00:43:32.180 --> 00:43:33.560 align:middle line:90% then tenants save money. 00:43:33.560 --> 00:43:36.720 align:middle line:84% If tenants save some money, they are willing to pay higher rent. 00:43:36.720 --> 00:43:37.710 align:middle line:90% That's the logic. 00:43:37.710 --> 00:43:40.370 align:middle line:90% So I put this channel. 00:43:40.370 --> 00:43:41.790 align:middle line:90% This is the middle channel. 00:43:41.790 --> 00:43:44.840 align:middle line:84% But the point is they are going to pay higher rent. 00:43:44.840 --> 00:43:47.670 align:middle line:84% More importantly, let's look at this pie. 00:43:47.670 --> 00:43:49.400 align:middle line:90% The pie is important. 00:43:49.400 --> 00:43:53.540 align:middle line:84% I think, just now, you also mentioned this retention 00:43:53.540 --> 00:43:54.830 align:middle line:90% of the talents, right? 00:43:54.830 --> 00:43:56.090 align:middle line:90% This is so important. 00:43:56.090 --> 00:43:59.940 align:middle line:84% Because if I'm a tenant, I'm not a real estate person. 00:43:59.940 --> 00:44:01.490 align:middle line:90% I'm a tenant. 00:44:01.490 --> 00:44:04.280 align:middle line:90% I'm Google, for example. 00:44:04.280 --> 00:44:08.090 align:middle line:84% You know, Google, just rent a big space 00:44:08.090 --> 00:44:11.660 align:middle line:84% on the main street very close Kendall Square, this Boston 00:44:11.660 --> 00:44:12.590 align:middle line:90% Properties building. 00:44:12.590 --> 00:44:14.550 align:middle line:84% That's a new renovation of the Kendall Square. 00:44:14.550 --> 00:44:16.380 align:middle line:84% There's a Boston Properties building. 00:44:16.380 --> 00:44:17.960 align:middle line:90% Google rent all the building. 00:44:17.960 --> 00:44:23.220 align:middle line:84% And you saw the Google headquarters logo there. 00:44:23.220 --> 00:44:26.970 align:middle line:84% So if I'm Google, I'm not a real estate company. 00:44:26.970 --> 00:44:30.350 align:middle line:84% And then I look at my cost, the pie. 00:44:30.350 --> 00:44:35.380 align:middle line:84% Then always the important thing is, for a company, 00:44:35.380 --> 00:44:36.580 align:middle line:90% energy is so little-- 00:44:36.580 --> 00:44:40.070 align:middle line:84% 1%, because I'm not an energy company. 00:44:40.070 --> 00:44:46.300 align:middle line:84% If I'm just an IT company, this will pay my office energy 1%; 00:44:46.300 --> 00:44:47.140 align:middle line:90% and rent-- 00:44:47.140 --> 00:44:51.550 align:middle line:84% 10%-- rent, 10%; and the rest, the wage. 00:44:51.550 --> 00:44:53.500 align:middle line:84% Wage is the largest, largest component 00:44:53.500 --> 00:44:58.200 align:middle line:90% of the cost of the company. 00:44:58.200 --> 00:45:02.520 align:middle line:84% And then this is so important, the human capital, 00:45:02.520 --> 00:45:08.050 align:middle line:84% to a company, not the physical energy bills or the rent. 00:45:08.050 --> 00:45:11.720 align:middle line:84% Yes, rent will be high if you want to have good, fancy office 00:45:11.720 --> 00:45:12.220 align:middle line:90% building. 00:45:12.220 --> 00:45:13.800 align:middle line:90% But here is the thing. 00:45:13.800 --> 00:45:18.030 align:middle line:84% And then if you pay money, if you pay wage to employees 00:45:18.030 --> 00:45:22.140 align:middle line:84% and all the employees always get sick, won't show up, always 00:45:22.140 --> 00:45:23.770 align:middle line:90% sick days, this is the loss. 00:45:23.770 --> 00:45:24.630 align:middle line:90% You pay money. 00:45:24.630 --> 00:45:25.260 align:middle line:90% You pay wage. 00:45:25.260 --> 00:45:27.570 align:middle line:84% Then they all get sick because the building is so bad. 00:45:27.570 --> 00:45:29.760 align:middle line:90% They always get sick, no good. 00:45:29.760 --> 00:45:34.020 align:middle line:84% So if you can help them keep their health and productivity, 00:45:34.020 --> 00:45:34.900 align:middle line:90% you'll pay wages. 00:45:34.900 --> 00:45:36.790 align:middle line:84% You'll gain a lot from their productivity. 00:45:36.790 --> 00:45:37.450 align:middle line:90% That's good. 00:45:37.450 --> 00:45:41.260 align:middle line:84% So that will be more important from the tenants' perspective. 00:45:41.260 --> 00:45:43.860 align:middle line:84% And we will have healthy building lecture to dive 00:45:43.860 --> 00:45:44.650 align:middle line:90% into this. 00:45:44.650 --> 00:45:48.270 align:middle line:84% But you understand why this building is good. 00:45:48.270 --> 00:45:52.410 align:middle line:84% They're not just the direct thing, but also indirect thing. 00:45:52.410 --> 00:45:55.470 align:middle line:84% The tenants get so happy and willing to pay higher rent 00:45:55.470 --> 00:45:57.750 align:middle line:90% in the rent space. 00:45:57.750 --> 00:45:58.690 align:middle line:90% Question? 00:45:58.690 --> 00:46:02.760 align:middle line:84% AUDIENCE: [INAUDIBLE] I worked in building operations 00:46:02.760 --> 00:46:03.600 align:middle line:90% for a long time. 00:46:03.600 --> 00:46:08.860 align:middle line:84% And especially when COVID hit, sometimes the human capital, 00:46:08.860 --> 00:46:12.090 align:middle line:84% the health and the well-being, came into conflict 00:46:12.090 --> 00:46:15.170 align:middle line:84% with maintenance costs and energy reduction and savings, 00:46:15.170 --> 00:46:18.100 align:middle line:84% specifically looking at the HVAC systems. 00:46:18.100 --> 00:46:20.370 align:middle line:84% So recycling the air is a good way 00:46:20.370 --> 00:46:21.930 align:middle line:84% to save energy because you don't have 00:46:21.930 --> 00:46:23.470 align:middle line:90% to heat it or cool it as much. 00:46:23.470 --> 00:46:25.890 align:middle line:84% And then the thing is you're recycling that air 00:46:25.890 --> 00:46:28.210 align:middle line:90% so it's not as clean or fresh. 00:46:28.210 --> 00:46:32.178 align:middle line:84% So sometimes it's hard to keep going in the same direction 00:46:32.178 --> 00:46:33.220 align:middle line:90% with both of these goals. 00:46:33.220 --> 00:46:34.670 align:middle line:84% Sometimes they come into conflict [INAUDIBLE]. 00:46:34.670 --> 00:46:36.690 align:middle line:84% SIQI ZHENG: Very good point, very good point. 00:46:36.690 --> 00:46:39.020 align:middle line:84% So you are saying this ventilation 00:46:39.020 --> 00:46:43.430 align:middle line:84% cost and the maintenance cost, they are like trade off, right? 00:46:43.430 --> 00:46:46.550 align:middle line:84% You cannot just, oh, save money and save cost and save energy, 00:46:46.550 --> 00:46:48.660 align:middle line:84% no ventilation or a very low ventilation. 00:46:48.660 --> 00:46:50.755 align:middle line:84% But then it will cost more for the healthy part. 00:46:50.755 --> 00:46:51.380 align:middle line:90% AUDIENCE: Yeah. 00:46:51.380 --> 00:46:53.370 align:middle line:84% SIQI ZHENG: I think that's very clear. 00:46:53.370 --> 00:46:55.290 align:middle line:90% It's not always win-win. 00:46:55.290 --> 00:46:57.000 align:middle line:90% It's sometimes trade off. 00:46:57.000 --> 00:46:59.090 align:middle line:84% And if you look at the higher level, 00:46:59.090 --> 00:47:01.820 align:middle line:84% that's basically three circles, PPP. 00:47:01.820 --> 00:47:06.300 align:middle line:84% That's some tension between the planet and the people. 00:47:06.300 --> 00:47:09.000 align:middle line:84% Yes, we want insulation, for example. 00:47:09.000 --> 00:47:10.880 align:middle line:84% Installation is good for energy saving, 00:47:10.880 --> 00:47:13.590 align:middle line:84% but we don't want to live in a plastic bag. 00:47:13.590 --> 00:47:15.170 align:middle line:90% Plastic bag-- bad. 00:47:15.170 --> 00:47:16.530 align:middle line:90% We cannot breathe. 00:47:16.530 --> 00:47:19.590 align:middle line:84% Although, it's very good insulation. 00:47:19.590 --> 00:47:20.820 align:middle line:90% So that's the idea. 00:47:20.820 --> 00:47:22.950 align:middle line:84% Nobody want to live in a plastic bag. 00:47:22.950 --> 00:47:25.310 align:middle line:90% So that's a very good point. 00:47:25.310 --> 00:47:27.840 align:middle line:84% And then give you empirical evidence, 00:47:27.840 --> 00:47:29.910 align:middle line:84% there's a paper, very good paper. 00:47:29.910 --> 00:47:31.620 align:middle line:90% This is the meta analysis. 00:47:31.620 --> 00:47:35.547 align:middle line:84% Meta analysis means they collect many, many empirical studies 00:47:35.547 --> 00:47:37.380 align:middle line:84% from different countries, different contact, 00:47:37.380 --> 00:47:38.200 align:middle line:90% different data. 00:47:38.200 --> 00:47:39.240 align:middle line:90% Then they summarize. 00:47:39.240 --> 00:47:43.170 align:middle line:84% And they say, OK, for all the green real estate studies-- 00:47:43.170 --> 00:47:45.210 align:middle line:84% there's so many studies, you can see-- 00:47:45.210 --> 00:47:49.170 align:middle line:84% overall, they-- these studies find significant rent premium 00:47:49.170 --> 00:47:51.690 align:middle line:90% of on average 6%. 00:47:51.690 --> 00:47:53.460 align:middle line:90% So that's the evidence. 00:47:53.460 --> 00:47:56.970 align:middle line:84% And you can see this more on the residential side and 5% 00:47:56.970 --> 00:48:01.230 align:middle line:90% on the commercial side. 00:48:01.230 --> 00:48:02.740 align:middle line:90% Keep in mind this number. 00:48:02.740 --> 00:48:04.905 align:middle line:84% But also, this is not a universal. 00:48:04.905 --> 00:48:06.940 align:middle line:90% This is just those studies. 00:48:06.940 --> 00:48:10.260 align:middle line:84% And for the scholars, like me, we found some papers. 00:48:10.260 --> 00:48:13.270 align:middle line:84% And actually, they summarize all the papers if you can see. 00:48:13.270 --> 00:48:14.910 align:middle line:90% But I'm sure you cannot see. 00:48:14.910 --> 00:48:19.840 align:middle line:84% This is one paper called Zheng here, it's my paper. 00:48:19.840 --> 00:48:23.710 align:middle line:84% I feel so proud that my paper got into this analysis. 00:48:23.710 --> 00:48:28.140 align:middle line:84% That's the most exciting time, moment of a scholar. 00:48:28.140 --> 00:48:32.140 align:middle line:84% I publish a paper, and then my paper got some impact attention. 00:48:32.140 --> 00:48:33.050 align:middle line:90% Then they summarize. 00:48:33.050 --> 00:48:34.630 align:middle line:90% They have Zheng's paper here. 00:48:34.630 --> 00:48:38.450 align:middle line:90% So, yes, that's mine. 00:48:38.450 --> 00:48:42.820 align:middle line:84% That's my first paper of the green buildings. 00:48:42.820 --> 00:48:44.770 align:middle line:90% OK. 00:48:44.770 --> 00:48:48.910 align:middle line:84% Now, we talked about just now, remember, there's a tenant. 00:48:48.910 --> 00:48:50.200 align:middle line:90% That's the end user point. 00:48:50.200 --> 00:48:54.970 align:middle line:90% Then we move on to the owner. 00:48:54.970 --> 00:48:56.810 align:middle line:90% We are so optimistic. 00:48:56.810 --> 00:49:00.010 align:middle line:84% Assume tenants are so happy they have higher willingness 00:49:00.010 --> 00:49:02.300 align:middle line:90% to pay for green buildings. 00:49:02.300 --> 00:49:04.690 align:middle line:90% Then they have a longer-- 00:49:04.690 --> 00:49:06.260 align:middle line:90% like this arrow of rent. 00:49:06.260 --> 00:49:10.690 align:middle line:84% That rent be translated into the owner perspective. 00:49:10.690 --> 00:49:12.640 align:middle line:84% It's a cost for the tenant, but it's 00:49:12.640 --> 00:49:17.620 align:middle line:84% benefit for the owner, this symmetric thing. 00:49:17.620 --> 00:49:19.240 align:middle line:90% Then look at this. 00:49:19.240 --> 00:49:20.510 align:middle line:90% Now, we look at the owner. 00:49:20.510 --> 00:49:21.740 align:middle line:90% Owner is not stupid. 00:49:21.740 --> 00:49:23.000 align:middle line:90% They are also rational. 00:49:23.000 --> 00:49:27.700 align:middle line:84% They understand maybe higher, effective rent, lower, 00:49:27.700 --> 00:49:31.060 align:middle line:84% we can see an higher rent per square feet. 00:49:31.060 --> 00:49:33.520 align:middle line:84% And then if we are so optimistic, 00:49:33.520 --> 00:49:38.800 align:middle line:84% we think about the operational cost, energy reduction, 00:49:38.800 --> 00:49:42.250 align:middle line:84% then this O1 will also become smaller. 00:49:42.250 --> 00:49:45.790 align:middle line:84% And then suppose later this will be more and more appreciated 00:49:45.790 --> 00:49:46.770 align:middle line:90% by the market. 00:49:46.770 --> 00:49:51.200 align:middle line:84% So there is a lower depreciation and higher resale price. 00:49:51.200 --> 00:49:53.260 align:middle line:90% So all to the positive side-- 00:49:53.260 --> 00:49:56.470 align:middle line:90% higher, higher, lower cost. 00:49:56.470 --> 00:50:01.960 align:middle line:84% And then we already mentioned that, because of some risk 00:50:01.960 --> 00:50:05.110 align:middle line:84% consideration, then the cost of capital is also low. 00:50:05.110 --> 00:50:11.210 align:middle line:84% So this is higher than this absolute value. 00:50:11.210 --> 00:50:12.940 align:middle line:84% This [INAUDIBLE] is a smaller thing. 00:50:12.940 --> 00:50:14.560 align:middle line:90% That will be bigger. 00:50:14.560 --> 00:50:17.290 align:middle line:84% All these are bigger, this bigger. 00:50:17.290 --> 00:50:19.030 align:middle line:90% So that's so good. 00:50:19.030 --> 00:50:22.900 align:middle line:84% Then that all translated to a higher purchase price. 00:50:22.900 --> 00:50:25.670 align:middle line:84% So I'm willing to pay higher price to buy 00:50:25.670 --> 00:50:28.160 align:middle line:90% that building from a developer. 00:50:28.160 --> 00:50:32.900 align:middle line:84% If this is true, then this will be later translated as a chain 00:50:32.900 --> 00:50:36.780 align:middle line:90% to the developer's sale price. 00:50:36.780 --> 00:50:37.850 align:middle line:90% So that's a point. 00:50:37.850 --> 00:50:39.110 align:middle line:90% That's a chain. 00:50:39.110 --> 00:50:41.490 align:middle line:90% So now, we have this cash flow. 00:50:41.490 --> 00:50:45.350 align:middle line:84% We know this one higher, this one higher. 00:50:45.350 --> 00:50:48.060 align:middle line:90% And how about the risk? 00:50:48.060 --> 00:50:51.560 align:middle line:84% We kind of intuitively think the risk may be lower. 00:50:51.560 --> 00:50:53.040 align:middle line:90% The i may go down. 00:50:53.040 --> 00:50:54.290 align:middle line:90% But why? 00:50:54.290 --> 00:50:59.270 align:middle line:84% Can we have some solid examples of why 00:50:59.270 --> 00:51:01.570 align:middle line:90% this risk may go down some? 00:51:01.570 --> 00:51:02.840 align:middle line:90% What kind of risks? 00:51:02.840 --> 00:51:06.202 align:middle line:84% What kind of risk you can think of? 00:51:06.202 --> 00:51:08.060 align:middle line:90% AUDIENCE: Energy cost? 00:51:08.060 --> 00:51:11.352 align:middle line:84% SIQI ZHENG: Energy cost, why this is a risk? 00:51:11.352 --> 00:51:17.040 align:middle line:84% AUDIENCE: If you [INAUDIBLE] prices increased every year. 00:51:17.040 --> 00:51:20.460 align:middle line:84% SIQI ZHENG: OK, but if we invent some nuclear energy things, 00:51:20.460 --> 00:51:22.450 align:middle line:90% the energy may be cheaper. 00:51:22.450 --> 00:51:24.930 align:middle line:84% But no, it's true that there's uncertainty, especially 00:51:24.930 --> 00:51:27.060 align:middle line:90% the Ukraine and Russia war. 00:51:27.060 --> 00:51:29.380 align:middle line:84% Then the gas more and more expensive. 00:51:29.380 --> 00:51:31.410 align:middle line:90% It's a lot of uncertainty here. 00:51:31.410 --> 00:51:33.120 align:middle line:90% OK. 00:51:33.120 --> 00:51:36.232 align:middle line:84% AUDIENCE: There's the exit risk, the risk of not being 00:51:36.232 --> 00:51:40.170 align:middle line:90% able to sell the [INAUDIBLE]. 00:51:40.170 --> 00:51:41.280 align:middle line:90% SIQI ZHENG: What's risk? 00:51:41.280 --> 00:51:42.243 align:middle line:90% AUDIENCE: The exit? 00:51:42.243 --> 00:51:43.160 align:middle line:90% SIQI ZHENG: Exit risk? 00:51:43.160 --> 00:51:43.490 align:middle line:90% AUDIENCE: Yeah. 00:51:43.490 --> 00:51:45.657 align:middle line:84% SIQI ZHENG: Yes, if you have a brown building nobody 00:51:45.657 --> 00:51:47.160 align:middle line:90% want to buy, then you get stuck. 00:51:47.160 --> 00:51:48.260 align:middle line:90% AUDIENCE: Yeah. 00:51:48.260 --> 00:51:49.830 align:middle line:90% SIQI ZHENG: OK. 00:51:49.830 --> 00:51:50.330 align:middle line:90% [INAUDIBLE]? 00:51:50.330 --> 00:51:50.840 align:middle line:90% AUDIENCE: Risk, policy. 00:51:50.840 --> 00:51:51.680 align:middle line:90% SIQI ZHENG: Policy. 00:51:51.680 --> 00:51:52.710 align:middle line:90% What kind of policy? 00:51:52.710 --> 00:51:55.480 align:middle line:84% AUDIENCE: Government may impose higher tax innovation. 00:51:55.480 --> 00:51:56.820 align:middle line:90% SIQI ZHENG: Sure. 00:51:56.820 --> 00:51:57.560 align:middle line:90% You want to say? 00:51:57.560 --> 00:51:58.660 align:middle line:90% AUDIENCE: Yeah, I had the same. 00:51:58.660 --> 00:51:59.065 align:middle line:90% SIQI ZHENG: Policy? 00:51:59.065 --> 00:51:59.470 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:51:59.470 --> 00:52:00.137 align:middle line:90% SIQI ZHENG: Yes. 00:52:00.137 --> 00:52:03.820 align:middle line:84% So now, we have a big category of policy, regulation. 00:52:03.820 --> 00:52:07.060 align:middle line:90% And we also have something-- 00:52:07.060 --> 00:52:08.260 align:middle line:90% let's see. 00:52:08.260 --> 00:52:10.720 align:middle line:84% So basically, we have three baskets. 00:52:10.720 --> 00:52:13.930 align:middle line:84% I'm not sure whether these can cover all, but at least 00:52:13.930 --> 00:52:15.450 align:middle line:90% the big baskets. 00:52:15.450 --> 00:52:19.040 align:middle line:84% First-- policy risk, for example, local law 97. 00:52:19.040 --> 00:52:22.180 align:middle line:84% We have this also in Boston and Cambridge, as you know. 00:52:22.180 --> 00:52:27.150 align:middle line:84% And market risk-- like get stuck, 00:52:27.150 --> 00:52:30.030 align:middle line:90% cannot sell if you are so brown. 00:52:30.030 --> 00:52:33.785 align:middle line:84% And if the market really value the green buildings, then 00:52:33.785 --> 00:52:35.910 align:middle line:84% green buildings, no matter whether you're premium-- 00:52:35.910 --> 00:52:37.840 align:middle line:90% remember 6% premium? 00:52:37.840 --> 00:52:43.510 align:middle line:84% But if you are so brown, you may have a brown discount. 00:52:43.510 --> 00:52:47.550 align:middle line:84% So if all other your counterparts they are so green 00:52:47.550 --> 00:52:49.890 align:middle line:84% and only one building is so bad in the market, 00:52:49.890 --> 00:52:51.780 align:middle line:90% then you have a discount. 00:52:51.780 --> 00:52:55.420 align:middle line:84% And actually, this is really real. 00:52:55.420 --> 00:52:59.080 align:middle line:90% It's not speculation. 00:52:59.080 --> 00:53:00.760 align:middle line:90% There's a paper. 00:53:00.760 --> 00:53:08.200 align:middle line:84% They started after financial crisis, 2009 financial crisis. 00:53:08.200 --> 00:53:12.380 align:middle line:84% They say, in good times, green buildings have the premium. 00:53:12.380 --> 00:53:16.240 align:middle line:84% Bad times, all people were losing money 00:53:16.240 --> 00:53:18.140 align:middle line:90% in bad times, financial crisis. 00:53:18.140 --> 00:53:21.580 align:middle line:84% But they found the resilience are much higher 00:53:21.580 --> 00:53:23.510 align:middle line:84% in the down times even for green building. 00:53:23.510 --> 00:53:25.990 align:middle line:84% So if all the buildings were losing tenants, 00:53:25.990 --> 00:53:28.250 align:middle line:84% the green buildings are relatively better. 00:53:28.250 --> 00:53:30.250 align:middle line:84% They are keeping a little bit more tenants. 00:53:30.250 --> 00:53:32.680 align:middle line:90% The paper was very famous. 00:53:32.680 --> 00:53:35.260 align:middle line:84% And now, I think there's some other papers 00:53:35.260 --> 00:53:37.000 align:middle line:90% after this pandemic. 00:53:37.000 --> 00:53:39.970 align:middle line:90% So that's a financial crisis. 00:53:39.970 --> 00:53:41.320 align:middle line:90% They are more resilient. 00:53:41.320 --> 00:53:43.700 align:middle line:84% After the pandemic, healthy buildings, 00:53:43.700 --> 00:53:45.100 align:middle line:90% they are more resilient. 00:53:45.100 --> 00:53:46.900 align:middle line:84% Because now, work from home, right? 00:53:46.900 --> 00:53:49.850 align:middle line:84% All the CBD buildings, they become weakened. 00:53:49.850 --> 00:53:54.040 align:middle line:84% But if you compare those relatively better, greener, 00:53:54.040 --> 00:53:57.740 align:middle line:84% and healthier buildings, they can keep more tenants. 00:53:57.740 --> 00:53:59.240 align:middle line:84% For example, the tenants, they still 00:53:59.240 --> 00:54:00.900 align:middle line:84% need to keep some office in downtown. 00:54:00.900 --> 00:54:03.260 align:middle line:84% They will go to the healthy buildings. 00:54:03.260 --> 00:54:05.850 align:middle line:84% And then finally-- physical risk. 00:54:05.850 --> 00:54:08.930 align:middle line:84% So this is, for example, Miami or Boston Seaport. 00:54:08.930 --> 00:54:12.890 align:middle line:84% That's will be our project, final project and the piece 00:54:12.890 --> 00:54:13.730 align:middle line:90% at number two. 00:54:13.730 --> 00:54:17.420 align:middle line:84% If you happen to be in place that maybe next 10 00:54:17.420 --> 00:54:20.600 align:middle line:84% years you will have flooding rates will be something higher, 00:54:20.600 --> 00:54:22.280 align:middle line:90% then you really have this. 00:54:22.280 --> 00:54:24.870 align:middle line:90% You have this physical risk. 00:54:24.870 --> 00:54:27.870 align:middle line:84% But if you are in high land, you are on high land, 00:54:27.870 --> 00:54:29.180 align:middle line:90% that's not so much for you. 00:54:29.180 --> 00:54:33.840 align:middle line:84% But you still are exposed to this type of risk. 00:54:33.840 --> 00:54:34.340 align:middle line:90% OK. 00:54:34.340 --> 00:54:37.050 align:middle line:84% Now, we have the entire-- almost we close the loop. 00:54:37.050 --> 00:54:40.430 align:middle line:84% We almost close the loop from the tenants, from the owner, 00:54:40.430 --> 00:54:42.110 align:middle line:90% then go to owner. 00:54:42.110 --> 00:54:46.280 align:middle line:84% Then we will soon go to the developer. 00:54:46.280 --> 00:54:48.570 align:middle line:84% AUDIENCE: Just about the previous line about the risk, 00:54:48.570 --> 00:54:50.930 align:middle line:84% so I think it makes perfect sense when 00:54:50.930 --> 00:54:54.200 align:middle line:84% you develop a new building for the risk to be lower. 00:54:54.200 --> 00:54:56.660 align:middle line:84% But what if you're buying a new building 00:54:56.660 --> 00:55:00.932 align:middle line:84% and retrofitting it to become a sustainable building? 00:55:00.932 --> 00:55:02.390 align:middle line:84% SIQI ZHENG: Yeah, that's very good. 00:55:02.390 --> 00:55:04.790 align:middle line:90% You reduce the risk. 00:55:04.790 --> 00:55:06.290 align:middle line:84% AUDIENCE: Or increase it because you 00:55:06.290 --> 00:55:09.710 align:middle line:84% have to make a capital investment to renew 00:55:09.710 --> 00:55:10.940 align:middle line:90% the building. 00:55:10.940 --> 00:55:13.307 align:middle line:84% And you don't know if it's going to work out. 00:55:13.307 --> 00:55:14.640 align:middle line:90% SIQI ZHENG: That's a good point. 00:55:14.640 --> 00:55:17.830 align:middle line:84% Actually, another case study that Zhengzhen will teach 00:55:17.830 --> 00:55:22.270 align:middle line:84% will be a private equity who has very strong expertise 00:55:22.270 --> 00:55:24.760 align:middle line:90% in retrofitting older buildings. 00:55:24.760 --> 00:55:26.590 align:middle line:90% And that company understand. 00:55:26.590 --> 00:55:28.450 align:middle line:90% They have the special expertise. 00:55:28.450 --> 00:55:29.380 align:middle line:90% They are specialized. 00:55:29.380 --> 00:55:32.390 align:middle line:84% They have energy team, et cetera, better than other teams. 00:55:32.390 --> 00:55:37.450 align:middle line:84% So they are more brave to do this kind of business. 00:55:37.450 --> 00:55:38.955 align:middle line:90% For others, they don't know. 00:55:38.955 --> 00:55:40.330 align:middle line:84% As you said, this is higher risk. 00:55:40.330 --> 00:55:42.670 align:middle line:84% But for some, they have done so many buildings. 00:55:42.670 --> 00:55:44.750 align:middle line:84% Then they go, OK, we will buy this building. 00:55:44.750 --> 00:55:46.810 align:middle line:90% We know we will get things done. 00:55:46.810 --> 00:55:49.060 align:middle line:84% AUDIENCE: So in a higher resilience during down times, 00:55:49.060 --> 00:55:50.560 align:middle line:84% you mentioned earlier that these buildings 00:55:50.560 --> 00:55:51.560 align:middle line:90% would have higher rents. 00:55:51.560 --> 00:55:54.528 align:middle line:84% So if I have a company and our employees are not 00:55:54.528 --> 00:55:56.320 align:middle line:84% coming to work because of COVID, wouldn't I 00:55:56.320 --> 00:56:01.320 align:middle line:84% just choose to buy or rent a lower cost building instead? 00:56:01.320 --> 00:56:06.090 align:middle line:84% SIQI ZHENG: So for the pandemic, if the tenants really 00:56:06.090 --> 00:56:08.370 align:middle line:84% value healthier indoor air quality, 00:56:08.370 --> 00:56:11.452 align:middle line:84% for example, so they will shrink their office space. 00:56:11.452 --> 00:56:13.410 align:middle line:84% For example, at first, they rent a lot of space 00:56:13.410 --> 00:56:14.510 align:middle line:90% in Boston downtown. 00:56:14.510 --> 00:56:15.510 align:middle line:90% Now, they don't need it. 00:56:15.510 --> 00:56:19.150 align:middle line:84% Because 80% of the employees, they don't come in every day. 00:56:19.150 --> 00:56:22.180 align:middle line:84% So they shrink, or they move to a smaller space. 00:56:22.180 --> 00:56:24.030 align:middle line:84% And then when they move to smaller space, 00:56:24.030 --> 00:56:25.410 align:middle line:90% they have more choices. 00:56:25.410 --> 00:56:28.240 align:middle line:84% And they will go to greener and healthier buildings. 00:56:28.240 --> 00:56:31.150 align:middle line:84% So that's why those buildings, they are more resilient. 00:56:31.150 --> 00:56:33.150 align:middle line:84% But other brown buildings and the bad buildings, 00:56:33.150 --> 00:56:37.780 align:middle line:84% they lose totally, completely all the tenants. 00:56:37.780 --> 00:56:40.710 align:middle line:84% OK, now, there's a table in your reading. 00:56:40.710 --> 00:56:41.680 align:middle line:90% Please read. 00:56:41.680 --> 00:56:44.760 align:middle line:84% So to summarize, why green buildings 00:56:44.760 --> 00:56:46.120 align:middle line:90% have higher asset value? 00:56:46.120 --> 00:56:50.170 align:middle line:84% Remember, asset value good for owner 00:56:50.170 --> 00:56:51.490 align:middle line:90% and also for the developer. 00:56:51.490 --> 00:56:54.920 align:middle line:84% Because developer will sell at a higher value. 00:56:54.920 --> 00:56:58.770 align:middle line:84% Basically, higher rent, higher occupancy-- lower turnover, 00:56:58.770 --> 00:57:00.710 align:middle line:90% always keep the tenants. 00:57:00.710 --> 00:57:02.780 align:middle line:90% That's delta R go up. 00:57:02.780 --> 00:57:06.140 align:middle line:84% Lower operational cost, the delta O1, go down. 00:57:06.140 --> 00:57:08.160 align:middle line:84% That's for the owner perspective. 00:57:08.160 --> 00:57:11.690 align:middle line:84% And the lower expected return, the cost 00:57:11.690 --> 00:57:14.700 align:middle line:84% of capital in the denominator becomes smaller. 00:57:14.700 --> 00:57:16.750 align:middle line:84% Altogether, think about the cash flow. 00:57:16.750 --> 00:57:21.350 align:middle line:84% Think about this discount equation, higher WTP. 00:57:21.350 --> 00:57:24.050 align:middle line:90% Willingness to pay-- WTP. 00:57:24.050 --> 00:57:27.860 align:middle line:84% And then if the owner has a higher willingness to pay, 00:57:27.860 --> 00:57:29.420 align:middle line:90% then developer is so happy. 00:57:29.420 --> 00:57:31.590 align:middle line:84% Because they can sell at a good price. 00:57:31.590 --> 00:57:34.320 align:middle line:84% So this is a summary of the empirical studies. 00:57:34.320 --> 00:57:37.460 align:middle line:84% Then you always say it's not like only one value. 00:57:37.460 --> 00:57:38.590 align:middle line:90% That would be stupid. 00:57:38.590 --> 00:57:40.720 align:middle line:90% Always a range, right? 00:57:40.720 --> 00:57:46.460 align:middle line:84% Rental sometimes no premium at all, 0% to 23%. 00:57:46.460 --> 00:57:49.220 align:middle line:90% Mean-- 6.3%. 00:57:49.220 --> 00:57:53.780 align:middle line:84% And the occupancy-- also, big range, which gives you 00:57:53.780 --> 00:57:56.435 align:middle line:90% a sense in operational cost. 00:57:56.435 --> 00:57:58.950 align:middle line:90% 00:57:58.950 --> 00:58:00.330 align:middle line:90% See? 00:58:00.330 --> 00:58:03.570 align:middle line:84% I think someone, you, just asked a question about operation cost 00:58:03.570 --> 00:58:04.650 align:middle line:90% go up and down. 00:58:04.650 --> 00:58:07.300 align:middle line:84% So it's very clear, inconclusive. 00:58:07.300 --> 00:58:09.490 align:middle line:84% Sometimes it goes up, sometimes goes down. 00:58:09.490 --> 00:58:11.280 align:middle line:84% It's very hard to see definitely will 00:58:11.280 --> 00:58:14.850 align:middle line:84% go down or go up because ventilation, for example, 00:58:14.850 --> 00:58:16.140 align:middle line:90% like those things. 00:58:16.140 --> 00:58:20.080 align:middle line:84% So then you can see it's negative 14% to positive 25%. 00:58:20.080 --> 00:58:22.030 align:middle line:90% So there's a big range. 00:58:22.030 --> 00:58:25.830 align:middle line:84% And overall, sales price may be some 0% and 43%, 00:58:25.830 --> 00:58:27.120 align:middle line:90% but with a mean. 00:58:27.120 --> 00:58:30.180 align:middle line:84% Our optimistic view is a mean still positive. 00:58:30.180 --> 00:58:33.510 align:middle line:84% So that gives you a very clear understanding is that you cannot 00:58:33.510 --> 00:58:36.400 align:middle line:84% think about this in the deterministic way, 00:58:36.400 --> 00:58:38.260 align:middle line:84% always positive, always negative. 00:58:38.260 --> 00:58:38.760 align:middle line:90% No. 00:58:38.760 --> 00:58:41.080 align:middle line:90% But in this way, it's a range. 00:58:41.080 --> 00:58:45.240 align:middle line:84% So this is a perfect time to talk about this again. 00:58:45.240 --> 00:58:47.580 align:middle line:84% Remember, in the intro section, I 00:58:47.580 --> 00:58:52.530 align:middle line:84% used this to show you how to connect economics and business. 00:58:52.530 --> 00:58:55.330 align:middle line:84% Economics we will show a lot of statistics 00:58:55.330 --> 00:58:59.460 align:middle line:84% and the overall big picture like that. 00:58:59.460 --> 00:59:03.300 align:middle line:84% But business, we look at cases, this company, this building, 00:59:03.300 --> 00:59:04.410 align:middle line:90% that building. 00:59:04.410 --> 00:59:07.650 align:middle line:84% So just now, we show all these parameters. 00:59:07.650 --> 00:59:10.080 align:middle line:84% All these parameters has a range, 00:59:10.080 --> 00:59:14.310 align:middle line:84% means they always have a distribution, not one point. 00:59:14.310 --> 00:59:16.410 align:middle line:84% The cost side have a distribution. 00:59:16.410 --> 00:59:19.470 align:middle line:84% The benefit has a distribution, cannot think in a very, 00:59:19.470 --> 00:59:20.940 align:middle line:90% very narrow way. 00:59:20.940 --> 00:59:24.280 align:middle line:84% And then those guys, those companies or buildings, 00:59:24.280 --> 00:59:27.880 align:middle line:84% they are distributed in this space in this way. 00:59:27.880 --> 00:59:31.080 align:middle line:84% So you understand some think green building is 00:59:31.080 --> 00:59:32.560 align:middle line:90% very, very good business. 00:59:32.560 --> 00:59:34.290 align:middle line:90% Some they don't think so. 00:59:34.290 --> 00:59:37.710 align:middle line:84% Because for some of them, the cost is much higher. 00:59:37.710 --> 00:59:40.950 align:middle line:84% And the benefit is so low, no rent premium at all. 00:59:40.950 --> 00:59:42.780 align:middle line:90% Maintenance cost is much higher. 00:59:42.780 --> 00:59:45.870 align:middle line:90% Then you will end up here. 00:59:45.870 --> 00:59:48.190 align:middle line:84% High cost, no benefit, why I'm going to do this? 00:59:48.190 --> 00:59:50.650 align:middle line:90% So stupid-- doesn't make sense. 00:59:50.650 --> 00:59:54.630 align:middle line:84% So then business case, maybe we look at this one. 00:59:54.630 --> 00:59:56.500 align:middle line:90% This is a business case. 00:59:56.500 --> 01:00:00.420 align:middle line:84% So [INAUDIBLE], no matter whether it's a so brilliant 01:00:00.420 --> 01:00:05.680 align:middle line:84% investor or these market conditions so good or this just 01:00:05.680 --> 01:00:08.620 align:middle line:84% have a very good skill or expertise, no matter what-- 01:00:08.620 --> 01:00:13.580 align:middle line:84% higher benefit, lower cost, go green, no-brainer. 01:00:13.580 --> 01:00:15.190 align:middle line:90% So this will be your case. 01:00:15.190 --> 01:00:18.370 align:middle line:84% But you cannot use that to apply to all. 01:00:18.370 --> 01:00:21.820 align:middle line:84% Because that guy thinks this is a good deal, 01:00:21.820 --> 01:00:23.420 align:middle line:90% all of us willing to go there. 01:00:23.420 --> 01:00:23.920 align:middle line:90% No. 01:00:23.920 --> 01:00:25.930 align:middle line:84% So be clear in this thing when we 01:00:25.930 --> 01:00:28.180 align:middle line:84% look at a specific company or specific case. 01:00:28.180 --> 01:00:29.800 align:middle line:90% And think about the range. 01:00:29.800 --> 01:00:32.800 align:middle line:84% And the range is confirmed by the scientific study. 01:00:32.800 --> 01:00:35.590 align:middle line:90% This is a range. 01:00:35.590 --> 01:00:38.390 align:middle line:84% So now, we already went through all this. 01:00:38.390 --> 01:00:41.320 align:middle line:84% I think that's all very clear that the green building 01:00:41.320 --> 01:00:46.150 align:middle line:84% case is the same pro forma, but I already changed the numbers. 01:00:46.150 --> 01:00:48.190 align:middle line:84% I already changed the numbers in the way 01:00:48.190 --> 01:00:51.700 align:middle line:84% that, now, we use mean value, mean value. 01:00:51.700 --> 01:00:54.700 align:middle line:84% Then higher rent and lower vacancy, like that-- 01:00:54.700 --> 01:00:57.110 align:middle line:84% higher sale price and lower discount rate. 01:00:57.110 --> 01:01:03.430 align:middle line:84% Then you will see clearly and NPV become higher. 01:01:03.430 --> 01:01:06.010 align:middle line:90% The greener is the new one-- 01:01:06.010 --> 01:01:08.200 align:middle line:84% become higher because all the parameters 01:01:08.200 --> 01:01:10.960 align:middle line:84% that use the mean value, so all this. 01:01:10.960 --> 01:01:14.240 align:middle line:90% Now, it's very clear. 01:01:14.240 --> 01:01:18.200 align:middle line:84% If you were the owner in this case, just in case 01:01:18.200 --> 01:01:19.670 align:middle line:90% that you are the medium person-- 01:01:19.670 --> 01:01:22.710 align:middle line:84% you are the average person in our space-- 01:01:22.710 --> 01:01:27.660 align:middle line:90% then you have this green NPV. 01:01:27.660 --> 01:01:31.950 align:middle line:84% Another brown building, baseline building, have this brown NPV. 01:01:31.950 --> 01:01:34.650 align:middle line:84% A green NPV-- much higher than the brown NPV. 01:01:34.650 --> 01:01:40.420 align:middle line:84% So if you are buyer, you look at two developers. 01:01:40.420 --> 01:01:42.570 align:middle line:84% One is building a green building, this green. 01:01:42.570 --> 01:01:45.150 align:middle line:84% The other is a brown building, all else equal. 01:01:45.150 --> 01:01:49.200 align:middle line:84% Are you willing to pay higher price to buy the green building? 01:01:49.200 --> 01:01:52.050 align:middle line:84% From a rational perspective, yes, right? 01:01:52.050 --> 01:01:54.048 align:middle line:90% Brown building NPV is so small. 01:01:54.048 --> 01:01:55.090 align:middle line:90% Green building is so big. 01:01:55.090 --> 01:01:56.048 align:middle line:90% Buy the green building. 01:01:56.048 --> 01:01:57.820 align:middle line:84% And they are willing to pay higher price. 01:01:57.820 --> 01:02:00.000 align:middle line:84% So that's basically the rationale. 01:02:00.000 --> 01:02:03.300 align:middle line:90% Then I show this again. 01:02:03.300 --> 01:02:05.270 align:middle line:90% And again, I have my paper here. 01:02:05.270 --> 01:02:06.980 align:middle line:90% I just want to highlight. 01:02:06.980 --> 01:02:08.640 align:middle line:90% That's the little guy here. 01:02:08.640 --> 01:02:12.960 align:middle line:84% But they summarize all the papers, overall price premium 01:02:12.960 --> 01:02:15.990 align:middle line:90% of 7.6% of those papers. 01:02:15.990 --> 01:02:17.370 align:middle line:90% And you give the numbers. 01:02:17.370 --> 01:02:19.390 align:middle line:90% So this is still average person. 01:02:19.390 --> 01:02:21.660 align:middle line:84% Remember, average, average, average. 01:02:21.660 --> 01:02:25.590 align:middle line:84% And actually, I think for my purpose, zero, no price 01:02:25.590 --> 01:02:27.410 align:middle line:90% premium in China's case. 01:02:27.410 --> 01:02:30.360 align:middle line:84% As I said, in China, your [INAUDIBLE] 01:02:30.360 --> 01:02:31.890 align:middle line:90% China market failure maybe. 01:02:31.890 --> 01:02:35.940 align:middle line:84% So my paper is a data point of zero. 01:02:35.940 --> 01:02:37.890 align:middle line:84% But on average, it's still positive. 01:02:37.890 --> 01:02:39.930 align:middle line:90% So that's a point. 01:02:39.930 --> 01:02:44.790 align:middle line:84% And finally, we go to the developer. 01:02:44.790 --> 01:02:48.240 align:middle line:84% Remember, we have the tenants just now show up here. 01:02:48.240 --> 01:02:50.820 align:middle line:90% And the owner showed up here. 01:02:50.820 --> 01:02:53.580 align:middle line:90% Oh, go here, and then go here. 01:02:53.580 --> 01:02:55.110 align:middle line:90% This is a chain. 01:02:55.110 --> 01:02:57.360 align:middle line:90% The chain is a following. 01:02:57.360 --> 01:03:03.030 align:middle line:84% If an average person would have a higher sale price, 01:03:03.030 --> 01:03:05.220 align:middle line:84% then the developer understand, oh, 01:03:05.220 --> 01:03:08.550 align:middle line:84% if I anticipate that later I can sell higher 01:03:08.550 --> 01:03:11.650 align:middle line:90% price of a green building. 01:03:11.650 --> 01:03:14.460 align:middle line:84% But it's not like, oh, then I must build. 01:03:14.460 --> 01:03:16.780 align:middle line:84% Because it's still benefit the cost analysis. 01:03:16.780 --> 01:03:19.860 align:middle line:84% It's no free lunch, not like green building, higher price. 01:03:19.860 --> 01:03:22.710 align:middle line:90% But you also higher cost. 01:03:22.710 --> 01:03:26.170 align:middle line:84% Construction cost, upfront cost may be higher. 01:03:26.170 --> 01:03:29.220 align:middle line:84% So you need to compare the upfront, the construction 01:03:29.220 --> 01:03:32.110 align:middle line:90% cost, and the later sale price. 01:03:32.110 --> 01:03:36.360 align:middle line:84% If the sale price go up 5% and for the construction cost 01:03:36.360 --> 01:03:40.630 align:middle line:84% it's 10% higher, then no, still no. 01:03:40.630 --> 01:03:41.940 align:middle line:90% So I need to compare. 01:03:41.940 --> 01:03:43.300 align:middle line:90% Why is it higher? 01:03:43.300 --> 01:03:47.340 align:middle line:84% I think there's no question why the construction cost is higher. 01:03:47.340 --> 01:03:50.490 align:middle line:84% Because we need more technology, like the insulation 01:03:50.490 --> 01:03:56.310 align:middle line:84% passive house, more advanced HVAC ventilation, 01:03:56.310 --> 01:04:00.790 align:middle line:84% and some lighting, new technology things. 01:04:00.790 --> 01:04:03.330 align:middle line:84% So those are all actual things you need to invest 01:04:03.330 --> 01:04:06.580 align:middle line:90% and you can buy. 01:04:06.580 --> 01:04:12.370 align:middle line:84% Here, from studies again, you will find this in your report. 01:04:12.370 --> 01:04:16.840 align:middle line:90% For new buildings, 0% to 12.5%-- 01:04:16.840 --> 01:04:19.630 align:middle line:84% wide the range of the cost premium. 01:04:19.630 --> 01:04:23.860 align:middle line:84% And then these are a little bit higher for the retrofit 01:04:23.860 --> 01:04:26.710 align:middle line:84% because you need to retrofit from a very old building, 01:04:26.710 --> 01:04:28.660 align:middle line:90% cannot control. 01:04:28.660 --> 01:04:33.310 align:middle line:84% Question, why there's any chance that there's no cost premium. 01:04:33.310 --> 01:04:35.320 align:middle line:90% That's like a free lunch thing. 01:04:35.320 --> 01:04:36.640 align:middle line:90% Why? 01:04:36.640 --> 01:04:39.130 align:middle line:84% Why, in some cases, the green buildings 01:04:39.130 --> 01:04:42.590 align:middle line:90% even have no cost premium? 01:04:42.590 --> 01:04:44.545 align:middle line:90% Any guess on this? 01:04:44.545 --> 01:04:49.680 align:middle line:90% 01:04:49.680 --> 01:04:51.040 align:middle line:90% OK, please. 01:04:51.040 --> 01:04:56.320 align:middle line:84% AUDIENCE: Could be [INAUDIBLE] government subsidies to help 01:04:56.320 --> 01:04:58.250 align:middle line:90% [INAUDIBLE]. 01:04:58.250 --> 01:04:59.690 align:middle line:84% SIQI ZHENG: But the actual thing, 01:04:59.690 --> 01:05:02.240 align:middle line:84% if you have some free money from the government, yeah. 01:05:02.240 --> 01:05:04.130 align:middle line:90% But besides that? 01:05:04.130 --> 01:05:05.630 align:middle line:84% AUDIENCE: Passive house [INAUDIBLE]. 01:05:05.630 --> 01:05:07.940 align:middle line:84% SIQI ZHENG: Passive house, you need to invest more. 01:05:07.940 --> 01:05:09.730 align:middle line:90% That's very clear. 01:05:09.730 --> 01:05:10.230 align:middle line:90% Yeah. 01:05:10.230 --> 01:05:11.688 align:middle line:84% AUDIENCE: They got some [INAUDIBLE] 01:05:11.688 --> 01:05:14.551 align:middle line:84% that [INAUDIBLE] change from traditional lights 01:05:14.551 --> 01:05:16.250 align:middle line:90% then for LED lights. 01:05:16.250 --> 01:05:17.570 align:middle line:90% The expense is not very high. 01:05:17.570 --> 01:05:18.935 align:middle line:90% SIQI ZHENG: Not very high, OK. 01:05:18.935 --> 01:05:22.760 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:05:22.760 --> 01:05:23.470 align:middle line:90% SIQI ZHENG: Yes. 01:05:23.470 --> 01:05:24.470 align:middle line:90% Do you have any thought? 01:05:24.470 --> 01:05:27.880 align:middle line:84% AUDIENCE: Technology advancement [INAUDIBLE]. 01:05:27.880 --> 01:05:30.660 align:middle line:90% SIQI ZHENG: But taper to zero? 01:05:30.660 --> 01:05:33.210 align:middle line:84% AUDIENCE: A more stringent permitting-- 01:05:33.210 --> 01:05:36.210 align:middle line:84% which actually requires them to reach closer 01:05:36.210 --> 01:05:40.010 align:middle line:90% to green building status. 01:05:40.010 --> 01:05:43.370 align:middle line:84% SIQI ZHENG: But more stringent permitting will get higher cost, 01:05:43.370 --> 01:05:43.980 align:middle line:90% I guess. 01:05:43.980 --> 01:05:46.430 align:middle line:84% Not material cost, but you will delay. 01:05:46.430 --> 01:05:46.930 align:middle line:90% Song. 01:05:46.930 --> 01:05:50.196 align:middle line:84% AUDIENCE: Even if you assign a third party contractor 01:05:50.196 --> 01:05:53.112 align:middle line:84% to the construction, then you pay them a fee. 01:05:53.112 --> 01:05:55.056 align:middle line:90% But the [INAUDIBLE]. 01:05:55.056 --> 01:05:59.450 align:middle line:90% 01:05:59.450 --> 01:06:02.030 align:middle line:84% SIQI ZHENG: OK, if you can get a very good contractor, 01:06:02.030 --> 01:06:03.320 align:middle line:90% say, I don't care. 01:06:03.320 --> 01:06:06.398 align:middle line:84% I can do this for you without any actual cost. 01:06:06.398 --> 01:06:07.440 align:middle line:90% Do you have any thoughts? 01:06:07.440 --> 01:06:08.180 align:middle line:84% AUDIENCE: I was going to echo what Catherine 01:06:08.180 --> 01:06:10.798 align:middle line:84% was saying, which was I think it's a question of definition. 01:06:10.798 --> 01:06:12.590 align:middle line:84% So if you're building in Boston and they're 01:06:12.590 --> 01:06:14.840 align:middle line:84% requiring you to do LEED certifiable, 01:06:14.840 --> 01:06:17.510 align:middle line:90% your baseline is green. 01:06:17.510 --> 01:06:19.400 align:middle line:84% If you're defining that as a cost premium, 01:06:19.400 --> 01:06:21.860 align:middle line:84% it's sort of an error the way you're defining that. 01:06:21.860 --> 01:06:23.360 align:middle line:84% But the technology is still advanced 01:06:23.360 --> 01:06:26.825 align:middle line:84% versus a more basic [INAUDIBLE] and, therefore, premium cost. 01:06:26.825 --> 01:06:27.450 align:middle line:90% SIQI ZHENG: OK. 01:06:27.450 --> 01:06:30.720 align:middle line:84% So, yes, I think you already covered most of this. 01:06:30.720 --> 01:06:33.730 align:middle line:84% But I just want to give you a sense. 01:06:33.730 --> 01:06:36.250 align:middle line:84% But I'm not an expert on building technology, 01:06:36.250 --> 01:06:37.020 align:middle line:90% I need to say. 01:06:37.020 --> 01:06:38.550 align:middle line:90% And we have Carlos-- 01:06:38.550 --> 01:06:40.210 align:middle line:90% not you, but another Carlos. 01:06:40.210 --> 01:06:43.680 align:middle line:84% A guest instructor later will come after midterm 01:06:43.680 --> 01:06:46.540 align:middle line:84% to teach three sustainable design sessions. 01:06:46.540 --> 01:06:49.840 align:middle line:84% I know, some of you, you are very good designers. 01:06:49.840 --> 01:06:52.680 align:middle line:84% But the conceptual level is the following. 01:06:52.680 --> 01:06:55.800 align:middle line:84% For the green design, sustainable design, 01:06:55.800 --> 01:06:57.900 align:middle line:84% there are at least two levels, one 01:06:57.900 --> 01:07:01.270 align:middle line:84% called passive, passive sustainable design. 01:07:01.270 --> 01:07:03.910 align:middle line:84% The other is active sustainable design. 01:07:03.910 --> 01:07:07.420 align:middle line:84% Passive design sometimes is really free, 01:07:07.420 --> 01:07:08.910 align:middle line:90% really you don't need money. 01:07:08.910 --> 01:07:12.850 align:middle line:90% For example, you use nature. 01:07:12.850 --> 01:07:13.840 align:middle line:90% You use nature. 01:07:13.840 --> 01:07:17.430 align:middle line:84% For example, your orientation, your window, and you 01:07:17.430 --> 01:07:20.310 align:middle line:84% just do this daylight and orientation. 01:07:20.310 --> 01:07:22.230 align:middle line:84% You have better design that will fit 01:07:22.230 --> 01:07:24.070 align:middle line:90% into this natural environment. 01:07:24.070 --> 01:07:26.550 align:middle line:84% You get better air flow in a building. 01:07:26.550 --> 01:07:29.380 align:middle line:84% And it doesn't cost too much money. 01:07:29.380 --> 01:07:32.910 align:middle line:84% But active design, you need mechanical systems. 01:07:32.910 --> 01:07:33.990 align:middle line:90% You need HVAC. 01:07:33.990 --> 01:07:37.650 align:middle line:84% You need all the mechanical systems and purchase the energy. 01:07:37.650 --> 01:07:40.830 align:middle line:84% If you cannot just use a nature to give the very cool 01:07:40.830 --> 01:07:42.930 align:middle line:84% environment, then you have to do AC. 01:07:42.930 --> 01:07:45.160 align:middle line:90% If you do AC, you spend money. 01:07:45.160 --> 01:07:49.410 align:middle line:84% So if you can use nature in the best way, in some cases, 01:07:49.410 --> 01:07:51.810 align:middle line:90% then they have 0% cost premium. 01:07:51.810 --> 01:07:53.320 align:middle line:90% Because you just use the nature. 01:07:53.320 --> 01:07:55.530 align:middle line:84% But if you have all these mechanical things, 01:07:55.530 --> 01:07:58.260 align:middle line:90% then you just spend money. 01:07:58.260 --> 01:08:01.000 align:middle line:84% But you said very clearly that's true. 01:08:01.000 --> 01:08:04.960 align:middle line:84% Cost premium is going down, on average is going down 01:08:04.960 --> 01:08:06.420 align:middle line:90% if you look at the time series. 01:08:06.420 --> 01:08:08.820 align:middle line:84% For example, later in Zhengzhen 's case, 01:08:08.820 --> 01:08:13.410 align:middle line:84% the Winthrop Center passive house cost premium, 01:08:13.410 --> 01:08:16.229 align:middle line:84% when they design that time, they made the decision. 01:08:16.229 --> 01:08:21.359 align:middle line:84% They found 3% to 10% when planned, the cost premium. 01:08:21.359 --> 01:08:23.220 align:middle line:84% And when they implement it-- because they 01:08:23.220 --> 01:08:26.189 align:middle line:84% need to get a permit, and it takes some time like that. 01:08:26.189 --> 01:08:28.800 align:middle line:84% And after about two years, it went to 3%. 01:08:28.800 --> 01:08:31.890 align:middle line:84% Because this technology become more mature, 01:08:31.890 --> 01:08:37.410 align:middle line:84% and they may find another good contractor construction team. 01:08:37.410 --> 01:08:40.937 align:middle line:84% They build other passive house, accumulate some expertise. 01:08:40.937 --> 01:08:41.979 align:middle line:90% They know how to do this. 01:08:41.979 --> 01:08:43.104 align:middle line:90% At first, they didn't know. 01:08:43.104 --> 01:08:45.750 align:middle line:84% They need to send people to Germany to learn. 01:08:45.750 --> 01:08:47.370 align:middle line:84% Because, that is the Germany thing. 01:08:47.370 --> 01:08:49.020 align:middle line:84% They sent team to Germany to learn 01:08:49.020 --> 01:08:50.740 align:middle line:90% how to build a passive house. 01:08:50.740 --> 01:08:53.160 align:middle line:84% And later, in Massachusetts, more and more passive 01:08:53.160 --> 01:08:56.050 align:middle line:84% house projects, like 10 or 20, then it's 01:08:56.050 --> 01:08:58.520 align:middle line:90% more like material technology. 01:08:58.520 --> 01:09:00.410 align:middle line:84% And [INAUDIBLE] they go one, two, three. 01:09:00.410 --> 01:09:03.310 align:middle line:84% So the key point is the following. 01:09:03.310 --> 01:09:05.620 align:middle line:90% It's still dynamic. 01:09:05.620 --> 01:09:07.000 align:middle line:90% Think about this. 01:09:07.000 --> 01:09:12.069 align:middle line:84% A function, the cost premium is a function of skills, as I said, 01:09:12.069 --> 01:09:13.340 align:middle line:90% more and more skills. 01:09:13.340 --> 01:09:15.830 align:middle line:84% At first, the system they design is not easy. 01:09:15.830 --> 01:09:18.649 align:middle line:84% They need to hire external design firm to do so, 01:09:18.649 --> 01:09:24.250 align:middle line:84% the developer, like KPF, like our Carlos instructor. 01:09:24.250 --> 01:09:29.170 align:middle line:84% And then later, they did several passive house or other things. 01:09:29.170 --> 01:09:33.240 align:middle line:84% And they have their internal team to do so, no need to hire. 01:09:33.240 --> 01:09:36.359 align:middle line:84% Innovation, more new technology pop up. 01:09:36.359 --> 01:09:39.660 align:middle line:84% And the new technology become cheaper and cheaper. 01:09:39.660 --> 01:09:43.029 align:middle line:84% Supply chain, you need new materials. 01:09:43.029 --> 01:09:46.260 align:middle line:84% Now, it's a disruptive because the pandemic. 01:09:46.260 --> 01:09:50.520 align:middle line:84% Then you're so hard to ship the parts from the supplier to you. 01:09:50.520 --> 01:09:55.350 align:middle line:84% Then you add wait, wait, wait with a new window. 01:09:55.350 --> 01:09:58.530 align:middle line:84% And if the supply chain become better, that can reduce cost. 01:09:58.530 --> 01:10:00.220 align:middle line:90% So that's all the things. 01:10:00.220 --> 01:10:03.810 align:middle line:84% So you need to think about in a very dynamic way, cannot say, 01:10:03.810 --> 01:10:07.410 align:middle line:90% oh, always 5%, always 10%. 01:10:07.410 --> 01:10:12.170 align:middle line:84% So now, I'm going to summarize the market side. 01:10:12.170 --> 01:10:19.150 align:middle line:84% So this cash flow chart always will show up in my class 01:10:19.150 --> 01:10:21.970 align:middle line:90% to remind you how market works. 01:10:21.970 --> 01:10:29.960 align:middle line:84% Three stakeholders-- end user as tenant, owner, and developer. 01:10:29.960 --> 01:10:32.720 align:middle line:90% And this is a chain process. 01:10:32.720 --> 01:10:36.740 align:middle line:84% The chain is this one and this one. 01:10:36.740 --> 01:10:38.320 align:middle line:90% They are chained. 01:10:38.320 --> 01:10:44.140 align:middle line:84% This one and this one, they are connect. 01:10:44.140 --> 01:10:46.900 align:middle line:84% One stakeholder's cost is the other stakeholder's benefit. 01:10:46.900 --> 01:10:50.110 align:middle line:84% And the other one's cost is the other's benefit. 01:10:50.110 --> 01:10:53.770 align:middle line:84% If this work-- should go this way, 01:10:53.770 --> 01:10:56.250 align:middle line:90% not like developer speculate. 01:10:56.250 --> 01:10:58.870 align:middle line:84% Oh, if I build this, and it will be so popular. 01:10:58.870 --> 01:10:59.420 align:middle line:90% I can sell. 01:10:59.420 --> 01:11:02.200 align:middle line:84% No, it's from the market fundamentals, 01:11:02.200 --> 01:11:03.620 align:middle line:90% from the end users. 01:11:03.620 --> 01:11:06.640 align:middle line:84% They are willing to pay and then trigger the investors, 01:11:06.640 --> 01:11:07.970 align:middle line:90% then trigger the developers. 01:11:07.970 --> 01:11:10.550 align:middle line:90% That's the point. 01:11:10.550 --> 01:11:13.130 align:middle line:84% OK, so then we put all the things in the three bubbles 01:11:13.130 --> 01:11:15.560 align:middle line:90% as a recap that we-- 01:11:15.560 --> 01:11:18.860 align:middle line:84% every item in here, here and there and all the things. 01:11:18.860 --> 01:11:20.900 align:middle line:90% So that's the point. 01:11:20.900 --> 01:11:23.930 align:middle line:84% Now, I still have some minute left. 01:11:23.930 --> 01:11:29.060 align:middle line:84% I'm going to touch a little bit on how market may fail. 01:11:29.060 --> 01:11:31.280 align:middle line:84% Now, we cannot be always, oh, market perfect. 01:11:31.280 --> 01:11:33.530 align:middle line:84% If we have this three stakeholders all 01:11:33.530 --> 01:11:35.400 align:middle line:84% chained together, everything will happen. 01:11:35.400 --> 01:11:36.350 align:middle line:90% No. 01:11:36.350 --> 01:11:39.350 align:middle line:84% Market may fail in some circumstances, 01:11:39.350 --> 01:11:42.580 align:middle line:90% and that is the market failure. 01:11:42.580 --> 01:11:46.130 align:middle line:84% So basically, the McKinsey-- very famous report. 01:11:46.130 --> 01:11:49.130 align:middle line:84% I'm not sure whether you read that or not. 01:11:49.130 --> 01:11:52.060 align:middle line:84% They raise a question, this McKinsey report. 01:11:52.060 --> 01:11:59.240 align:middle line:84% This is a so-called energy efficiency dilemma or something, 01:11:59.240 --> 01:12:00.910 align:middle line:90% energy efficiency curve. 01:12:00.910 --> 01:12:07.240 align:middle line:84% In this one, they point out many, many building energy 01:12:07.240 --> 01:12:10.570 align:middle line:84% efficiency technologies, they are NPV positive, 01:12:10.570 --> 01:12:12.920 align:middle line:90% means additional cost. 01:12:12.920 --> 01:12:16.330 align:middle line:84% But later, we will see more energy, additional benefit. 01:12:16.330 --> 01:12:18.730 align:middle line:84% And always the benefit will exceed cost. 01:12:18.730 --> 01:12:22.360 align:middle line:84% So that's why, when you look at the cost, they are negative, 01:12:22.360 --> 01:12:24.220 align:middle line:90% means positive NPV. 01:12:24.220 --> 01:12:26.410 align:middle line:90% So all the things are negative. 01:12:26.410 --> 01:12:29.770 align:middle line:84% Cost means negative lifetime cycle. 01:12:29.770 --> 01:12:31.460 align:middle line:84% Upfront, of course, you have cost. 01:12:31.460 --> 01:12:33.400 align:middle line:84% But if you think about life cycle-- 01:12:33.400 --> 01:12:39.670 align:middle line:84% negative cost, positive NPV, NPV positive. 01:12:39.670 --> 01:12:41.740 align:middle line:84% For example-- I'm not sure it's too small. 01:12:41.740 --> 01:12:47.230 align:middle line:84% But it's a retrofit HVAC system, residential commercial. 01:12:47.230 --> 01:12:52.330 align:middle line:84% And the retrofit buildings, water, heating, and this 01:12:52.330 --> 01:12:53.740 align:middle line:90% and that-- all here. 01:12:53.740 --> 01:12:57.620 align:middle line:84% Only a few very expensive ones are positive cost. 01:12:57.620 --> 01:13:00.030 align:middle line:90% Then they ask question. 01:13:00.030 --> 01:13:02.970 align:middle line:84% Since it's so good and NPV positive, 01:13:02.970 --> 01:13:06.780 align:middle line:84% why it's not that easy, that not all buildings suddenly 01:13:06.780 --> 01:13:08.510 align:middle line:90% start to retrofit themselves? 01:13:08.510 --> 01:13:09.450 align:middle line:90% No. 01:13:09.450 --> 01:13:12.470 align:middle line:84% Why not all the market suddenly becomes all green? 01:13:12.470 --> 01:13:13.900 align:middle line:90% No. 01:13:13.900 --> 01:13:20.390 align:middle line:84% So why those opportunities were left there without exploited? 01:13:20.390 --> 01:13:21.920 align:middle line:90% So that's their question. 01:13:21.920 --> 01:13:24.880 align:middle line:90% So they raise this question. 01:13:24.880 --> 01:13:26.320 align:middle line:90% The point is the following. 01:13:26.320 --> 01:13:29.710 align:middle line:84% We always say PPP, oh, intersection, all 01:13:29.710 --> 01:13:30.920 align:middle line:90% win, win, win solution. 01:13:30.920 --> 01:13:31.750 align:middle line:90% No. 01:13:31.750 --> 01:13:35.840 align:middle line:84% In many circumstances, they will diverge like three bubbles. 01:13:35.840 --> 01:13:40.660 align:middle line:84% Three balloons will just diverge and with no intersection at all, 01:13:40.660 --> 01:13:42.100 align:middle line:90% no intersection. 01:13:42.100 --> 01:13:45.320 align:middle line:84% If you care about the planet, you'll lose money. 01:13:45.320 --> 01:13:48.110 align:middle line:84% If only look at people, you cannot make profit. 01:13:48.110 --> 01:13:51.020 align:middle line:84% If you make profit, you cannot protect the environment, 01:13:51.020 --> 01:13:52.890 align:middle line:90% so like that. 01:13:52.890 --> 01:13:56.200 align:middle line:84% So then there's three major market failures. 01:13:56.200 --> 01:13:58.560 align:middle line:84% But today, I will just start with the first one, 01:13:58.560 --> 01:14:02.170 align:middle line:84% which is information asymmetry, the information problem. 01:14:02.170 --> 01:14:03.970 align:middle line:90% That's the information problem. 01:14:03.970 --> 01:14:07.230 align:middle line:84% And the second one is a split incentive. 01:14:07.230 --> 01:14:09.430 align:middle line:90% Next class-- split incentive. 01:14:09.430 --> 01:14:12.610 align:middle line:84% Tenants and landlords are fighting with each other. 01:14:12.610 --> 01:14:13.950 align:middle line:90% That's a problem. 01:14:13.950 --> 01:14:15.870 align:middle line:90% Third will be externality. 01:14:15.870 --> 01:14:17.910 align:middle line:84% That will policy need to step in. 01:14:17.910 --> 01:14:20.060 align:middle line:90% The city mayor need to step in. 01:14:20.060 --> 01:14:22.030 align:middle line:90% The government need to step in. 01:14:22.030 --> 01:14:25.590 align:middle line:84% So three major market failures make your hope 01:14:25.590 --> 01:14:28.910 align:middle line:90% become like this, no solution. 01:14:28.910 --> 01:14:32.720 align:middle line:84% Then, of course, we are not so a completely pessimistic. 01:14:32.720 --> 01:14:33.930 align:middle line:90% We understand. 01:14:33.930 --> 01:14:34.770 align:middle line:90% We know this. 01:14:34.770 --> 01:14:37.100 align:middle line:84% After we know this, we try to fix the problem. 01:14:37.100 --> 01:14:40.070 align:middle line:84% We try to fix those market failures 01:14:40.070 --> 01:14:42.440 align:middle line:90% with some new innovative ways. 01:14:42.440 --> 01:14:46.670 align:middle line:84% So thus, we have different ways to fix. 01:14:46.670 --> 01:14:51.520 align:middle line:84% Let's look at information problem first. 01:14:51.520 --> 01:14:54.940 align:middle line:90% So the point is, all of you-- 01:14:54.940 --> 01:14:56.710 align:middle line:84% of course, I have been doing this research 01:14:56.710 --> 01:14:57.910 align:middle line:90% for more than 10 years. 01:14:57.910 --> 01:15:01.690 align:middle line:84% Now, you are in a class, a core class, then you learn this. 01:15:01.690 --> 01:15:03.370 align:middle line:84% All of us, we are more sophisticated 01:15:03.370 --> 01:15:07.930 align:middle line:84% than the average market person, every person in the market. 01:15:07.930 --> 01:15:10.120 align:middle line:84% Because we are here learning this 01:15:10.120 --> 01:15:13.210 align:middle line:84% in a professional way, in a sophisticated way, 01:15:13.210 --> 01:15:14.000 align:middle line:90% in the classroom. 01:15:14.000 --> 01:15:16.700 align:middle line:84% But not all the home buyers they understand this. 01:15:16.700 --> 01:15:19.540 align:middle line:84% We cannot assume everyone understand immediately, oh, 01:15:19.540 --> 01:15:21.880 align:middle line:90% green is good. 01:15:21.880 --> 01:15:27.490 align:middle line:84% So that's why if we have supply-- 01:15:27.490 --> 01:15:32.290 align:middle line:84% but if the demand for the consumers in the market, they 01:15:32.290 --> 01:15:34.390 align:middle line:84% don't understand the benefit, they 01:15:34.390 --> 01:15:36.250 align:middle line:84% won't have a higher willingness to pay. 01:15:36.250 --> 01:15:39.010 align:middle line:90% Then that will lower the demand. 01:15:39.010 --> 01:15:40.310 align:middle line:90% That's a problem. 01:15:40.310 --> 01:15:42.910 align:middle line:90% But how to educate the market? 01:15:42.910 --> 01:15:48.360 align:middle line:84% If market dysfunction, how we educate the market? 01:15:48.360 --> 01:15:54.150 align:middle line:84% So that's one paper I did back to 2016. 01:15:54.150 --> 01:15:57.870 align:middle line:84% So at that time, China's green building market, 01:15:57.870 --> 01:16:00.240 align:middle line:84% residential market, was so immature. 01:16:00.240 --> 01:16:03.330 align:middle line:84% And only me, like a professor, we knew. 01:16:03.330 --> 01:16:06.422 align:middle line:84% But the common buyers, they didn't understand. 01:16:06.422 --> 01:16:07.380 align:middle line:90% They didn't understand. 01:16:07.380 --> 01:16:11.160 align:middle line:84% Especially in that market, the first [INAUDIBLE] problem 01:16:11.160 --> 01:16:12.430 align:middle line:90% is housing affordability. 01:16:12.430 --> 01:16:16.430 align:middle line:84% So high housing price, they cannot buy a small house. 01:16:16.430 --> 01:16:18.810 align:middle line:84% How can I have some luxury [INAUDIBLE] 01:16:18.810 --> 01:16:20.200 align:middle line:90% about the environment? 01:16:20.200 --> 01:16:21.670 align:middle line:90% That's not my business. 01:16:21.670 --> 01:16:25.500 align:middle line:84% How I have a luxury [INAUDIBLE] about this environment 01:16:25.500 --> 01:16:26.050 align:middle line:90% protection? 01:16:26.050 --> 01:16:27.240 align:middle line:90% No. 01:16:27.240 --> 01:16:29.150 align:middle line:84% And then they also don't understand. 01:16:29.150 --> 01:16:31.950 align:middle line:84% They say, oh, green building is good for the society. 01:16:31.950 --> 01:16:34.250 align:middle line:90% But it's nothing to do with me. 01:16:34.250 --> 01:16:35.830 align:middle line:90% How can I benefit from this? 01:16:35.830 --> 01:16:37.350 align:middle line:90% No idea. 01:16:37.350 --> 01:16:40.710 align:middle line:84% And then I send my student teams. 01:16:40.710 --> 01:16:43.190 align:middle line:90% I send my student teams to-- 01:16:43.190 --> 01:16:46.720 align:middle line:84% well, there were some scattered around the green building, 01:16:46.720 --> 01:16:47.860 align:middle line:90% new green building project. 01:16:47.860 --> 01:16:50.870 align:middle line:84% As the very first movers of the developer, 01:16:50.870 --> 01:16:53.590 align:middle line:84% they build some green buildings here and there, but very few. 01:16:53.590 --> 01:16:57.940 align:middle line:84% I send students to three green buildings and three nongreen 01:16:57.940 --> 01:16:59.895 align:middle line:84% buildings which appeared together. 01:16:59.895 --> 01:17:01.270 align:middle line:84% One green building-- and, nearby, 01:17:01.270 --> 01:17:04.720 align:middle line:84% find a very similar location but nongreen building. 01:17:04.720 --> 01:17:09.790 align:middle line:84% I send my students to those complex and then 01:17:09.790 --> 01:17:14.020 align:middle line:84% to interview the residents for the green building 01:17:14.020 --> 01:17:16.500 align:middle line:84% residents and the nongreen building residents, 01:17:16.500 --> 01:17:18.010 align:middle line:90% interview them. 01:17:18.010 --> 01:17:19.600 align:middle line:90% And I interview them-- 01:17:19.600 --> 01:17:21.340 align:middle line:90% our students interviewed them. 01:17:21.340 --> 01:17:24.310 align:middle line:84% And we found out, for the green buildings, 01:17:24.310 --> 01:17:25.780 align:middle line:84% they have really a high willingness 01:17:25.780 --> 01:17:30.280 align:middle line:84% to pay for greenness, for this energy efficiency, these 300 01:17:30.280 --> 01:17:32.420 align:middle line:90% RMB per square meter like that. 01:17:32.420 --> 01:17:35.510 align:middle line:84% So we ask questions, hypothetical question. 01:17:35.510 --> 01:17:37.870 align:middle line:84% If you later have another chance to buy a house, 01:17:37.870 --> 01:17:40.450 align:middle line:84% buy a green house, are you willing to pay a higher 01:17:40.450 --> 01:17:42.110 align:middle line:90% price for the next one? 01:17:42.110 --> 01:17:43.600 align:middle line:90% We asked that question. 01:17:43.600 --> 01:17:46.390 align:middle line:84% The green building residents, they understand the benefit. 01:17:46.390 --> 01:17:49.840 align:middle line:84% They have this willingness to pay. 01:17:49.840 --> 01:17:52.810 align:middle line:84% The brown building residents, they didn't have any idea. 01:17:52.810 --> 01:17:53.980 align:middle line:90% They don't have. 01:17:53.980 --> 01:17:55.420 align:middle line:90% So I have it low. 01:17:55.420 --> 01:17:59.160 align:middle line:84% And then the following is the same. 01:17:59.160 --> 01:18:00.750 align:middle line:90% We show our information card. 01:18:00.750 --> 01:18:02.130 align:middle line:90% We educated them. 01:18:02.130 --> 01:18:04.270 align:middle line:84% Green building is not just about carbon. 01:18:04.270 --> 01:18:07.360 align:middle line:84% It's about this and that, the light, the indoor air quality, 01:18:07.360 --> 01:18:09.980 align:middle line:84% your energy bills, and this and that. 01:18:09.980 --> 01:18:12.150 align:middle line:84% And we had some technology students 01:18:12.150 --> 01:18:13.720 align:middle line:90% who really it mattered a lot. 01:18:13.720 --> 01:18:15.350 align:middle line:90% And then we asked them again. 01:18:15.350 --> 01:18:18.770 align:middle line:84% Then you can see it jump up for these nongreen building 01:18:18.770 --> 01:18:21.750 align:middle line:84% residents, that they got some new information. 01:18:21.750 --> 01:18:24.170 align:middle line:84% They adjusted their understanding of this. 01:18:24.170 --> 01:18:26.210 align:middle line:84% And they have a higher willingness to pay. 01:18:26.210 --> 01:18:28.910 align:middle line:84% So that was my paper, just a small example 01:18:28.910 --> 01:18:31.050 align:middle line:84% to show information really matters. 01:18:31.050 --> 01:18:33.870 align:middle line:84% But of course, this is all hypothetical question. 01:18:33.870 --> 01:18:38.060 align:middle line:84% That's a limitation of this questionnaire approach, right? 01:18:38.060 --> 01:18:39.720 align:middle line:84% When you say so, maybe you won't do so. 01:18:39.720 --> 01:18:43.160 align:middle line:84% But anyway, as a first try to show, 01:18:43.160 --> 01:18:45.050 align:middle line:84% so many people they are less educated 01:18:45.050 --> 01:18:47.040 align:middle line:84% about the benefit of the green building. 01:18:47.040 --> 01:18:48.950 align:middle line:84% And if you give them information, 01:18:48.950 --> 01:18:50.990 align:middle line:90% they will change their mind. 01:18:50.990 --> 01:18:55.010 align:middle line:84% This is very true for real estate. 01:18:55.010 --> 01:19:01.040 align:middle line:84% Because as we understand, these are some different goods, 01:19:01.040 --> 01:19:03.110 align:middle line:90% so-called experience good. 01:19:03.110 --> 01:19:06.950 align:middle line:84% That's some good you cannot immediately judge whether good 01:19:06.950 --> 01:19:07.650 align:middle line:90% or not. 01:19:07.650 --> 01:19:10.401 align:middle line:90% You need experience. 01:19:10.401 --> 01:19:13.790 align:middle line:84% And even for some mature building materials, 01:19:13.790 --> 01:19:17.810 align:middle line:84% credence good means even you experience you don't 01:19:17.810 --> 01:19:19.370 align:middle line:90% know unless you are an expert. 01:19:19.370 --> 01:19:21.350 align:middle line:84% Because you cannot say you cannot feel. 01:19:21.350 --> 01:19:25.380 align:middle line:84% So that's even further information became a problem. 01:19:25.380 --> 01:19:27.620 align:middle line:84% But real estate is very clear, the building's 01:19:27.620 --> 01:19:30.260 align:middle line:84% indoor air quality and energy efficiency. 01:19:30.260 --> 01:19:33.320 align:middle line:84% If you only look at the brochure of the marketing materials from 01:19:33.320 --> 01:19:36.830 align:middle line:84% the builder, you cannot just really believe in that, 01:19:36.830 --> 01:19:38.430 align:middle line:90% or you will be cheated. 01:19:38.430 --> 01:19:40.850 align:middle line:84% And after you live in a house for a few years, 01:19:40.850 --> 01:19:42.360 align:middle line:90% you really understand that. 01:19:42.360 --> 01:19:45.170 align:middle line:84% So that's called an experience good. 01:19:45.170 --> 01:19:47.450 align:middle line:84% What other examples of experience good 01:19:47.450 --> 01:19:48.265 align:middle line:90% can you think of? 01:19:48.265 --> 01:19:51.060 align:middle line:90% 01:19:51.060 --> 01:19:53.500 align:middle line:84% Experience good besides real estate, 01:19:53.500 --> 01:19:56.100 align:middle line:84% do you have another example in the real world 01:19:56.100 --> 01:19:58.560 align:middle line:90% that you must experience? 01:19:58.560 --> 01:20:02.160 align:middle line:84% Otherwise, you don't understand the quality. 01:20:02.160 --> 01:20:05.460 align:middle line:84% That brings a lot of uncertainty when you decide. 01:20:05.460 --> 01:20:06.600 align:middle line:90% AUDIENCE: Food? 01:20:06.600 --> 01:20:07.720 align:middle line:90% SIQI ZHENG: Food, yes. 01:20:07.720 --> 01:20:09.720 align:middle line:84% AUDIENCE: Because you can't judge it until you-- 01:20:09.720 --> 01:20:11.800 align:middle line:90% SIQI ZHENG: Until you eat-- 01:20:11.800 --> 01:20:15.150 align:middle line:84% I think another example is people. 01:20:15.150 --> 01:20:18.930 align:middle line:84% I have a lot of experience people. 01:20:18.930 --> 01:20:22.590 align:middle line:84% So now, we are in an admission cycle right now. 01:20:22.590 --> 01:20:27.030 align:middle line:84% I work to midnight the day before to review 01:20:27.030 --> 01:20:30.340 align:middle line:84% all the applications to our MCP DUSP program. 01:20:30.340 --> 01:20:33.280 align:middle line:84% And then later, we will admit [INAUDIBLE] students. 01:20:33.280 --> 01:20:36.960 align:middle line:84% So now, all MIT professors are busy with reviewing 01:20:36.960 --> 01:20:38.170 align:middle line:90% all these applications. 01:20:38.170 --> 01:20:43.630 align:middle line:84% And then we can only read, you know, CV, and the statement, 01:20:43.630 --> 01:20:47.410 align:middle line:84% and the transcript, and these three reference letters. 01:20:47.410 --> 01:20:50.920 align:middle line:84% However, a person is an experience good 01:20:50.920 --> 01:20:52.300 align:middle line:90% in the labor market. 01:20:52.300 --> 01:20:58.180 align:middle line:84% So basically-- if you only read a CV and a reference letter 01:20:58.180 --> 01:20:58.840 align:middle line:90% so good. 01:20:58.840 --> 01:21:01.810 align:middle line:84% This person is perfect, so good, all the 01:21:01.810 --> 01:21:05.660 align:middle line:84% As, and all this and this, and all this, and all awards, 01:21:05.660 --> 01:21:07.820 align:middle line:90% of 10 publications like that. 01:21:07.820 --> 01:21:09.760 align:middle line:84% However, when you meet the person, 01:21:09.760 --> 01:21:13.630 align:middle line:84% later you found out, oh, that's not that true. 01:21:13.630 --> 01:21:16.400 align:middle line:84% So I feel it's very hard to judge a CV. 01:21:16.400 --> 01:21:17.830 align:middle line:90% That's an experience good. 01:21:17.830 --> 01:21:21.490 align:middle line:84% So if I want to admit a student, I really 01:21:21.490 --> 01:21:25.390 align:middle line:84% prefer to have a short period of together, being together, 01:21:25.390 --> 01:21:27.160 align:middle line:90% work together on something. 01:21:27.160 --> 01:21:28.180 align:middle line:90% Then we can experience. 01:21:28.180 --> 01:21:30.040 align:middle line:84% And that student can also experience 01:21:30.040 --> 01:21:33.740 align:middle line:84% whether I'm a very bad professor or OK professor. 01:21:33.740 --> 01:21:36.250 align:middle line:84% So real estate is the same thing. 01:21:36.250 --> 01:21:41.920 align:middle line:84% So that's why some developers, some real estate people, they 01:21:41.920 --> 01:21:44.230 align:middle line:84% take advantage of this information asymmetry. 01:21:44.230 --> 01:21:47.920 align:middle line:84% Because the buyer is so blinded, especially common people. 01:21:47.920 --> 01:21:49.890 align:middle line:90% Then they do greenwashing. 01:21:49.890 --> 01:21:51.640 align:middle line:84% I think you heard this word so many times, 01:21:51.640 --> 01:21:53.800 align:middle line:84% greenwashing, greenwashing, greenwashing. 01:21:53.800 --> 01:21:56.830 align:middle line:84% So greenwashing means is you are not green building, 01:21:56.830 --> 01:21:58.660 align:middle line:90% but you just plant some trees. 01:21:58.660 --> 01:22:01.930 align:middle line:84% And you put some plants on your balcony, say, oh, so green. 01:22:01.930 --> 01:22:03.010 align:middle line:90% That's green building. 01:22:03.010 --> 01:22:04.750 align:middle line:90% So that's greenwashing. 01:22:04.750 --> 01:22:07.310 align:middle line:90% It's no energy efficiency. 01:22:07.310 --> 01:22:09.040 align:middle line:84% And you just see the image or you 01:22:09.040 --> 01:22:14.140 align:middle line:84% print this brochure fancy marketing materials, so green. 01:22:14.140 --> 01:22:16.120 align:middle line:90% That's called greenwashing. 01:22:16.120 --> 01:22:17.530 align:middle line:90% Greenwashing is not good. 01:22:17.530 --> 01:22:19.910 align:middle line:90% But why greenwashing exist? 01:22:19.910 --> 01:22:22.660 align:middle line:84% We understand because the information problem. 01:22:22.660 --> 01:22:25.190 align:middle line:90% That's an information problem. 01:22:25.190 --> 01:22:29.140 align:middle line:84% So if you have a very good CV, but actually you 01:22:29.140 --> 01:22:32.410 align:middle line:84% are not that good, you are greenwashing yourself. 01:22:32.410 --> 01:22:34.000 align:middle line:90% That's a way. 01:22:34.000 --> 01:22:36.820 align:middle line:84% And some smart professor will find out. 01:22:36.820 --> 01:22:40.520 align:middle line:84% OK my research, too, studied greenwashing in Beijing. 01:22:40.520 --> 01:22:42.740 align:middle line:84% But I won't go into details because we 01:22:42.740 --> 01:22:44.130 align:middle line:90% are going to run out of time. 01:22:44.130 --> 01:22:47.450 align:middle line:84% But the point is, at that time, even earlier 01:22:47.450 --> 01:22:50.600 align:middle line:84% than my last paper, the information paper, 01:22:50.600 --> 01:22:54.950 align:middle line:84% China had no green certificate at all, no green certificate. 01:22:54.950 --> 01:22:57.210 align:middle line:84% All the developers, they self-advertise. 01:22:57.210 --> 01:22:58.860 align:middle line:84% Oh, my building is a green building. 01:22:58.860 --> 01:23:00.090 align:middle line:90% Green building is so good. 01:23:00.090 --> 01:23:03.840 align:middle line:84% And you will have so much benefit from my building. 01:23:03.840 --> 01:23:07.460 align:middle line:84% So for those developers, they self-advertise 01:23:07.460 --> 01:23:10.970 align:middle line:84% without any certificate, without any data. 01:23:10.970 --> 01:23:15.140 align:middle line:84% And in that time, the market was presale stage, no building 01:23:15.140 --> 01:23:17.180 align:middle line:90% at all, vacant land. 01:23:17.180 --> 01:23:21.050 align:middle line:84% And they are building the foundation maybe, a big hole. 01:23:21.050 --> 01:23:22.460 align:middle line:90% And then they-- oh, so good. 01:23:22.460 --> 01:23:23.690 align:middle line:90% Look at the pictures. 01:23:23.690 --> 01:23:28.070 align:middle line:84% Then the consumers got so excited and bought the building. 01:23:28.070 --> 01:23:32.358 align:middle line:84% And then the buyers got into the building and, after a few years, 01:23:32.358 --> 01:23:34.400 align:middle line:84% found out the energy bill is so high and not good 01:23:34.400 --> 01:23:36.500 align:middle line:90% at all or plastic bag problem. 01:23:36.500 --> 01:23:38.070 align:middle line:90% All the things happened. 01:23:38.070 --> 01:23:40.160 align:middle line:84% And then when they resell their buildings, 01:23:40.160 --> 01:23:42.990 align:middle line:84% they resell their houses on the resale market, 01:23:42.990 --> 01:23:45.260 align:middle line:84% the developer is already gone, disappeared. 01:23:45.260 --> 01:23:47.930 align:middle line:84% I don't know where the developer is. 01:23:47.930 --> 01:23:52.140 align:middle line:84% And then it turned out that they couldn't sell any premium. 01:23:52.140 --> 01:23:57.080 align:middle line:84% So the first round of buyers will become victims of this. 01:23:57.080 --> 01:23:58.890 align:middle line:90% For later, they found out. 01:23:58.890 --> 01:24:01.430 align:middle line:84% But the first round of the buyers got this problem 01:24:01.430 --> 01:24:03.410 align:middle line:90% and got stuck in. 01:24:03.410 --> 01:24:07.100 align:middle line:84% So the key point of this, I'm going to only show two 01:24:07.100 --> 01:24:10.280 align:middle line:84% slides right now for the sake of time. 01:24:10.280 --> 01:24:13.530 align:middle line:84% Understand this because there's no market signal. 01:24:13.530 --> 01:24:15.480 align:middle line:90% There's no market certificate. 01:24:15.480 --> 01:24:18.960 align:middle line:84% For example, this cost, this word selection, 01:24:18.960 --> 01:24:21.880 align:middle line:84% that's a very important economic concept. 01:24:21.880 --> 01:24:23.980 align:middle line:84% Suppose we have a good developer. 01:24:23.980 --> 01:24:26.960 align:middle line:84% We have a bad developer-- not bad, average developer. 01:24:26.960 --> 01:24:28.660 align:middle line:90% We have green developer. 01:24:28.660 --> 01:24:30.920 align:middle line:84% And we have an average developer. 01:24:30.920 --> 01:24:34.810 align:middle line:84% We know that when we build a green house, 01:24:34.810 --> 01:24:37.190 align:middle line:90% there's a cost premium. 01:24:37.190 --> 01:24:38.210 align:middle line:90% There's no free lunch. 01:24:38.210 --> 01:24:42.580 align:middle line:84% Suppose every house is 0.95 million, 01:24:42.580 --> 01:24:45.950 align:middle line:90% and the green is 1.25 million. 01:24:45.950 --> 01:24:47.140 align:middle line:90% That's a cost. 01:24:47.140 --> 01:24:49.280 align:middle line:84% And if the buyer are so sophisticated 01:24:49.280 --> 01:24:52.120 align:middle line:84% and we have a very good certificate system, 01:24:52.120 --> 01:24:53.500 align:middle line:90% then they can tell. 01:24:53.500 --> 01:24:54.810 align:middle line:90% The buyer not blinded. 01:24:54.810 --> 01:24:56.950 align:middle line:84% They can tell the green building is good 01:24:56.950 --> 01:24:58.810 align:middle line:84% and the nongreen building not good. 01:24:58.810 --> 01:25:00.480 align:middle line:84% Then they have willingness to pay. 01:25:00.480 --> 01:25:01.390 align:middle line:90% This one is higher. 01:25:01.390 --> 01:25:02.470 align:middle line:90% This one is lower. 01:25:02.470 --> 01:25:08.500 align:middle line:84% So you can clearly see, at any time, at this time, 01:25:08.500 --> 01:25:11.768 align:middle line:84% this one is higher than the cost. 01:25:11.768 --> 01:25:13.560 align:middle line:84% So that gives you incentive for the builder 01:25:13.560 --> 01:25:16.350 align:middle line:84% to build because they know they can sell at 1.4 million, 01:25:16.350 --> 01:25:18.870 align:middle line:90% the cost 1.25 million. 01:25:18.870 --> 01:25:21.533 align:middle line:84% And this market also exists because some people, 01:25:21.533 --> 01:25:22.200 align:middle line:90% they don't care. 01:25:22.200 --> 01:25:23.190 align:middle line:90% And they don't want to invest. 01:25:23.190 --> 01:25:23.830 align:middle line:90% That's fine. 01:25:23.830 --> 01:25:25.030 align:middle line:90% They go to this market. 01:25:25.030 --> 01:25:28.060 align:middle line:84% So a differentiated market exists. 01:25:28.060 --> 01:25:30.990 align:middle line:90% That green building will exist. 01:25:30.990 --> 01:25:35.370 align:middle line:84% However, if it's so blinded-- no certificate like that. 01:25:35.370 --> 01:25:38.700 align:middle line:84% And then the buyers couldn't tell which one is which. 01:25:38.700 --> 01:25:40.410 align:middle line:84% They couldn't tell which one is built 01:25:40.410 --> 01:25:42.060 align:middle line:90% green, which one is not green. 01:25:42.060 --> 01:25:45.650 align:middle line:84% And they don't want to be cheated. 01:25:45.650 --> 01:25:47.758 align:middle line:90% Then they say, OK, I don't know. 01:25:47.758 --> 01:25:48.550 align:middle line:90% They just say that. 01:25:48.550 --> 01:25:50.340 align:middle line:90% They say, how can I believe? 01:25:50.340 --> 01:25:52.000 align:middle line:90% I just put them together. 01:25:52.000 --> 01:25:53.020 align:middle line:90% It's no difference. 01:25:53.020 --> 01:25:55.690 align:middle line:90% Then they have 1.2 million. 01:25:55.690 --> 01:26:00.510 align:middle line:84% So this creates a problem that will the deincentivize 01:26:00.510 --> 01:26:01.120 align:middle line:90% this part. 01:26:01.120 --> 01:26:04.680 align:middle line:84% Because, now, all put together, they 01:26:04.680 --> 01:26:06.557 align:middle line:84% are willing to pay the same 1.2 million 01:26:06.557 --> 01:26:08.140 align:middle line:84% no matter whether you're green or not. 01:26:08.140 --> 01:26:09.310 align:middle line:90% Because I don't know. 01:26:09.310 --> 01:26:12.050 align:middle line:84% Then for this part, they don't want to build. 01:26:12.050 --> 01:26:14.830 align:middle line:84% They have no incentive because the cost exceeds the benefit. 01:26:14.830 --> 01:26:18.640 align:middle line:84% So that will crowd out the good guys. 01:26:18.640 --> 01:26:22.010 align:middle line:84% And only the lemons, the bad guys, will stay in the market. 01:26:22.010 --> 01:26:23.500 align:middle line:90% So that's a problem. 01:26:23.500 --> 01:26:28.150 align:middle line:84% To solve that problem is certification. 01:26:28.150 --> 01:26:29.620 align:middle line:90% So I want to give credit. 01:26:29.620 --> 01:26:32.170 align:middle line:84% Of course, many people, they are criticize. 01:26:32.170 --> 01:26:34.450 align:middle line:84% LEED has this problem, that problem. 01:26:34.450 --> 01:26:36.880 align:middle line:84% But the fundamental, the first order benefit 01:26:36.880 --> 01:26:40.160 align:middle line:84% of this certification, is to solve this information 01:26:40.160 --> 01:26:41.170 align:middle line:90% asymmetry. 01:26:41.170 --> 01:26:45.040 align:middle line:84% At least you have a certificate instead of China's case in 2012, 01:26:45.040 --> 01:26:45.610 align:middle line:90% nothing. 01:26:45.610 --> 01:26:47.920 align:middle line:90% You just promote by yourself. 01:26:47.920 --> 01:26:50.050 align:middle line:84% You have the certificate on the wall. 01:26:50.050 --> 01:26:54.340 align:middle line:84% And you show this, the LEED Platinum and the LEED Gold. 01:26:54.340 --> 01:26:57.750 align:middle line:84% Then you understand this one is not a cheater. 01:26:57.750 --> 01:27:02.710 align:middle line:84% So that's to help with the information asymmetry. 01:27:02.710 --> 01:27:06.580 align:middle line:84% And then this is just a first impression 01:27:06.580 --> 01:27:08.710 align:middle line:84% of what's the problem of information problem 01:27:08.710 --> 01:27:09.863 align:middle line:90% and how to solve. 01:27:09.863 --> 01:27:12.280 align:middle line:84% And when they solve, they say, oh, the limitation of this, 01:27:12.280 --> 01:27:14.410 align:middle line:84% the limitation of this, the limitation of this. 01:27:14.410 --> 01:27:17.780 align:middle line:84% And they improve, gradually, this certification. 01:27:17.780 --> 01:27:21.350 align:middle line:84% But first, the first order thing is this good thing. 01:27:21.350 --> 01:27:23.050 align:middle line:90% This is a public good. 01:27:23.050 --> 01:27:26.170 align:middle line:84% The government provide, or the non-NGO, provide this, 01:27:26.170 --> 01:27:31.550 align:middle line:84% will help the buyers to be not so blinded and became like this 01:27:31.550 --> 01:27:37.050 align:middle line:84% and kill this good market and to solve this adverse selection 01:27:37.050 --> 01:27:37.740 align:middle line:90% problem. 01:27:37.740 --> 01:27:40.250 align:middle line:90% OK, I'm going to stop here. 01:27:40.250 --> 01:27:58.000 align:middle line:90%