Part 2: Unlock Hidden Cash Flow and Value with Energy Efficiency Retrofits
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Face it, today’s tough capital markets force every real estate investor to drill deeper into existing building performance to eliminate waste, sustain and/or increase net operating income.
In Part 2 of our Special Series on the Green Building Finance & Investment Forum – New York, industry pacesetters detailed the positive investment benefits from building energy efficiency retrofits.
Research data and practical experiences of the World Business Council for Sustainable Development (WBCSD), Citi Realty Services, Jones Lang LaSalle (JLL), the United States Environmental Protection Agency (EPA) and Real Win Win, Inc all pointed to a mountain of evidence that greening existing buildings reduces wasted capital that is hidden within portfolio performance inefficiencies.
WBCSD: Do not underestimate the size and significance of energy efficiency retrofit opportunities within your portfolios
Many facility owners and managers think of green retrofit measures as not amounting to much savings – i.e. presenting a weak business case. But the actual data being developed by experts shows that these investors/operators are misjudging the opportunity.
Bill Sisson, director of sustainability at the WBCSD and the United Technologies Corporation, put out some tough stats that underscore the degree of financial, resource and operational inefficiency currently buried within the global property industry:
The International Energy Agency (IEA) calculates that the potential energy savings for existing building energy retrofit is 25% of global energy usage, which is equivalent to the energy that is used globally for transport (26%). The retrofit of existing structures can eliminate ¼ of the current global final energy use, equivalent to the production capacity of 3,200 700MW power plants.
The WBCSD is studying the business case for property owners via it’s “Energy Efficiency in Building” project, with the objective of creating “the first quantitative look ever at what may be accomplished economically by reducing energy demand and CO2″. This project, based on 1 trillion square feet of data (wow!), focuses on the cost effective reduction in property energy use through new technologies, financial structures, and shared knowledge. The WBCSD has published a summary and trends report (PDF) based on their study of this data, ahead of the full report, due out in 2009.
EPA & JLL: You can earn back up to 10% of operating expenses plus lease or sell a more competitive asset
Here in the US, commercial buildings generate 45% of our national greenhouse gas emissions and cost landlords and tenants more money than necessary. Alyssa Quarforth, the Energy Star program manager for the US Environmental Protection Agency (EPA), laid out the sizable savings and financial opportunity to property owners implementing energy retrofit projects:
- On average, energy costs represent 28% of total operating expenses for commercial office buildings.
- 30% of energy consumed in commercial buildings is used unnecessarily or inefficiently.
- Based upon these figures, almost 10% of operating expenses are inefficiently spent. These inefficiencies provide an opportunity for building owners to improve property fundamentals and increase their ROI via the green retrofit process.
Peter Belisle, president of project and development services at Jones Lang Lasalle (JLL), spoke about the competitive advantages that they see in certified green buildings over conventionally built and non-certified structures. JLL has a project volume of $13 billion as of last year. He reported that in the same submarket, and even for nearly identical structures, green buildings lease up faster, enjoy lower vacancy, and present the better potential for higher lease rates than their conventionally built peers.
Citi Realty Services: Leasing space in buildings with energy efficiency retrofits improves our bottom line and helps fulfill our corporate sustainability charter
Many of us have heard that the social responsibility charters enacted by corporate tenants are driving their demand for certified green space. Tenants are aware that green space boosts their bottom line, too.
Susan Chapman, director of global real estate operations for Citi Realty Services, which operates real estate for Citigroup, pointed out how some of the real estate strategies that Citigroup is implementing to reduce the group’s greenhouse gas emissions, also provide the immediately positive financial benefit of cutting their overhead costs.
For example, by utilizing alternative workspace strategies, Citigroup can eliminate the need for roughly 48,000 workspaces over the next 4 years. This will reduce their global real estate demand by roughly 10 million square feet of space. Chapman estimates that eliminating these workspaces will reduce the carbon footprint of Citigroup’s real estate by 29%, and reduce real estate-related operating expenses by 22%.
In addition to this demand reduction, Citigroup will concentrate their employees in energy efficient, green-certified facilities that maximize daylight and indoor air quality.
Many tenants are implementing real estate strategies that will reduce their commercial real estate footprint. This puts the pressure on existing landlords to retrofit space to stay competitive, or risk losing tenants when their leases are up for renewal.
Real Win Win: Your ability to ask the right questions drives the success of your energy efficiency retrofit program
One of the biggest challenges to green retrofits is to determine which particular upgrades and strategies will maximize return on investment. One of the key workshop takeaways is that integrated design is not only applicable to new construction, but is also vitally important to the retrofit process. If you set a program for renovation, green strategies have to be planned from day one.
Mark Jewell, president of Real Win Win, Inc, presented strategies for working with existing landlords to approve these renovations, and to ensure that new operating efficiencies accrue to those who pay for them. Framed in a “myths versus math” outline, he laid out a question set that owners and facility managers can apply when selecting retrofit strategies that yield the best return on investment. Here are a few of those questions:
- How would our existing (and future) leases allocate the costs and savings of a building wide energy retrofit?
- Has anyone examined each lease & calculated who would benefit from lower energy costs?
- Do your payback analyses consider who gets the savings?
- Do your upgrade recommendations communicate the true costs/benefits to the cap ex decision-makers?
- Would lower Op Ex (and improved comfort) help with tenant retention and attraction?
As more owners/operator become wise to the financial advantages of green retrofits, and the risks to owners that do not improve their structures continues to grow, we expect to see more activity in the retrofit sector.
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If you liked this post and would like to receive more, please subscribe. Don’t forget to read the other installments of our Special Series on the Green Building Finance and Investment Forum - New York. As always, we welcome your comments.
Al Gore: More Energy Efficiency, Smart Grids and Green Power
No one can miss the massive tidal wave of media articles by and about experts urging the incoming Obama administration to allocate big dollars towards clean energy and a “New Green Deal” for the American economy.
Here’s the Green Journey contribution to your collection –> Al Gore’s op-ed in today’s New York Times, laying out his recommendations on the exact sectors/areas of greatest opportunity for the new administration.
And the buzzwords for sustainable real estate developers, investors and community officials?
While we’re all pretty used to the big picture on climate change from Gore, here he’s making specific, bold suggestions that — if adopted — would accelerate green real estate and green communities beyond anything that we could have imagined:
- energy efficiency: he calls for direct government support of retrofitting existing buildings. See our other posts on what green real estate leaders are saying about the business case for energy efficiency retrofits.
- smart grids: $400 billion cost to build over 10 years vs. $120 billion per year losses to American businesses. A big price tag — that’s overshadowed by the cost of doing nothing.
- greatly increased solar and wind investment. He calls the current clean coal ideas “too imaginary to make a difference” and “lacking investment” to get off the ground.
Are You Funding Green Sprawl?
Today’s post is dedicated to all our euphoric green finance and investment friends who are suffering from PEWS — post-election withdrawal syndrome.
Here’s a delicate question:
>>Are you funding green sprawl?<<
Sustainable Industries recently published an article about the dilemma of having green homes and buildings built in suburban locations.
Their set-up:
While the profusion of buildings that use at least 15 percent less energy and reduce water usage as well as other non-sustainable resources is good news for a country searching for energy independence and a planet combating a variety of environmental ills, some are starting to think more needs to be done.
Top of the list: Considering whether sprawling architecture and 4,200-square-foot McMansions can truly be considered “green.”
For us here, the article highlights some challenges for those builders and investors who have business models focused on commuter-oriented suburban markets, that now invest in green homes and buildings but ignore the overall smart growth principles that come with sustainable real estate investing.
Here’s an example from the article of a financial opportunity that is buried within implementing smart growth principles in tandem with green building:
Reducing sprawl and its attendant reliance on cars also increases the spending power of individuals, according to a study prepared by Portland-based Impresa Consulting in July 2007. According to the study, residents of Portland travel 20 percent fewer miles per day than the average American. At $3 per gallon, this equates to $1.1 billion saved or $800 million that stays in the local economy each year.
Essentially, funding green buildings in locations without smart growth principles might make a good return for the builder/owner, but it also imposes a quantifiable, lifelong tax on the residents and businesses who move in to those developments. And as some builders and investors are finding out in these tougher economic times — people can move, the real estate can’t.
As always, we welcome your comments.
Photo credit: Alex-S / Flickr
Part 1: Lessons for Future-Proofing Property Values
Since when has any firm achieved competitive advantage by just goin’ along with the crowd? Even in the current tough capital markets environment, excellence in real estate demands a continuous search for the newest ways to protect and advance asset values. This first installment of our Special Series on the Green Building Finance and Investment Forum New York, features highlights from the talks by industry pacesetters that make sustainable real estate’s tomorrow happen today. It was a workshop chaired by Leanne Tobias, of Malachite LLC, and Galley Eco Capital’s Lisa Michelle Galley. Specifically, the session addressed threats and opportunities for investors created by rising energy costs, carbon policies, green building regulations, and changing tenant demand.
Fast Facts:
- In today’s tenant markets, green buildings are the entry price for retaining corporate tenants - and their top talent.
- On-site power generation and other new building technologies are not ‘star wars’ experiments, rather pragmatic, down-to-earth tools for energy price risk-mitigation.
- Special taxation districts are a way to create financial solutions for community-scale sustainable development.
“I advise my clients to only consider
green facilities.”
– Peter Miscovich, Managing Director of Strategic Consulting, Jones Lang LaSalle
Green Buildings Are Plug-and-Play Solutions for Tenant CSR - and an Entry Requirement for Competitive Landlords in a Tenant’s Market
Peter Miscovich advises Fortune 100 companies on their corporate sustainability strategies. At GBFI, he laid out the 10-15 year roadmap on how tenant demand and demographics will dramatically impact real estate values. So what’s he saying?
- Corporate sustainability is now a permanent issue that will influence all organizational decisions, including real estate. Companies are paying attention to their energy use, and green buildings will be the required tool in their strategy toolbox to mitigate their exposure to energy and operating expense price risk. This will have major implications for the owners of existing, conventionally built commercial and industrial properties.
- Corporations will reduce their real estate footprint. Existing facilities are structurally underutilized, and the advent of telecommuting, office hostelling, and remote data management (from 3rd party vendors) will further reduce demand for office and flex/industrial space.
- By 2012, we will have a nationwide carbon policy, and those policies will directly impact real estate patterns.
- The suburban corporate campus model is outdated.
- Over the next 25 years, the vast majority of new household growth will be childless. There will be an increase in demand for smaller housing units, developed around transit.
- Given these impending changes, metropolitan areas that have scalable urban and suburban public transportation systems will prosper.
These expected changes point to demand and value implications for all commercial property types. Certified green buildings are a plug-and-play solution within overall corporate sustainability strategy. And in tough economic times, when it’s a tenant’s market, tenants — and their top talent — have more leverage to demand the green space they seek.
This has harsh implications for those landlords who want to retain corporate tenants, but will not or can not adapt space to the tenant’s corporate sustainability requirements. At the market level, this means that green commercial real estate sited near public transportation and affordable urban housing will be the favored locations of corporations over conventionally built property, because it provides them with significant soft and hard cash benefits.
Future-proofing Property-level Energy Price Risk: On-Site Power Generation and ESCO-led Retrofits
Incorporating on-site power generation into new construction and existing properties is no longer the province of special use properties like research labs and hospitals; today’s market considerations show this to be a pragmatic energy strategy that is gaining traction among the investors within the “four food groups”, too.
Fred Fucci, a partner at Arnold and Porter, LLP, addressed some of the challenges to creating and managing on-site generation capacity, as well as two other potential methods to minimize the impact of high energy costs:
- Utilize an energy services company (ESCO) to assess energy usage of existing structures, and enter into a performance contract to make recommended capital improvements.
- Use less energy, period. (Our comment: Everybody laughed when Fred said this, but heck - who can challenge that?).
Taking future-proofing one step further, Ed Brzezowski of Noveda Technologies, expanded the boundaries of technologically possibilities with his presentation of Noveda’s 31 Tannery project, a 42,000 square foot office/flex structure with “net-zero electric” operations.
31 Tannery, in Branchburg, New Jersey, enjoys the rare Energy Star score of 100 and is a living showroom for high-performance, sustainable building technologies. Noveda, who’s business is to provide technology tools for monitoring real-time information about building energy use, were in need of new office space, wanted to show off their innovative capabilities and were resolute about walking their talk. The result? 31 Tannery uses less than 20% of the energy consumed in a conventionally-built structure, and reduces its carbon footprint by more than 1 million pounds of CO2 per year.
But wait, there’s more…. The most impressive number was the expected payback period for the advanced energy systems of 6 to 7 years, which is well within the investment horizon for institutional investors.
But participants had critical questions for Ed: do all those cutting-age systems actually cost out? Ed’s response? Yes, if you properly monitor your system performance. At 31 Tannery, they track real-time system performance down to 10 seconds, which allows them to catch and fix every system glitch that could negatively impact energy performance, and undermine their expected return on investment.
Special Taxation District Enables Community-Scale Sustainable Development
Frank Owens presented Georgetown Land Development Company’s vision of future-proofing: a to-be-built, transit-orientated, new-urbanist, mixed-use, brownfield development with on-site energy generation.
This $90 million re-development of the Gilbert & Bennett industrial site in Redding, Connecticut, will feature 300,000 square feet of commercial space, and 415 housing units, which includes loft-style apartments, townhouses and single-family homes. The 55 acre site will also feature a passenger rail link into New York City.
The development will create a special taxing district to provide low-cost financing for environmental site clean-up, rail-station improvements, and renewable energy systems. The district is a financing platform that can issue bonds, temporary notes, and other financial instruments, which are payable through the district’s fees, revenues, or benefit assessments. An important feature of this district is that, unlike tax incremental financing (TIF), the local municipality and state are not liable for the district’s debt. There is no specific limit to the number of financial instruments that the district can offer.
While the real estate market is in a downturn, and other projects are being canceled, this sustainable real estate project has lined up financing, and will proceed with medical office and local-serving retail in the project’s first phase.
By incorporating on-site energy generation, multiple transit linkages, and a compact urban format featuring multiple uses, this project is hedging against many of the forces that are affecting real estate values. Have you done the same yet with your portfolio?
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Don’t forget to read the other installments of our Special Series on the Green Building Finance and Investment Forum New York. Our series brings you perspective and frank discussion from the industry pacesetters that are making sustainable real estate’s tomorrow happen today.
