Part 2: Unlock Hidden Cash Flow and Value with Energy Efficiency Retrofits

 

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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