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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The Green Building Finance & Investment Forum: First Movers, 9 Ideas & Some Challenges

So today is a two post day, just to stay on top of the info deluge that is besieging my inbox. I’d posted before about the Green Building Finance & Investment Forum, which took place the latter half of last week.

The focus of the conference was for the green first movers to share experiences from their particular vantage point.

Most Talked About Green Building Ideas

• Be green or be obsolete. You have heard this one here many times before. It was reiterated throughout every panel and presentation. Leanne Tobias used the term “future-proofing” to refer to how green is being seen as a way to mitigate the risk of obsolescence. It became one of the most repeated buzzwords throughout the event.

• Think abundance - apply sustainability to grow the top line. Tom Paladino gave a wonderful case study about how his firm uses sustainability to create specific features that increase the rent premium owners can get on their buildings. This runs contrary to most people’s focus on using green building principles to reduce expenses.

• Sustainable markets – the downtown premium. Jonathan Rose presented his company’s approach to investing, which includes focusing on smart growth locations. They’ve got it down to the point where they have established relative return premiums for various markets.

• LEED branding is gaining economic value. Transwestern’s Greg O’Brien pointed out that investors were seeing a particular value in green building being certified. It is not enough for an investor to just say that they had made specific improvements to the property, but that LEED certification was being seen as a ‘good housekeeping’ seal of approval on the asset.

• Think beyond the net zero building. On the technology and innovation panel, panelists talked about thinking in terms of a net zero community, not just individual buildings. Bill Sisson, of United Technologies and the World Business Council for Sustainable Development and Laura Rodormer, of Swinerton Management Consulting talked about the need for the investment community to enlarge its view of how far we can go with net zero energy.

• Go for the low-hanging fruit. Immediately adopt low cost green strategies. Several panelists said that there were many high ROI green moves that can be immediately implemented at little or no cost (and without an investment committee’s approval). Changing lightbulbs might sound boring, but the energy savings generate a great return.

• Metrics measure what matters. Several investors pointed this out. We will not have positive financial, environmental and social outcomes unless we are measuring portfolio performance on all of these dimensions. Real estate investors now have the challenge to integrate measuring environmental and even some social outcomes within their portfolios alongside financial returns.

• Use government incentives, subsidies and tax breaks to your advantage. Steve Grant, of the Bond Companies, was in the audience.  He stood up in the middle of a presentation and pointed out how his company has gotten quite strategic about how they source and apply incentive dollars. It can be a significant source of financing that is often overlooked by investors.

• The green building tsunami is just beginning. State of California Treasurer Bill Lockyer commented that a year ago the investment officers at CalPERS and CalSTRS (our state pension funds) hardly ever heard about green building investments. Now they get about two proposals a week, requesting their investment in a new green fund.

And then there are still challenges

• Diagnosing with LEED-EB: Lots of investors talked about how implementing LEED for Existing Buildings is a very challenging, highly imperfect endeavor. Not only just to green a building, but they are also applying LEED-EB (now LEED-EBOM) as a screen for potential investments. No solutions were offered, this is an open point for all of us to follow. However, it was interesting to note that several
  consultants in the audience were muttering that the investors difficulties stemmed from trying to force LEED to fit their organization’s existing investment approach (i.e. put LEED criteria into the organization’s existing checklists) and not the other way around. There are lots of efforts underway throughout the industry trying to tackle this problem, so I’m sure we’ll see lots of movement here in the coming months.

• Underwriting, Appraisals & Standards: When it comes to talking about underwriting standards, the industry talk sounds like the City of Babel. Lots of confusion. We still lack formalized underwriting standards that the industry can apply in order to understand green buildings financially, but there are groups, such as the Green Building Finance Consortium, that will be putting out papers about this topic in the coming months. Tim Lowe also presented a detailed analysis of what needed to happen in order for real estate appraisers to adequately value green properties. In short, there is lots of education still needed within the appraisal industry.