Energy Efficiency and Real Estate: Opportunities for Investors

Commercial real estate developers, owners and managers are not adverse to making money. However, many are tentatively uncertain when it comes to energy efficiency -- implementing energy- and cost-savings measures to improve the performance and increase the value of their assets. Until recently, their trepidation made sense; minimal information and benchmarks existed to validate and propel their energy-efficiency investments. Times are changing.

A recent report authored by Mercer and Ceres -- Energy efficiency and real estate: Opportunities for investors -- elaborates how and why fiduciaries responsible for real estate portfolios assume significant risk and overlook substantial opportunities to enhance returns if they fail to factor energy efficiency into their real estate investment decisions. The seminal report lays out the steps investors can take to improve energy efficiency, and presents best practices for different types of investments.

A few metrics validating the business case for energy efficiency:

• A 2008 McGraw-Hill Construction/US Green Building Council survey found that markets for green commercial and institutional buildings in the US have risen from 2 percent in 2005 ($3 billion) to about 10 to 12 percent of construction value ($24 billion – $29 billion) in 2008, with projected growth to 20 to 25 percent ($56 billion – $70 billion) by 2013.
• Current research by RREEF, Deutsche Bank’s real estate investment division, reveals a shortage of energy efficient real estate to meet this growing demand. Price and value premiums observed for green buildings reflect this shortage of such properties on the market.
• A Maastricht University study found an actual rental premium of 3.5 percent on US office properties, a 6 percent increase in occupancy for ENERGY STAR buildings (similar to McGraw-Hill survey results), and a 16 to 17 percent premium on transaction prices (sales price per square foot).
• In a 2008 study, University of Arizona Professor Gary Pivo and Indiana University Professor Jeffrey Fischer found higher income and income growth, lower capitalization rates, higher net operating income per square foot, higher market value, higher rent and lower expenses for ENERGY STAR rated properties, compared to properties with no energy efficiency rating.
• In a 2009 study, researchers at the School of Real Estate and Planning at Henley Business School found commercial building price premiums of 10 percent and 31 percent, respectively, for ENERGY STAR and LEED- certified buildings.

In addition, the report (page 26) sequences -- in plain, make-it-happen language -- technical improvements for energy efficiency upgrades: Retrocommissioning, lighting, supplemental load reductions, air distribution systems, and heating and cooling systems.

Overall, the three most significant drivers for energy-saving retrofits are energy cost reductions, responding to client demand and a desire to create a superior product. Based purely on economic returns, investing in energy efficiency is the single most viable investment a property owner or manager can make.