Energy Efficiency Boom to Halt Commercial Real Estate Swoon?

We've refrained herein from posturing about politics and energy policy. Why worry about what you can't control?, our (apathetic?) side contends. That said, at Octus we're acutely focused on existing incentives, tax credits and other catalysts that fortify our clients: commercial building owners and managers who invest in energy efficiency. And, a recent report, "The Imminent Commercial Real Estate Crisis and The CRE Solution," caught our eye. A few snippets:

• CRE transactions have dropped a staggering 90 percent since 2007. Between now and 2014, $1.4 trillion in CRE loans are coming due; more than half of these are currently underwater. Commercial property values have plummeted by more than 40 percent, and commercial vacancies rates continue to increase.
• Congress can simultaneously address the looming CRE crisis and crippling construction unemployment through The CRE Solution. This can be jumpstarted quickly by building upon the existing Energy Efficient Commercial Building Tax Deduction (26 U.S.C. 179(d)) from $1.80 per square foot to a range of $3 to $9 per square foot for new and existing commercial buildings meeting specific energy reduction targets.
• For each $6 billion of deferred CRE revenue, for example, The CRE Solution would generate $73.4 billion in new private spending, $15.9 billion in new federal tax revenue, and $5.25 billion in state and local government tax revenue, according to the report findings.
• The CRE Solution would decrease building sector energy consumption and greenhouse gas emissions, increase after-tax cash flow and property values, reduce loan defaults, and increase new CRE sales, desirability, and investment value.

The 14-page report can be viewed at architecture2030.org.

BOMA San Francisco Launches Commercial Property Energy Efficiency Program

A preponderance of activity and attention in the energy efficiency industry focuses on tangible, physical improvements to buildings and their equipment. Rightly so, given the energy savings and returns generated through the implementation of lighting, HVAC and energy management technologies. But, such activities are only part (albeit a primary piece) of the energy efficiency puzzle -- there's much to be learned, and many dollars to be saved, through thoughtful behavioral and operational practices.

Last month, the Building Owners and Managers Association (BOMA) of San Francisco announced they will coordinate delivery throughout California of the BOMA Energy Efficiency Program (BEEP), an innovative series that teaches commercial real estate professionals how to reduce energy consumption -- and related costs -- with proven, no- and low- cost strategies for optimizing equipment, people and practices. From BOMA's press release:

Nationwide, the commercial real estate industry spends approximately $24 billion annually on energy. Yet energy consumption represents the single, largest controllable operating expense for office buildings. BOMA anticipates BEEP will reduce energy consumption by as much as 30 percent in participating commercial properties

"If 2,000 Bay Area buildings adopt BEEP's best practices during the next three years, the resulting savings gained from reduced energy consumption will amount to $400 million," said BOMA SF Executive Vice President Marc Intermaggio. "The fact is a 30 percent reduction in energy consumption in the nation's commercial buildings, which equates to $7.2 billion, is readily achievable simply by improving building operating standards."

Click here to visit BOMA's BEEP site and learn more.

Johnson Controls Paints a Promising Picture for the Future of Energy Efficiency

Johnson Controls is the world's largest provider of energy efficiency solutions for commercial buildings. While their approach -- provision of services as an ESCO (primarily for governmental organizations) and the sale of large-scale, proprietary energy management systems -- differs a bit from what we do at Octus Energy, our focus is the same: Generate sustainable energy savings through various means for commercial building owners. JCI is big brother. When they speak, people and companies and analysts take note.

At last week's CleanTech analyst day -- as summarized in an investment brief by analyst Canaccord|Genuity -- Johnson Controls shared a few interesting morsels:

The cleantech “megatrend.” Clean technology is now a “long-term global growth megatrend,” according to JCI management. Management specifically noted that buildings in North America and Europe, which together account for 40% of the world’s energy consumption and 70% of electricity usage, represent the single biggest opportunity for cleantech.

$24 billion opportunity. JCI estimates the energy solutions market is a $24 billion global opportunity, growing at approximately 9%-14% per year. Key market drivers for the energy solutions market include: 1) climate legislation and energy security; 2) corporate climate commitments; 3) volatile energy costs; 4) innovative funding models (including PACE, as Octus discussed here and here); 5) deployment of smart-grid technology; and 6) energy efficiency renewable resource standards.

Feds step up. Legislation and regulation are key drivers in the energy efficiency marketplace. In the United States, there have been energy efficiency bills in both the lower and upper house (the American Energy and Security Act of 2009 in the House and the American Clean Leadership Act of 2009 in the Senate). The Senate bill has been passed out of committee and includes the following features:

• National electricity and renewable electricity standard
• Energy efficiency building retrofit program
• Energy efficiency programs for states
• Building codes incentives
• Building performance information
• New clean energy deployment administration

Meanwhile, recent events in the Gulf of Mexico are spurring interest in energy and climate bills that otherwise would not have been brought up or passed this year.

PACE financing programs gaining momentum. Property Assessed Clean Energy, or PACE, is a financing solution that enables property owners to pay for energy efficiency, renewable energy and water efficiency projects via an additional assessment on their property tax bill over a five to ten-year term. The PACE program benefits building owners by: 1) eliminating the need for large upfront cash payments; 2) offering a competitive cost of capital; 3) solving credit rating collateral issues; 4) potentially moving the projects off-balance sheet; and 5) allowing owners to pass through retrofit costs to tenants. Johnson Controls echoed our sentiment that PACE financing will be one of the keys to unlocking the huge retrofit opportunity in the commercial building sector.

IT convergence. JCI sees the “smart building” as the starting point that is needed before a “smart grid” is even possible; again, echoing Octus's energy management and building automation strategy through our Smart Energy Platform. Put simply, the “smart grid” can’t analyze much without a “smart building” providing it with real-time information. The company noted that the integration of equipment and controls coming together in one product has been a major advancement for the industry.

Energy Efficiency Investments Remain Strong

We chime often about the outstanding virtues of investing in energy efficiency: The ability to slash energy costs, increase property values, bolster occupancy and lease rates, improve workspace environments, and reduce carbon impacts. Add to this the return-on-investment generated by investing in energy efficiency improvements -- typically in the 30-to-50% range, oftentimes higher -- and it's no surprise that such investments are mushrooming.

A global survey of 2,882 companies (the Energy Efficiency Indicator) released by Johnson Controls last week validates and amplifies the emerging opportunity. "These survey results indicate the growing importance on having energy efficient buildings that are cost effective and sustainable," said Dave Myers, president, Building Efficiency, Johnson Controls. A few snippets:

• Energy price increases: More than two-thirds of companies surveyed expect energy prices to rise, and many have made or are considering efforts to cut operational costs with energy efficiency retrofits.
• Illuminating savings: Among companies that have conducted energy efficiency retrofits, 73% modified their lighting, 64% trained building superintendents to be more energy efficient, and about one-third made larger investments, including replacement of HVAC units and installing efficient glass.
• Money, money: The biggest factor in energy efficiency investment for these companies is that the investment pay for itself -- quickly -- within three years.
• Making it happen: Sixty-three percent of companies surveyed plan to make capital investments in energy efficiency and 70% plan operating budget expenditures in efficiency programs over the next 12 months. And, 85% plan to make efficiency a priority in their new construction and retrofit projects.

"Despite the recession, decision-makers have put efficiency high on their agendas for 2010, especially those in India and China," said Clay Nesler, vice president, Global Energy and Sustainability, Johnson Controls. "It's encouraging to see that the financial returns and environmental benefits of energy efficiency investments are recognized in all regions around the world."

Why Sustainability is Sustainable for Commercial Real Estate

Great post last week in RealEstateJournals.com engaging how and why sustainable buildings make sense for commercial real estate developers, investors and managers. Here's the initial tease from the post's author, Don Schoenheider, a vice president of Liberty Property Trust (NYSE: LYR), a $6.6 billion REIT:

Fifteen years ago the word “recycling” was something aging hippies did and a “carbon footprint” was what was left if you stepped too close to the fireplace and then walked on a rug. How times change: today both are top of mind for commercial real estate developers, brokers and tenants, and it is crucial to understand the benefits if you want to best serve your company or client.

Schoenheider believes -- and we concur -- commercial real estate development has forever changed on four important levels: building occupancy cost, employee productivity, customer relations and commitment to the future of business.

1. Occupancy cost. Sustainable buildings are first and foremost about efficiency – saving energy, saving water and keeping reusable materials out of landfills. Liberty has consistently demonstrated they can provide tenants with a commitment to a sustainable environment and save them money; at least $.15-$.30 cents – or more – a square foot in occupancy costs. Lower electric bills, lower water bills, lower gas bills … something they can easily (and happily) relate to.
2. Healthier buildings. Sustainable buildings tend to be healthier, meaning less time is lost to illness which translates into greater productivity and lowered employee turn-over.
3. Customer relations. Investors see the cost savings, employees see the health benefits, vendors see the opportunity to work with a progressive company and customers are actively looking for a commitment to the environment.
   
4. Sustainability: The future of business. Who will be the commercial real estate decision makers in just 10 or 15 years? Schoenheider posits. People who have grown up recycling, tracking that carbon footprint (and I don’t mean across the carpet), installing solar panels in their homes and driving hybrid cars. How will they view non-sustainable buildings? Just like disco (and grunge and ponchos and Ugg boots and …): obsolete.

Schoenheider wraps with a reflection of the past decade: We at Liberty remember saying in 2002 that a sustainable building was only expected to cost 10-20% more to develop than a standard building. Today as we approach break-even, the goal is to make them even less expensive to develop than standard buildings.

Companies like Liberty get it. The qualitative virtues of sustainable buildings are somewhat difficult to grasp; they're there, but they are intangible. However, there's no argument with the quantitative benefits. When you invest in making your real estate assets more efficient and sustainable, your NOI increases, asset values are bolstered, occupancy rates rise, and you can command higher lease rates. It's a sustainable path to the bank.