Commercial Building Energy Efficiency Retrofits: $190 Billion Market

How big is the market for energy-efficient retrofits of commercial buildings? In a word: Immense. In numbers: Tens of billions of dollars, as we've quantified in previous SmartEnergyWorks posts. As ambitious and bullish as we are at Octus about the market -- and our opportunity to build an extraordinary business -- the Urban Land Institute just upped the stakes.

According to ULI, and as reported in SustainableBusiness.com, the market potential for energy efficiency retrofits in commercial real estate is projected to total $190 billion over the next ten years. From the article:

... the sheer size of the commercial real estate sector's carbon footprint illustrates the potential of energy-efficiency measures to make a dramatic impact on reducing emissions. The nation's approximately five million commercial buildings are responsible for 18% of total annual energy consumption in the U.S.; moreover, only 7% of those buildings represent half of the overall floor area of commercial buildings.

Investing in energy efficiency in real estate--an emerging practice with great market potential--requires new business practices and government incentives to overcome investment barriers. "Recent efforts to catalyze investments in energy efficiency in buildings have challenged how policy makers and market participants view real estate finance and valuation practices," the report says.

"Are investments in energy efficiency to be approached as a discreet value capable of being financed independently of the underlying real estate asset, and then traded as "efficiency-backed" securities on secondary markets? Or, is an energy efficiency investment to be treated in the same way a lobby upgrade is, which without question drives new value to the real estate asset? The answer is both, as policymakers work to unleash market forces to reduce energy demand."

The reports states that innovation in this emerging investment market requires evidence of real costs and returns. Information now available on building performance indicates that feasible energy retrofits for an individual building typically save 20% to 30% and in some cases as much as 60% of energy use, depending on a building's age, type, design, condition and maintenance.

As we discussed a few weeks ago, several energy efficiency project financing vehicles (including the Octus-Five Star Bank Building Energy Savings program; click here for a recent Business Journal article) are emerging. Coupled with increasing incentives and rebates from utility companies, the market is ripe, albeit with barriers. The ULI report echoes our thinking: there is a strong business case for commercial real estate owners and managers to incorporate energy efficient practices in their business strategies:

• Operating-cost reductions through energy savings in an era of tighter budgets
• The creation of reputational advantage in the context of evolving voluntary and regulatory emissions reductions targets
• The creation of new markets or lines of service leading to economic expansion
• Improved tenant working environments, leading to employee retention and higher productivity
• Lower building vacancy rates and tenant turnover
• Reduced business risk in the midst of energy price volatility and changes in consumer preferences regarding green building
• Reduced reputational risk in a globalized, increasingly transparent marketplace.

As SustainableBusiness summarizes, the report cites the need for a change in the perception of energy efficiency as an "investment in less," as in less environmental impact, to an "investment in more," or an investment that produces more value and cost-saving.

We could not agree more.

Key Lessons: Energy Efficiency Retrofits

Leanne Tobias, author of Retrofitting Office Buildings to be Green and Energy-Efficient (recently published by the Urban Land Institute), shares a high-level summary of readily-available energy efficiency opportunities. Here's a snapshot:

• Energy efficient and sustainable retrofits can be remarkably cost-effective. A number of the case studies profiled in the book achieved payback in a year or less, and an early sample of U.S. LEED-certified retrofits showed average paybacks of approximately 17 months, with an average cost per square foot of just $.21.
• Many of the retrofit approaches with the best paybacks are the simplest. A few of the readily implemented, low-cost ways to reduce building energy use include such approaches as operational changes, lighting retrofits, and replacing constant speed drives with variable speed drives on major mechanical equipment. These types of changes are not technologically advanced, but they are extremely cost-effective.
• There are also some fascinating technological advances being introduced to the building energy-efficiency market. Among them: smart meters and smart grid systems, which use wireless technology to monitor and optimize energy use in real time.
• One of the most intriguing trends is the extensive use of passive heating and cooling to minimize reliance on mechanical systems. Passive heating and cooling approaches include the use of natural ventilation, the uncovering of thermal mass (exposing walls and underfloor slabs), and the use of vents or chimneys to regulate interior temperatures.

Click here to read the entire post published in GreenerBuildings.