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.

Commercial Building Energy Use: Start Your Disclosures

If you are a CRE professional in California, section 25402.10 of the California Public Resources Code is probably the last thing on your mind. If you lease, sell or finance commercial properties, come January 1, 2011, it will be top of mind. Specifically, the state will require disclosure of energy ratings and building performance. From the statute: An owner or operator of a nonresidential building shall disclose the [EPA's] Energy Star Portfolio Manager benchmarking data and ratings for the most recent twelve-month period to a prospective buyer, lessee of the entire building, or lender that would finance the entire building.

Last spring the California Energy Commission published a proposed schedule, which after January 1 will require disclosure for any nonresidential building that is solely occupied by the owner or that measures more than 50,000 square feet. Any nonresidential buildings that measure 10,000 to 50,000 square feet will be required to comply as of January 1, 2012, and those as small as 1,000 square feet must be compliant by July 1, 2012.

Analogous -- but obviously, with more depth and variables -- to automobile fuel efficiency stickers, as discussed below. For Octus Energy and other companies involved in generating energy savings and financing energy projects, it will further validate and quantify the value of a building's operating and energy efficiency.

Here's an in-depth look from California Lawyer:

A building's energy score must be accurately calculated, either on the EPA's Portfolio Manager website (www.energystar.gov) by a knowledgeable building owner, or by a third-party energy firm. Although the EPA provides helpful resources on its website (see the Tools and Resources tab), this can be complicated stuff. And because an inaccurate disclosure could create liability, some owners will opt to spend a modest amount of money for professional help.

The required disclosures can also create legal issues regarding tenants' privacy rights. A building owner or an energy disclosure professional is responsible for entering data regarding the tenants' energy consumption over the previous twelve months, along with building parameters such as hours of operation, computer usage, and thermal settings. For the landlord of a triple net leased building, this entails disclosing the tenant's energy bill, which raises potential confidentiality issues. At a minimum, counsel should be writing leases that specifically allow for this statutory disclosure; however, in the absence of a specially tailored clause, seek the tenants' cooperation in attempt to comply with the law.

Limitations of the EPA's online Portfolio Manager may prove problematic for some commercial buildings. For example, though office buildings can be rated quite easily, other facilities such as movie theaters, bowling alleys, and funeral homes are not specifically addressed by the free online software.

Despite imperfections, California's energy disclosure law is an important step forward. Commercial tenants, buyers, and lenders in this state will soon be comparing buildings based on their energy efficiency and, it is hoped, the market will reward more–energy efficient buildings.

So what should attorneys suggest to their clients who own buildings? They should first see if the online compliance resources will suit their purposes. If a more searching analysis is required, the clients can consider having their buildings surveyed by an energy engineer to understand their energy spending and how to reduce it. Indeed, some owners may wish to be more aggressive in the "green market," opting for a full-blown energy audit to identify ways to make a building more efficient.

Energy disclosures do more than comply with legal rules. They also can contribute to a smarter real estate market, just as the fuel efficiency stickers on new cars help educate consumers. And studying a building's energy use may lead to less consumption, higher net operating profits, and a healthier planet.

Well said. To learn more about EPA's Energy Star Portfolio Manager tool, click here.

Green premium? Not so, as it continues to pay to go green with commercial buildings

There's a lot of greenwash in the commercial real estate industry, fostered by pundits and proponents alike. Separating fact from fiction and reality from distortion is a challenge. Except, of course, when it comes to the facts.

Take a recent report from CoStar and the U.S. Green Building Council (USGBC): Green Premium Continues to Justify Implementation Costs for Building Owners. This one's good, and it's real.

A few snippets:

• The economic payback for building owners from 'going green' has been tested in the crucible of the worst economy since the Great Depression, and while the premiums in rental rates, faster lease-up times and lower vacancy associated with green buildings varies market to market, the corresponding increases in rental income, together with the resulting energy savings in operating the property, continue to justify the modest additional costs associated with going green in most markets.
• For tenants, a growing body of research continues to show that buildings with better air quality, natural lighting and variable temperature control yield greater productivity by employees. Also, separate metering and individual utility billing of tenants for their energy use encourages conservation and additional cost savings.
• One big change, however, has been the market shift in LEED certifications from new development. Today, much of the USGBC's certification activity has shifted to LEED for Existing Buildings (LEED-EB), which has seen certifications jump sharply from less than 15% of all certifications in early 2008 to more than 35% in second-quarter 2010.
• Class A LEED office buildings that completed construction before the recession hold a significant advantage over the national average for all Class A office buildings, with the LEED buildings averaging $28.50 per square foot in rent with an average vacancy rate of 6.5%, compared with $25.89 per square foot in average rent and an average vacancy of 10.7% for all Class A office stock.

Green is, well, green. At Octus Energy, we're acutely focused on the economic virtues of improving the operating efficiency of commercial buildings -- slash utility bills first which then drives building certifications (e.g., LEED and Energy Star).

"We do find that it does continue to pay to go green," CoStar Vice President of Analytics Norm Miller said. "In the long run buildings that do not include sustainable features run the very real risk of becoming obsolete. And it will likely be very risky to own buildings that do not have sustainable features in the future."

"We also know that tenants in green buildings enjoy higher levels of productivity and see a real benefit and value to having their employees in green buildings. Because there are still so few green buildings out there many tenants haven't experienced that impact yet. But we believe this will change in time as those markets become more educated and tenants begin to pursue the productivity benefits of green buildings," Miller said. "We expect rental premiums or energy savings to more than justify the added costs for energy saving green features like separate meters, motion detection light devices, or water savings devices."