Investing in Energy Efficiency: Unlocking Value for Real Estate Owners

There are lots of stories about the significant paybacks companies can get from doing energy retrofits—big and small—on the buildings they own and manage.

For example, a strip mall that replaces all of its regular lights with LED lights and sees a 58 percent savings in electricity costs; or an office building in Paris that gets an €18 million ($25 million) upgrade, which then boosts its assessed value from €52 million ($72 million) to €100 million ($138 million).

But many companies still are not willing to do them—or, if they are, financiers aren’t willing to lend for them.

“The business case has been in the public domain for a while. The scale of opportunity is enormous,” said Kate Brown, the group director for sustainability at Grosvenor, a private property group that operates in 65 markets around the world.

But she and others at a 2014 ULI Spring Meeting workshop on the barriers to corporate investment in energy-efficient building said the real issue is that while there are many positive stories about high returns, there are still too many unknowns for the number-crunchers.

“There’s an argument for double, triple, quadruple the return, but investors see too much risk,” said James Gray-Donald, the vice president for sustainability at Bentall Kennedy, one of North America’s largest property management firms.

To change that, groups like the Urban Land Institute’s Greenprint Center for Building Performance and the United Nations Environment Program (UNEP) Finance Initiative are trying to come up with systems of measurement and processes that will encourage companies to tackle the enormous job of reducing the energy their buildings use.

A recent UNEP report, which Gray-Donald discussed in detail, identified three broad areas that companies need to address if they really want to effect change.

The first area is information. Companies need to measure and benchmark how their buildings are performing (although not to such a degree that people drown in numbers).

Then, top executives need to be sold on the case for reducing energy, instead of having the job handed over to a sustainability group.

Brown said the biggest change she saw in her company was after the executive team was sent off to a sustainability leadership retreat at Cambridge.

“That led to this almost army of senior champions within the organization,” she said. “That for us has been very, very powerful.”

The second area is incentives. A company has to set goals, reward asset managers for achieving them, and ensure that tenant leases are written in a way to allow retrofits. (In Australia, one company provides up to $77,000 (€55,447) a year in executive bonuses for those who achieve energy-reduction targets.)

The third is investment. Companies need to not just look at whether their electricity bill was lower for a year, but how making a building perform better improved its overall value as an asset.

“It’s the flows to the bottom line that you capitalize when you sell the building,” said Nicholas Stolatis, the director of strategic initiatives asset management for TIAA-CREF, which manages pension money (partly through investing in property) for teachers and others.

The most energy-efficient buildings are increasingly attracting more tenants, as well as tenants who are willing to pay a higher price. That increases the buildings’ overall value.

The three experts agreed that it’s often easier to sell the idea of doing energy retrofits when the market is down or when the price of energy goes up.

“We’ve had markets where rents have skyrocketed and it’s ‘Who cares about energy efficiency?’ ” said Stolatis.

Also, it helps to have either government or a competitive market forcing everyone to jump on board.

For example, the United Kingdom has introduced grading systems for buildings, rating them from A to G. By 2018, owners of buildings in the F and G categories will not be permitted to lease them.

In Australia, there is no government standard, but everyone is required to file information with the Commercial Building Disclosure Program and every building is issued a rating.

“The market uptake there has been so quick,” said Brown. “You get to a point where you can’t lease a building if it’s not four-star or five-star.”

One of the biggest barriers, however, is just plain quirky human behavior.

“You don’t get pushback when you want to spend a million to put marble and granite in the lobby,” said Stolatis. “But you do get pushback if you want a million dollars to replace the chillers,” even if it means lower costs and a higher value for the building.