Commercial real estate tenants and investors are increasingly explicit in recognizing that an energy-efficient asset produces stronger returns by lowering operating costs. However, information on whole-building energy performance is often unavailable, making it difficult for the market to distinguish between efficient and inefficient assets. As a consequence, demand for energy-efficient buildings is kept at bay and competition among owners to improve building management and overall performance remains low, stunting the market forces that otherwise would drive investment in building efficiency.
Recently, a new wave of legislation in several cities with active commercial real estate markets seeks to make energy use in buildings more transparent to the marketplace by requiring the disclosure of energy consumption. New York City, Washington, D.C., Seattle, San Francisco, Los Angeles, Austin, and the state of Massachusetts all have passed laws requiring individual buildings to publicly report annual energy use. How will these mandatory disclosure laws be implemented and what effect will they have on the marketplace?
To address these questions in depth, ULI in June convened a forum titled “The New Transparency in Real Estate: Sustainability Metrics, Asset Performance, and Public Disclosure,” bringing together in Chicago representatives of these cities as well as more than 130 private, nonprofit, and public sector stakeholders from across the country and from as far away as the U.K. and Australia.
This dialogue came on the heels of the announcement by the U.S. Energy Information Administration (EIA) that the long-anticipated 2007 Commercial Buildings Energy Consumption Survey (CBECS)—a national sample survey that collects information on the stock of U.S. commercial buildings, their energy-related characteristics, and their energy consumption and expenditures—would not be released because of concerns about data-collection methodology. This leaves a significant void in the quality of market wide energy use data for commercial buildings. The CBECS database, last updated in 2003, provides the underlying framework for the U.S. Environmental Protection Agency’s popular Energy Star program, establishing a baseline for building performance comparison across U.S. markets.
ULI CEO Patrick Phillips opened the forum with a series of questions: How are building owners reporting on their progress? What information have you and your organizations deemed essential to track and manage? How is access to new energy information leading to market innovation and transformation?
Ron Herbst, global head of energy management and sustainability for Deutsche Bank AG London, addressed these questions in his keynote address, first acknowledging that while numerous sovereign and corporate climate change commitments are in place, many have not been fully acted upon. In turn, individual cities have now taken center stage to lead efforts at market transformation and are setting climate policy through mandatory building performance disclosure laws. While such individual laws constitute a major step in terms of leadership and accountability, the broader real estate industry will quickly be in the position of having to harmonize the energy efficiency disclosure requirements. “I believe that mandatory disclosure is just around the corner,” Herbst said.
He left the audience with four key points: climate change represents both a corporate responsibility and business opportunity; the macroeconomic and political forces shaping the climate change conversation globally continue to gain momentum; regulations targeting buildings are likely to emerge from the local to the national level; and now is the time for building owners to understand the baseline energy performance of their property portfolios and start planning for improvements.
Jayson Antonoff, green building policy adviser for Seattle, summarized the challenge he and his public sector colleagues face in implementing their aggressive legislation. “Local energy efficiency disclosure programs are moving beyond incentives and seeking to affect property valuation within the context of the local marketplace,” he said. Each of the cities represented outlined similar programs, with specific details varying by the size of the buildings affected, the manner and process of disclosure, and the specific information metrics to be disclosed.
New requirements for energy metrics are not limited to cities. Drew Ades, director of multifamily risk at Fannie Mae, addressed his corporation’s approach to requiring disclosure of energy efficiency metrics as a component of new underwriting standards. “Energy efficiency is a strategy to improve the operating cost side of the property equation,” he said. “The vast majority of multifamily properties that are currently being refinanced by Fannie Mae are in excess of 30 years old, and they generally do not have much ability to increase rents and overall revenue. We believe that in the near term, all lenders are going to care about energy efficiency—whether it’s voluntary, mandatory, or in response to some unforeseen market condition.”
The U.S. General Services Administration (GSA) is also requiring explicit sustainability information to be incorporated into federal leases. James Nobil, senior realty specialist at the Center for Realty Policy in the GSA’s Office of Real Estate Acquisition, described how GSA is implementing its energy and sustainability goals under Executive Order 13514. “Energy efficiency is not an option for the GSA,” he said. “We are finding that as we engage the leasing markets with the issue of energy efficiency, once owners see the data, they understand it, they see the opportunity, and get right on board.”
Property appraisers are also sharpening their pencils. James Finlay, commercial real estate appraisal manager with Wells Fargo Bank, pinpointed the attractiveness of energy efficiency retrofits as being “where the rubber is hitting the road right now.” The risk of not embracing energy efficiency is at least as important as the benefits of energy efficiency building improvements in terms of how appraisers weigh development projects, he said. “Managing risk and various risk profiles is imperative.”
Chuck Leitner, chairman of RREEF and CEO of the Greenprint Foundation, a worldwide alliance of industry stakeholders committed to reducing carbon emissions across the global property industry, said he supports the appraisal community’s recent focus on how to value energy efficiency as a component of longer-term investments in both new buildings and existing building retrofits. “I think we have the attention of the real estate market around this issue that we haven’t had before,” Leitner said.
Ross Malme, a partner in the Atlanta office of Skipping Stone, an energy consulting firm, predicts that investments in smart grid metering will enable utilities to enter into a broader array of energy demand–response agreements with building owners. Given the dramatic change in the utility markets, Malme said, “Energy efficiency data tracking is going to be the dot-com of the electricity business... The last mile of the smart grid effort is going to be as big as the internet itself.”
Only about 1 percent of buildings are currently connected to automated systems that allow their energy use to be monitored in real time, so the effort to get tenants, property owners, and property managers to install such systems is a “sea change that will get building owners and tenants able to participate in the demand-response markets,” Malme said. He believes that in order for automated demand response to scale up, the real estate industry ultimately needs both a dedicated finance mechanism to help owners pursue the opportunities offered by demand response, and their buy-in to “dive deep” into their buildings and invest in technology necessary to outfit them for real-time energy monitoring.
Three primary themes emerged during the ULI forum:
- Disparate building ratings systems and regulations will need harmonizing or standardization across regional and international markets;
- A primary aspect in the valuation of energy efficiency in real estate transactions is managing both the lending risk and the risk of regulatory uncertainty; and
- Educating diverse industry stakeholders—from tenants all the way to utilities—is imperative in order to advance the transparency associated with collecting and sharing building energy performance data.
