hen commercial real estate (CRE) companies are trying to discern what drives the costs of the buildings in their portfolios, it’s no secret that energy management strategies are among the first aspects that they look at. The bigger issue, unfortunately, is that after the initial scrutiny, energy is treated as a low-level line-item expense that is delegated to isolated property managers to deal with on a case-by-case basis.
This kind of approach is fraught with risk for any kind of organization, but can be particularly detrimental to those with high energy expenses. CRE businesses without a targeted and comprehensive energy strategy can expose themselves to everything from financial pitfalls to missed opportunities to a failure to comply with standards regarding carbon emission reduction and climate change initiatives.
As these trends continue to make energy strategy a critical factor of success for businesses, failing to take action on these trends will not be option. In fact, this transformation of the energy world has already begun. Here are five eye-opening facts about the growing importance of energy in the commercial real estate industry.
1. CRE Has Some of the Most Potential for Improving Energy Efficiency
According to the United Nations Environment Programme (UNEP), the building sector has the largest potential for delivering significant long-term progress on greenhouse emissions, as large buildings are responsible for more than 40% of global energy consumption.
Further driving this potential is that CRE businesses now have access to greater tools and expertise to take control of energy than ever before. Emerging technologies like
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the Internet of Things and energy intelligence software enable businesses to gain insights into their operational efficiency and find opportunities to cut significant costs.
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Read the strategy brief from EnerNOC and PwC to see why energy is becoming a C-suite priority.
This is especially important because…
2. Lawmakers and Regulators Know This, and They’ve Started to Take Action
Here’s just a short list of the recent efforts from lawmakers and regulators to drive progress on energy efficiency that will have implications in the CRE sector:
The COP 21 agreement reached in Paris last year signaled unheralded consensus on efforts to stem the effects of climate change, which will impact the energy-intensive CRE world.
The World Economic Forum created and published specific environmental sustainability principles for the real estate industry (available in a PDF here), urging adherence to rigorous standards, improvements in environmental innovation, and the tracking and analyzing of environmental performance data in all buildings.
The US Department of Energy (DOE) launched the Better Buildings Challenge, designed to spur progress in energy management in the CRE sector through accelerated investment and sharing of best practices.
Emerging local-level regulations have the potential to impact the CRE industry. For example, San Francisco now requires all new buildings to install solar panels, and in New York City, Mayor Bill de Blasio recently announced new energy efficiency initiatives that will affect more than 1 million buildings to help meet an 80% carbon emissions reduction goal by 2050.
But it’s not just about eliminating costs or reducing carbon emissions, because…
3. Improving Energy Efficiency Can Improve Asset Value
Independent research has discovered that energy efficiency improvements can actually boost a building or portfolio’s value.
For example, a McGraw Hill study focused on global green building trends found that new green buildings were 7% more valuable than their non-green counterparts, with a 15% decrease in operating costs over five years. A Notre Dame study of PNC Bank retail branches also showed that those using LEED for green building certification spent $675 less in annual utilities cost per employee than the bank’s non-green buildings.
And increased asset value leads to…
4. Energy Efficient Buildings Driving Higher Revenue
As millennials continue to account for more and more potential tenants, it’s more important for businesses to align with their environmentally friendly ideals and values. This means capitalizing on a high-potential market for green real estate.
Los Angeles is a prime example of such a market. According to CoStar data regarding green buildings in the Los Angeles region, the average asking price for “non-green” CRE in the city is somewhere around $2.16 per square foot. But this number increases greatly when factoring in LEED and ENERGY STAR certification. ENERGY STAR-certified buildings command $2.69 per square foot, while LEED certification brings in a whopping $2.91 per square foot. What’s more, the increased rent is not affecting vacancy rates, proving that tenants are not turned off by the higher costs of green buildings.
Finally, with satisfied tenants, increased revenue and asset value, regulatory compliance, and an energy management program in place, a CRE organization will learn that…
5. Energy Efficiency is Becoming a Competitive Differentiator
The 2015 US Green Building Council (USGBC) study from Booz Allen Hamilton showed that the green building sector is vastly outpacing conventional construction growth in the US, and by 2018, green construction will encompass more than a third of the entire US construction market. Respondents to a 2016 Dodge Data Analytics survey of global construction professionals replied that 60 percent of their projects would be green construction.
The message is clear—CRE businesses that develop a comprehensive energy strategy to embrace this shift in the industry will set themselves apart from those that fail to adapt.
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by Chris Markle
Posted on September 14, 2016 | Enterprises, US
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