Much is said about pollution from cars and industrial smokestacks, but 38% of all carbon emissions in America come from powering our buildings, and much of that energy is wasted.
A new report says that proven, existing efficiency technologies–in everything from lighting to climate control and more–can unlock the untapped reserves of efficiency gains buried in many real estate holdings. Those gains would be a boon to real estate investors’ bottom lines–both direct property owners like large pension funds and smaller investors who primarily hold real estate securities–even as they make our buildings far less power-hungry and a big part of America’s efforts to combat climate change.
The report, "Energy Efficiency in Real Estate Portfolios: Opportunities for Investors," was commissioned by Ceres and authored by the responsible investment group of the investment consulting business line of Mercer.
"This report documents what common sense tells us–that an energy efficient building is a more marketable building," said Ceres President Mindy Lubber, who also directs the Investor Network on Climate Risk.
"Increasing energy efficiency in our buildings can increase occupancy rates, leasing prices and sale prices–all in a highly-competitive environment," Lubber said. "And energy efficiency–stopping the waste of energy we use–is America’s cheapest, cleanest, smartest and most readily available new energy source."
The global trend toward putting a price on greenhouse gas emissions–thus ending the practice of disregarding the cost of polluting–tacks a strong business case for limiting buildings’ emissions onto the strong environmental case.
But while there are clear opportunities in unlocking efficiency gains, the report also cites a flip side for real estate investors who fail to factor in efficiency: the same trend toward ending free pollution may expose unprepared investors and fiduciaries of investment portfolios to unnecessary investment risks. That’s because expected higher energy costs, existing and possible legislation demanding increased efficiency, and competition from more efficient buildings could drag down the profits of less efficient portfolios.
"That message needs to be taken seriously by both direct investors in real estate and those who invest through real estate investment trusts and other securities," said Craig Metrick, Mercer’s U.S. Head of Responsible Investment.
"It’s critical that both types of investors understand how the push for greater efficiency can impact building value," Metrick said. "And it’s particularly important given the current challenges facing the commercial real estate industry over the next few years."
The report draws on key industry and academic research on building efficiency’s economic impacts. It also outlines key steps and best practices for leveraging efficiency in real estate investments, and includes case studies from leading investors that show the possible positive impacts of efficiency upgrades.
For instance, in 2008 financial services giant TIAA-CREF established a goal of reducing energy use in its real estate portfolio 10% by 2010, and the company is well on its way to meeting that goal. The effort is already yielding $4 million a year in reduced energy costs across the portfolio, and all new buildings TIAA-CREF develops will be LEED certified.
The California Public Employees’ Retirement System (CalPERS), the world’s largest pension fund, is also on target to meet a 20% energy use reduction goal in its real estate by the end of this year.
"As fiduciaries, focusing on energy efficiency in our real estate portfolios just makes sense," said CalPERS CEO Anne Stausboll. "CalPERS invests in millions of square feet of real estate," said Stausboll, "so cutting back on energy use and lowering operating costs can only boost the value of the properties in our portfolio, while also contributing to climate change mitigation."
Other major real estate managers pursuing significant efficiency initiatives include Jones Lang LaSalle (JLL)–whose ongoing retrofits of New York’s famed Empire State Building will translate into $4.4 million in annual energy savings–and Deutsche Bank’s RREEF Alternative Investments.
Recent research cited in the report shows that efforts similar to those above can yield bottom-line results:
A 2009 Maastricht University study found rental premiums of 3.5% on US office properties, a 6% increase in occupancy for "ENERGY STAR" buildings and a 16-17% premium on sales prices per square foot.
The University of Arizona’s Gary Pivo and Indiana University’s Jeffrey Fischer found higher income and income growth, higher net operating income per square foot, higher market values, higher rent and lower expenses for ENERGY STAR-rated properties, when compared to properties with no energy efficiency rating, in a 2008 study.
The impact of such practices can be profound when spread across millions of American buildings. According to McKinsey & Company, energy efficiency measures alone can tackle about half the goal of reducing greenhouse gas emissions 60 to 90% by the year 2050–the target advised by climate experts.
"So efficiency investments are a three-way win: for investors, the environment, and an American economy that emerges both more competitive and with new jobs in energy-efficiency industries," said the Investor Network on Climate Risk’s Mindy Lubber.
"As some have put it, if we’re not investing in energy efficiency we’re leaving money on the table," Lubber said. "Why would we do that–especially when the costs of inaction are so high?"
The report is available at the link below.
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