Why Energy Efficiency? Three Compelling Business Cases
A new City Energy Project resource takes an in-depth look at the business case for energy efficiency in buildings from the perspective of three real estate companies, all at the leading edge of efficiency and sustainability, who each describe their approach and experience making energy efficiency work for them.
The City Energy Project—a joint initiative of NRDC and the Institute for Market Transformation—has been partnering with cities across the United States to develop and put into practice ambitious actions to reduce carbon emissions from buildings since 2016. Today we’re releasing a new resource—“Breaking Down the Bottom Line: The Business Case for Energy Efficiency in Buildings”—that centers a unique perspective: the first-hand experience of executives at three real estate companies—Jamestown LP, Physicians Realty Trust, and Praxia Partners—who each describe their approach to the business case for efficiency. The takeaway? There’s a compelling energy efficiency success story for every company to tell, and no “one-size fits all” approach.
This new resource, like so many in the City Energy Project Resource Library, reflects the incredible insight and knowledge that emerged from the project’s multi-year partnership with more than 20 cities. And while the Resource Library offers everything from best practices and practical guides to case studies and templates, most are written for and from the perspective of cities and advocates. This compilation of case studies, however, offers details of the energy efficiency successes experienced by commercial real estate executives and is aimed at helping other companies find their own business case for energy efficiency. While no two stories will be the same, every company can profit from its own approach to smarter energy use based on its unique values, data, building stock, staff capacity, and local market conditions. And companies can and should look to industry leaders for ideas, which is where this report—and some of its key findings—come in.
The Math Favors Efficiency
Reducing utility bills increases profit and value, but efficiency measures require significant up-front costs. How do businesses weigh and justify these costs? Easily. An upgrade that reduces energy costs by $10,000 per year, in turn raising Net Operating Income (NOI) by the same amount, could increase the value of the property by $100,000 to $200,000.
According to Praxia’s Joe Recchie, because of different capitalization rates in various parts of the country, “Saving $1 per year in my property can produce $14 in value in Columbus [OH]. If I’m in California, that $1 in savings is $33 in value. Then think about long-term return on equity. Why wouldn’t you pursue this?”
Green Leasing Can Help Close the Gap
Split incentives—where owners pay for upgrades, but tenants receive the benefits because they pay their own utility bills—create additional barriers to energy efficiency improvements. However, the use of green leases to align incentives and benefits can help overcome this hurdle.
Jamestown’s Becca Rushin explains, “Green lease provisions streamline and validate the process. An owner might be able to use language in a green lease that says the tenant will provide utility data. Green leasing provisions allow capital expenses to be passed through if they save energy. You don’t have to, but at least it opens up another conversation with the tenant about what that means.”
In Affordable Housing, Energy Efficiency Reduces Risk and Increases Value
In an economy where expenses have risen while incomes have stagnated, utility costs can present a significant burden for tenants, which increases risk for owners. Energy efficiency can help reduce both burden and risk, especially in affordable housing (often defined as a home that a household can obtain for 30 percent or less of its income).
As Recchie explains, “If you’re renting out affordable housing, you are essentially competing with the utility for the consumer’s dollars. Why wouldn’t you produce something more affordable on the utility front, so that you can collect more rent? And even if the rent is the same dollar amount, with an energy-efficient property you have reduced your risk because you have a renter who’s more able to pay rent.”
Energy Efficiency and Sustainability Are Becoming Expected Practice
Sustainability is increasingly being seen as an indicator of corporate values and responsibility. Corporate boards and investors are requiring companies to apply environmental, social, and governance (ESG) principles to their investments and operations. Potential tenants are seeking information on sustainability and ‘green’ certifications. And achieving those benchmarks pays off: according to the U.S. Department of Energy, ENERGY STAR® certification for buildings yields a green premium ranging from 7.3 to 8.6 percent for rents, 6 to 10 percent for sale prices, and 10 to 11 percent for occupancy rates.
“We came to realize that if you don’t do environmental measures, you’ll be in trouble, whether it’s trying to lease a space or sell a building,” says Becca Rushin of Jamestown LP. “Most of our competitors’ buildings that our potential tenants might be considering are LEED-certified. More and more frequently, we get questionnaires from tenants such as [the U.S. General Services Administration], asking about certifications and other sustainability features.”
City Benchmarking Requirements Help Level the Playing Field
Benchmarking policies—a common undertaking among City Energy Project cities—require building owners to track, report, and publicly share energy use information and have become an important factor for many owners when weighing the case for energy efficiency. That’s good news for the more than 30 U.S. cities that have passed such a policy. According to Rushin, “These ordinances help level the playing field, and push all owners at least to measure their building energy performance.” And the marketplace has taken notice: “our tenants, our investors—all of our main stakeholders—also expect us to know how our buildings are doing.”
Rushin says that what she finds can help determine the company’s path forward. “If we’re looking at a building with a high ENERGY STAR score, I would be thinking immediately about certifying it, and assuming that the low-hanging fruit has been picked, what next-level stuff can we do—battery storage or some other clean tech project,” she explains. “On the other hand, if a building is poor- performing or not benchmarked in Energy Star, we stage our engagement differently. That goes into the acquisitions budget, capital planning, and so on.”
On the fundamental question of why and how to pursue energy efficiency, these conversations reveal common themes, but with different approaches for each company. Ultimately, though, they all agree: energy efficiency is not only the right thing to do, it’s also good business for their companies.
For more detail, check out the entire report here, and a summary primer here.