By Paul Rosta
Forward-thinking commercial real estate investors must now take energy into consideration along with other performance metrics. It’s now generally accepted that efficient buildings command premium values. Randy Moss, a veteran consultant at Yardi Energy, recently offered insights into smart energy strategies, challenges of meeting efficiency goals, and the trends ahead.
What trends are you seeing regarding heightened investor attention to energy efficiency? For instance, does it appear particularly intense when it comes to properties of any particular category, age or location?
Investors are increasingly seeking utility efficiency details, particularly ENERGY STAR Benchmarking of both energy and water. The need for benchmarking is being driven by both regulatory requirements and new financing rules from lenders. Initially, discounted Green Financing programs were targeted toward multifamily properties, but investors are now seeking energy efficiency metrics for many types of investments. It seems investors are viewing how well a property manages its energy and water use as an indicator of how well a property is managed, overall.
This idea is backed up by a recent study by the US Department of Energy Better Buildings initiative. The study of commercial and residential buildings confirmed a strong correlation between ENERGY STAR scores, occupancy rates, and rents. The study found buildings that had ENERGY STAR scores of 75 or higher achieved higher rents per square foot and higher occupancy rates compared to similar buildings without ENERGY STAR Certification in the same markets. ENERGY STAR Certified Class B buildings in the study outperformed non-certified Class A buildings on both occupancy and rent per square foot.
What are the main challenges facing investors in evaluating the energy performance of properties they are interested in buying?
The biggest challenge is getting the right data to understand energy efficiency. After getting the right data, interpreting it can also be challenging. Utility data is rarely standardized, and methods needed for acquiring data are as varied as the number of utility companies a property owner uses. Often properties have units directly invoiced by the utility providers to the tenants. This is common in multifamily and triple-net leased commercial buildings. Accessing and aggregating this data can be time consuming and prone to error. Even when all utility data is available, comparing yearly like-to-like utility use can be difficult due to variances in utility rates, occupancy, and weather.
When investors consider assets for possible purchase, how are their priorities for energy performance changing? What are they looking for?
Investors have recently been increasing their focus on energy efficiency as a key metric in valuing properties. Utility costs have long been recognized as one of the largest manageable operational expenses. More in-depth review of a building’s energy use provides insight into utility costs, savings opportunities, and overall management effectiveness. Measuring energy use is the first step toward identifying opportunities to improve efficiency.
Investors are also focusing on sustainability factors including environmental, social, and governance practices. Reporting systems such as GRESB, BOMA Best, and others, look beyond energy and help identify how sustainability practices for a building are impacting it as a place to live or work. Current industry discussions support the idea that sustainable buildings are more pleasant places to work and live, leading to increased tenant satisfaction and higher occupancy rates.
What are investors telling you about their goals in managing their energy strategy more efficiently? Is it about the bottom line, tenant retention, prestige/reputation, or are there other priorities as well?
Energy efficiency strategies are becoming a lifelong part of managing buildings, impacting purchasing, marketing to tenants, and the final sale of many locations. The idea of sustainable buildings often comes up when reporting metrics with investors are discussed.
Today, it is generally accepted that more efficient buildings are more valuable. Investors have taken note of the correlation between ENERGY STAR Scores, occupancy, and rents. An increasing number of finance programs are loading specific reports into ENERGY STAR Portfolio Manager and requiring their clients to submit these reports. The increasing focus on visibility into energy metrics indicates investors are studying energy efficiency more than ever before. Investors selling properties today usually highlight successful energy efficiencies as a way to increase value. Managing energy use at a property over its lifetime is an important component of the location’s present and future value.
How have investors been modifying their evaluation strategies in the past 12 to 24 months? Are any kinds of steps in particular becoming more popular for assessing energy performance, and if so, why?
Historically, energy systems have been reviewed and managed by Engineering and Asset Management teams. Often the involvement of these groups was after the decision to acquire a new asset. This has changed over the past few years with discussions around energy efficiency and sustainability moving into acquisition teams as a component of their strategies. The use of energy efficiency metrics in evaluating a property’s value is driving an increased need for data and reporting. Having the right energy information in a useful and understandable format is a common need, today. Recognized certifications such as ENERGY STAR or LEED are more sought after today than a few years ago.
Investors are finding value in having detailed energy and water efficiency metrics for buildings that are being sold, as well as acquisitions. With the recent data indicating higher efficiency buildings cash flow better than average, being able to prove a building is efficient adds to its value. Investors can use efficiency metrics to review data, identify areas for improvement, and document efficient buildings, thereby increasing their value. In many cases, low-cost changes to a property’s systems and management practices can yield very high returns on investment. Having a strategy of reviewing ongoing energy metrics provides for quick analysis of a buildings efficiency when considering a sale.
Are any new kinds of tools out there to help investor meet their energy-related goals, whether from your shop or on the market generally?
Investors are increasingly using sustainability reporting systems to analyze their data. The need to normalize information across portfolios for energy use based on outside factors, such as weather, are driving systems to provide more sophisticated analysis and simultaneously be easier to understand. Linking systems for data sharing is also important as many regulations and investors need access to energy data in standard reporting formats.
Yardi Energy’s Utility Expense Management service and E2 Insight reporting platform are widely used to manage utility costs and consumption. The combination of these products, and other components of Yardi’s Smart Energy Suite, provide portfolio-wide views of energy and water consumption with the ability to weather-normalize data and rapidly identify and drill down into specific areas needing attention. Many of Yardi’s Smart Energy Suite products also help properties reduce their energy consumption overall which will improve a building’s Energy Star score. As an ENERGY STAR Partner, Yardi is able to share data directly into ENERGY STAR Portfolio Manager, where many of the reports required by various programs are located.
Investors are also making property investments in energy efficiency as part of long-term ownership planning. Today, many investors are upgrading properties with energy efficient systems. In addition to traditional financing there are new financing mechanisms in the market to be considered; such as Commercial PACE, Energy as a Service, PPAs, etc. It is also important investors continually review rebates and other incentives from governments and utility providers as ways to make energy efficiency upgrades at a location more affordable.
What new products and strategies can we expect in the next few years?
Increasing numbers of municipal, state, and province governments have enacted regulations mandating use of benchmarking and transparency of the benchmarking results. These regulations are expected to increase in the future and this transparency is making it easier to compare buildings’ relative efficiency. As an example, New York City’s Local Law 33 was recently updated to required Energy Grades, based on ENERGY STAR Scores be posted at entrances to buildings beginning in 2020. Tenants and prospective investors will know immediately how efficient these buildings are and consider this information as they seek a place to invest, live, or work.
Products and systems capable of sharing data with ENERGY STAR will be important as benchmarking requirements grow. Energy management strategies will move data requirements closer to real-time access to permit building operators to rapidly adjust how their buildings are consuming energy. Automated control decisions by building management systems will be needed to respond quickly enough to stay ahead of energy use spikes and simultaneously maintain tenant comfort. Having all building management components in a single system will be required to maintain the most efficient and valuable buildings.