Commercial real estate: unlocking the energy efficiency retrofit investment opportunity

Commercial real estate: Unlocking the energy efficiency retrofit investment opportunity provides a synthesis of wisdom and practices from real estate leaders presented in the form of a sevenstep process for how investors can increase the value of their real estate assets through energy efficiency retrofits. Each step is supported by a practical example of how it has been addressed and implemented by an investor.

The central arguments of this report are:

• The scale of the investment opportunity in energy efficiency building retrofits is significant, between USD 231 billion2 and up to USD 300 billion3 per annum globally by 2020. It is expected to continuously rise in the future.
• There is a robust business case for these types of investments and cost-effectiveness fares better than in most other sectors of the economy.
• A traditional response to these market failures has been the introduction of new policies, tax breaks, grants and loan programs; however, even with these incentives in place, the vast majority of profitable retrofit opportunities remain untapped.
• A complementary market-driven approach is to translate these challenges into three investment-related root causes and develop a practical framework for how to address them. The framework is composed of a seven-step process to overcome these causes, within the realm of control of asset owners and investment managers.
• Whatever their property mix, there are steps owners and managers can take now to set themselves up for success.

The framework’s initial five steps will ensure asset owners and managers have the right information and incentives to significantly increase the number of energy efficiency retrofits:

1. Ensure executive awareness of the business case

• This will lead to an investment in consultants or of internal staff time to carry out the next step.

2. Measure and benchmark building energy performance

• This requires competent staff or trusted consultants to manage a portfolio-level program and an allocation of funds to carry out the audits and put in place energy benchmarking software.

3. Set portfolio energy efficiency targets

• Whether or not they are publicly disclosed, executives and key decision makers need to know what they are aiming for.

4. Link asset manager compensation to energy performance

• Like any major corporate initiative, the surest path to progress is to pay people based on performance, in this case on energy performance and some qualitative targets such as certification.

5. Align lease clauses to enable retrofits (green leases)

• Systematically introducing these clauses at lease creation and renewal enables energy efficiency retrofit projects to become viable.

The last two steps will increase an investment manager’s chances of getting energy efficiency retrofits approved and financed:

6. Include impact on asset value in investment analysis

• Enlarge the business case beyond the energy efficiency project assessment level by accounting for impact on the financial performance of the investment.

7. Take a portfolio approach to determine next steps

• Map out your buildings according to four key variables (type of lease, lease duration, availability of capital and relationship to property [owner, manager or tenant]) and determine next steps for either a retrofit or creating the lease and financing conditions to enable one.