The Economics of Green Retrofits Nils Kok, PhD Visiting Scholar, University of California, Berkeley Assistant Professor at the University of Maastricht [email protected]Norm Miller, PhD Professor, Burnham-Moores Center for Real Estate University of San Diego [email protected]Peter Morris Davis Langdon, An AECOM Company [email protected]
This slideshow was presented during the session "The Economics of Green Retrofits," with Nils Kok, Norm Miller and Peter Morris, at Greenbuild 2012, Toronto.
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The Economics of Green Retrofits
Nils Kok, PhDVisiting Scholar, University of California, BerkeleyAssistant Professor at the University of Maastricht
• Context: the future is in the past– Most buildings that will be here in 20 years are already here– Historically we build new about 2% of the stock each year
• In this session we examine the majority of the renovated office buildings that became LEED under EBOM– Note: today most (87%) LEED EB buildings are Energy Star labeled,
something not true prior to 2008– We provide both a market perspective (survey) as well as market
verified (hard data) analysis of benefits and costs
• Most of the costs in green retrofits are energy related, but the benefits of greening go beyond energy costs
Green talk…and green walkFinancial crisis has slightly dented interest…
2005 2006 2007 2008 2009 20100
1,000
2,000
3,000
4,000
5,000
6,000
0
5,000
10,000
15,000
20,000
25,000
30,000
Counts of the usage of "green build-ing" in the popular press
Visitors at "Greenbuild" conference
Green building in the marketplace…but LEED and Energy-Star-ratings have “exploded”
Green building in the marketplace…but LEED and Energy-Star-ratings have “exploded”
The focus has shiftedLEED EB certification now outpaces LEED NC
What do we know so far?Effects on demand side have been well-documentedSome evidence on a “green” premium: – Eichholtz, Kok and Quigley (2010, 2011)– Fuerst and McAllister (2011, 2009)– Miller, Florance and Spivey (2009)
Some evidence on health and productivity— Singh, Syal, Grady, and Korkmaz (2010, Am J Public Health) — Miller, Pogue, Gough, Davis (2009)
Continuing Operations and Management Studies by CBRE & USD
But limited systematic evidence on costs– Case studies on the economic implications focus often on new buildings
And most research focused on new construction (LEED NC)– Comparing apples with oranges
This study”The economics of green retrofits”
Identify office buildings built before 1990:– Multi-tenant– Renovated to LEED EB:O&M standards– 2005 – 2010 period– Matched age and size of samples
Examine:– Survey attitudes and typical improvements – Impact on rents and occupancy– Cost of typical improvements and possible return results
Sampling methodologyPre-1990 office buildings in 14 MSAs
• LEED vs. Non-LEED office building samples– LEED and Non-LEED building samples drawn from the same 14 major
U.S. markets where we had the largest number of renovated properties. The total filtered sample included 374 properties.
• Data Source: Costar
• LEED building criteria: Existing, class A or B, built prior to 1990, minimum 15,000 square feet, multi-tenant only
• Non-LEED building criteria: existing, class A or B, built prior to 1990; earliest year built and minimum size varied by market to match average size and age of buildings in LEED sample, multi-tenant only.
LEED EB:O&M sample locationsGeographically diversified across the US
Survey of LEED EB managers and owners
• Survey of LEED EB:O&M building property managers and owners
• Survey link emailed to 317 property managers in Costar LEED sample (same sample as above but some managers oversaw more than one building)
• 41 responses received back (13% response rate).
Source: Survey of LEED buildings in 14 major U.S. markets
Platinum
Gold
Silver
Certified
22.5%
25.0%
47.5%
5.0%
Survey respondents by LEED certification25% certified, but “Gold” is the standard
Percent improvements related to sustainabilityvs. improvements to merely remain competitive
Source: Survey of LEED buildings in 14 major U.S. markets
30% or Less
40%-60%70%-90%
100%
Impossible to Sepa-
rate
18.2%
36.3%
9.0%22.7%
13.6%
Source: Survey of LEED buildings in 14 major U.S. markets *Includes rain capture systems
Major improvements during retrofitStrong focus on energy, but water is increasingly important
Windo
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Floo
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Irrigat
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Conta
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s
Wat
er F
low S
yste
ms
HVAC
Ligh
ting
0%
20%
40%
60%
80%
100%
4.2%8.3%
16.7%
29.2%
41.7%
54.2%
70.8%
83.3% 83.3%87.5%
Source: Survey of LEED buildings in 14 major U.S. markets *Includes rain capture systems
Responses
Major improvements by certification levelMultiple responses allowed
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etec
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HVAC
Wat
er fl
ow sys
tem
s
Ligh
ting
0
4
8
12
16
20
24
Platinum Gold Silver Certified
Source: Survey of LEED buildings in 14 major U.S. markets
How much do you save? That depends on where you are!
How much do you save?
How much do you save?
Capitalized Value Impact = $8 to $15/SF from simply the energy savings
Source: Survey of LEED buildings in 14 major U.S. markets
Less than 5 Years
5 to 10 Years
10+ Years
Impos-sible to
Estimate
45.4%
13.6%
9.1%
31.8%
Expected payback in years onsustainability-related improvements
Source: Survey of LEED buildings in 14 major U.S. markets *Includes rain capture systems
Major improvements during retrofitStrong focus on energy, but water is increasingly important
Windo
ws
Insu
latio
n
Floo
rsRoo
f
Irrigat
ion
Syst
ems*
Mot
ion
Detec
tors
Recyc
ling
Conta
iner
s
Wat
er F
low S
yste
ms
HVAC
Ligh
ting
0%
20%
40%
60%
80%
100%
4.2%8.3%
16.7%
29.2%
41.7%
54.2%
70.8%
83.3% 83.3%87.5%
Reduction in the carbon footprint?
Summing upThe cost-benefit trade-off
• Assuming a triple-net rental contract:– Benefits
• $2/sf rent increase, $2.7/sf cash flow increase• At current cap rates of 6.5% this translates into $30/sf – $40/sf of value increase• Additional energy costs value impacts in the range of $8 to $15 which accrue
to the landlord if a full service lease.
– Costs• $10-$20/sf for an energy retrofit saving 30-50kBTu, on average
– Other considerations• Lower insurance costs (i.e., Fireman’s Fund)• Reduced tenant turnover will save leasing commissions• Doing good by carbon footprint reduction!
Summing up The cost-benefit trade-off
• The energy part of “green” retrofits seems to make financial sense– On average, benefits outweigh costs especially for the low
hanging fruit -- quicker payback options– Deeper retrofits make sense in raising the overall quality and
competitiveness of the building in a time of lower opportunity costs – that is after losing a major tenant when occupancy is low
• Split incentives are not necessarily impediment– Rents increase, occupancy rates increase– More use of full service leases– More evolution of green leases
Concluding thoughts
• Our research shows:– Green retrofits happen, even without accurate knowledge of
ROI– Data suggests that average benefits exceed average costs
• Negative investment yields for most assets in current market– Increases attractiveness of energy efficiency
• Reduces fat tail risk (hedge)• Should have lower return threshold
• Payback versus return – are investments capitalized?
• What other aspects of “green” are priced?
Thank you……more at PL12 (The Retrofit Triangle) @4pm
Nils Kok, PhDVisiting Scholar, University of California, BerkeleyAssistant Professor at the University of Maastricht