The Economics of Green Retrofits
Nils Kok, PhDVisiting Scholar, University of California, BerkeleyAssistant Professor at the University of Maastricht
Norm Miller, PhDProfessor, Burnham-Moores Center for Real Estate
University of San [email protected]
Peter MorrisDavis Langdon, An AECOM Company
OverviewGreen retrofits are taking the lead
• 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
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
50
100
150
200
250
300
350
400
450
New Construction (NC) Existing Buildings (EB)
Squa
re F
eet (
in m
illio
n)
A gentle reminder…2007 – 2009 office market dynamicsOffice rents, vacancy rate, and unemployment
Office rents –30%
Vacancy rate +40%
Unemployment +115%
The “economics” are ever more importantFinancial implications of “greening” buildings
A higher initial outlay…– Not clear how much higher (0 – 20%)– But we know to hit LEED Silver is very modest– “Smarter” building managers, software
… may be compensated subsequently– Direct cost savings
• Energy savings (up to 35%)• Emission reduction
– Increased rents, faster absorption, lower turnover• Reputation• Corporate preferences (IAQ, corporate policies)
– Lower risk• Increased economic lives • Lower risk (reduced depreciation)
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
ws
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latio
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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%
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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sens
or d
etec
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cont
aine
rs
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
Water Energy Other Operating Expenses0%
20%
40%
60%
80%
100%95.5%
82.4%
4.5%0%
17.6%
Yes No*“Other” responses:waste removal, recycling,janitorial, landscaping
*
100%
Savings on expense items after LEED retrofitReductions in energy and water expenses are universal
Source: Survey of LEED buildings in 14 major U.S. markets
Increased
De-creased
No Change
Impos-sible to
Esti-mate
59.1%
9.1%18.2%
13.6%
Change in operating expenses following LEED retrofit 9% noticed an increase (?)
Source: Survey of LEED buildings in 14 major U.S. markets
30% or Less
40%-60%
100%
Impossible to Estimate
55.6%
11.1%
11.2%
22.3%
Note: No responses in70%-90% range
Expected ROI sustainable-related improvementsComplex for most respondents
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 on sustainable-related improvements
Market implications?What does this mean for building owners?
• Why go “green”?– Regulation– Stay competitive (tenant demand)– Improve asset
• The split-incentive problem– Benefits flow to tenants– But this should be reflected in rents
Source: Survey of LEED buildings in 14 major U.S. markets
Increased
No change
Impossi-ble to
Estimate24.0%
68.0%
8.0%
Rent increase following retrofitNo respondents indicated a decrease in rent
Source: Survey of LEED buildings in 14 major U.S. markets
+1% to 5%
+6% to 10%
+11% to 15%
No Dif-ference
56.5%
21.7%
17.4%
4.3%
Current rental level Compared to similar but non-LEED buildings
This is what the data tells us…Average rents on all LEED EB versus non-LEED with renovations since 2005
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 $20.00
$25.00
$30.00
$35.00
$40.00
$45.00
$50.00
Rents Non LEED
Rents EBOM
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201180%
82%
84%
86%
88%
90%
92%
94%Non_LEEDLEED
This is what the data tells us…Average occupancy rates on all LEED EB versus non-LEED with renovations since 2005
Source: Costar; criteria: existing buildings, class A or B, built before 1990
Effects differ per marketLEED EB vs. Non-LEED average rents, 2011, by market
New Y
ork
City
Was
hing
ton
DC
San
Fran
cisc
o
Houst
on
Los Ang
eles
Chica
go
Seat
tle/P
uget
Sou
nd
Bosto
n
Orang
e (C
A)
East
Bay
/Oak
land
Denve
r
Atlant
a
Dallas/Ft
Wor
th
Minne
apolis/S
t Pau
l$0
$10
$20
$30
$40
$50
$60
$70
LEED Non-LEED
Source: Costar; criteria: existing buildings, class A or B, built before 1990
Effects differ per marketLEED vs. Non-LEED percent leased, 2011, by market
New Y
ork
City
Was
hing
ton
DC
Houst
on
Seat
tle/P
uget
Sou
nd
Minne
apolis/S
t Pau
l
Bosto
n
Denve
r
Chica
go
Los Ang
eles
San
Fran
cisc
o
East
Bay
/Oak
land
Atlant
a
Dallas/Ft
Wor
th
Orang
e (C
A)60%
70%
80%
90%
100%
LEED Non-LEED
Let’s dig a little deeper…LEED and non-LEED are quite similar
Model specification Standard hedonic pricing model
The market implications of “green” certification in commercial office properties:
(1)
Rin is the rent or effective rent per sq.ft. Xi is a vector of hedonic characteristics
Size, age, renovation, class, amenities, public transport, … City cn dummies to control for location – 14 separate dummies in the
sample
LEED EB certification and office rentsPublic transportation matters…
LEED EB certification and office rentsAchieved rents higher by about 7 percent
LEED EB certification and office rentsAchieved rents higher by about 7 percent
LEED EB certification and effective cash flowsEffective rents higher by about 9 percent
Financial implications Eco-investment real estate sector is not only “doing good”
Ceteris paribus, green buildings1. Have higher rents by 7% or about $2 per sq.ft.2. Have higher effective rents by 9% or about $3 per sq.ft.
Effects go beyond energy efficiency alone
Respondents indicate investments pass ROI hurdle
The missing analytical piece…what is the cost of “greening” properties?
Source: Survey of LEED buildings in 14 major U.S. markets
Thousands
$438,957
$2,093,846
Median Mean$0
$500
$1,000
$1,500
$2,000
$2,500
Total dollar amount invested in retrofit
Where’s the capital cost in greening building?It’s about energy (mostly)
• “Greening” commercial property– Green cleaning– Water re/use and reduction– Transportation – Recycling
– Energy use• Optimization/management• Lighting, heating, cooling, ventilation, plug-load
Where does the energy go?
Standard Office Building• 500,000 GSF• 12 Stories• Skin Area:135,200• Skin Ratio: 0.271
• Lighting load normalized at 10.7 kBtu/SF/yr
• Plug load normalized At 15.34 kBtu/SF/yr
Where does the energy go?
Miami Anchorage
(Colder climates as you move to the right on the horizontal axis)
Where does the energy go?Matching the Energy Star Score with Energy Consumption
How do you get to the target? Reducing the ES Score from 50 to 80, 90, 95, 100
How do you get to the reduction target?
Primary strategies• Plug load• Lighting• Ventilation• Cooling• Heating
How do you get to the reduction target?
Plug Load• Baseline: 10 – 20 kBtu/SF/Yr • Current best practice: 4 – 10 kBtu/SF/Yr – Energy star/best in class appliances– Reduced equipment quantity– Occupancy sensors
• Reduction: 6 – 15 kBtu/SF/Yr• Cost: negligible if managed in equipment life cycle
How do you get to the reduction target?
Lighting• Baseline: 10 – 15 kBtu/SF/Yr (1.25W/SF)• Current best practice: 4 – 7 kBtu/SF/Yr – T8/T5 Lights – Motion sensors/day lighting control– Task lighting
• Reduction: 6 – 8 kBtu/SF/Yr• Cost: $3 - $5/SF (mainly for controls)
How do you get to the reduction target?
Ventilation• Baseline: 6 – 10 kBtu/SF/Yr (1.25W/SF)• Current best practice: 3 – 6 kBtu/SF/Yr
– Seal ducts– Optimize/commission air handlers– Optimize/commission terminal units– Balance heating & cooling requirements
• Reduction: 4 – 5 kBtu/SF/Yr• Cost: $2 - $5/SF• Note: Operable windows are also a possibility but this tends to be a fairly
expensive option.
How do you get to the reduction target?
Cooling: Basic Strategies• Baseline: 15 – 40 kBtu/SF/Yr (Except zones 6 – 8)• Current best practice: 10 – 20kBtu/SF/Yr– Replace/Optimize primary equipment– Improve controls– Optimize/commission terminal units– Balance heating & cooling requirements
• Reduction: 10 – 15 kBtu/SF/Yr• Cost: $3 - $7/SF
How do you get to the reduction target?
Cooling: Deeper Strategies• Deeper Strategies– Envelope sealing– Improve glazing: thermal & solar– Reinsulate exterior cladding– Chilled Beams or some form of radiant cooling
• Reduction: 10 – 25 kBtu/SF/Yr• Cost: $10 - $75/SF
How do you get to the reduction target?
Heating: Basic Strategies• Baseline: 5 – 15 kBtu/SF/Yr (Except zones 6 – 8)
• Current best practice: 2 – 8kBtu/SF/Yr– Replace/Optimize primary equipment– Improve controls– Optimize/commission terminal units– Balance heating & cooling requirements
• Reduction: 3 – 10 kBtu/SF/Yr• Cost: $1 - $2/SF (over cooling cost)
How do you get to the reduction target?
Heating: Deeper Strategies• Deeper Strategies– Envelope sealing– Improve glazing: thermal & solar– Reinsulate exterior cladding
• Reduction: 2 – 10 kBtu/SF/Yr• Cost: $10 - $75/SF
How do you get to the reduction target?
kBtu/SF/Yr(Reduction)
Cost/SF
Plug load 6 – 15 0
Lighting 6 - 8 $3 - $5
Ventilation 4 – 5 $2 - $5
Cooling 10 - 15 $3 - $7
Heating 3 - 10 $1 - $2
Total 30 - 50 $10 - $20
How do you get to the reduction target from 50?
How do you get to the reduction target from 60?
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
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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
Norm Miller, PhDProfessor, Burnham-Moores Center for Real Estate
University of San [email protected]
Peter MorrisDavis Langdon, An AECOM Company