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High-Performance Buildings Linked to Increased Value for CRE Portfolio

September 08, 2017 | Monica Kanojia

The U.S. commercial real estate (CRE) sector consumes approximately 20% of total commercial building energy use. The commercial building sector overall spends upwards of $30 billion on energy per year. Given that energy is often the largest controllable operating expense, CRE investors and owners have been increasingly adopting energy efficiency measures. Despite an overall understanding that these measures ultimately contribute to reduced operating costs and an increase in net operating income (NOI), there is limited empirical evidence that demonstrates the deeper financial performance and value that energy efficiency can support for this sector. The U.S. Department of Energy’s Utilizing Commercial Real Estate Owner and Investor Data to Analyze the Financial Performance of Energy Efficient, High-Performance Office Buildings study is a step towards addressing data-related barriers as the first to integrate and analyze actual building data to determine whether a correlation exists between efficiency features and profitability indicators.

Stakeholders have noted that while byproducts of strategic energy improvements, like increases in tenant attraction and retention, higher rents, and improvement in occupant health and productivity, are beneficial, they are difficult to observe in individual portfolios given the lack of data available for analysis. In an industry where certain property features can provide an edge against the competition it’s understandable that CRE stakeholders classify portfolio performance data and associated financials as proprietary and are reluctant to share information. Principal Real Estate Investors (Principal), the dedicated real estate investment group within Principal Global Investors, partnered with DOE for this study and agreed to provide data from 131 commercial office properties for analysis.

Principal’s data was split into two categories – green and non-green based on whether they had an ENERGY STAR score of at least 75, or had achieved LEED certification. A correlation analysis was performed on each category, which contained at least 60 properties, across six variables:

  • Market value
  • Net operating income (NOI)
  • Operating expenses
  • Rental income
  • Rental concessions
  • Occupancy

The results of the analysis validate what the industry has believed to be true – properties classified as high-performance buildings with integrated energy efficient technology and strategies yield stronger financial performance than their non-green counterparts. Principal’s high-performance properties had reduced rental concession, which are often used by landlords as an added benefit to attract tenants. It should not come as a surprise that concessions are ultimately tied to NOI; if owners offer a concession like a month’s free rent to new tenants, they are losing revenue. The lack of concessions results in greater profitability through a more stable revenue stream, as well as a reduction in marketing needs and vacant space. There was a decrease in operating expenses as well with an average reduction of 17.6%. This decrease demonstrates the ability of green features to increase cash flow, which is especially important for building owners looking to secure financing for efficiency projects.

Most importantly, the analysis found a significant correlation between NOI and high-performance buildings with an increase of 28.8% per square foot. NOI plays a key role in the underwriting process ultimately impacting a portfolio’s valuation, as well as the owner’s ability to secure financing energy efficiency upgrades, so a positive correlation indicates potential for a suite of financial benefits to building owners. While this study has provided initial validation of the correlation between green features and increased asset value, there is still more to be done for broad uptake within CRE. The transition to a fully energy-efficient commercial building stock requires equipping stakeholders with the tools necessary to address energy data transparency, the role of energy factors within the valuation process, as well as educating the industry on best practices. The Department of Energy is working to fill knowledge gaps in the industry to help it reach its potential.

About the Author
Monica Kanojia is a consultant with the U.S. Department of Energy. She is the Communications Lead for the Buildings Integration (CBI) program in the Building Technologies Office.

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