Environmental awareness and sustainability have become increasingly important in recent years, and this is certainly true of the commercial real estate industry. Commercial property owners who implement energy-saving improvements can not only help the environment but at the same time unlock a number of long-term benefits for their businesses.
1. Cost Savings
According to energy.gov, commercial buildings waste up to 30% of the energy they consume. Investing in energy-saving improvements can significantly lower overall operating costs. Some common measures include:
• Lighting upgrades — 17% of all electricity consumed by commercial building is from lighting. Incandescent bulbs are energy hogs. Replacing them with LED bulbs can result in a significant cost savings. According to EnergyStar, LED’s provide the same brightness as tradition bulbs, but use 90% less energy and can last 15 times longer. Traditional bulbs also release 80% of their energy as heat, raising the cost of air conditioning.
• Utilizing natural lighting — Increasing natural lighting via skylights and south-facing windows where possible, and using energy-efficient blinds and shades can help reduce the need for artificial lighting.
• Insulation and weatherization — Ensuring that the building is properly insulated and weatherized can prevent energy loss and reduce heating and cooling costs by as much as 10% according to the EPA. Windows, doors, and walls are the first places to look, but don’t forget the roof, HVAC ducts, outlets, and pipes.
• Using power management settings on computers and other hardware — Per EnergyStar, each office desktop computer wastes up to $50 a year. This is an easy way to reduce electricity use.
• Getting an energy audit — Contact your utility company to learn what services are available, but in many locales there are different audit levels, varying from free to paid. Some utility companies offer rebates or other incentives to customers who follow through on audit recommendations. An energy audit can help define what options are worthwhile and what their costs and potential savings could be; and a consultation with your CPA to review the cost-benefit balance can reveal the actual tangible return on investment for any of the cost-saving strategies.
• Getting a competitive quote for electricity — If you’re in a deregulated state, you may be able to choose your electricity supplier and lock in a rate that is lower than what you would get from your utility company.
• Installing solar panels — While solar can be good for your bottom line and for the environment, and perhaps even reduce your dependence on the grid, it’s important to weigh some potential offsetting factors. Does the roof have adequate structural integrity, or must you upgrade that first? Does the building get enough days of full sun? Could future adjacent development block direct sunlight? Are there regulations about hookups or fire department roof access that you need to anticipate? Is your electricity bill — especially if you’re a landlord responsible solely for common area utilities — sufficient to justify the initial capital outlay? A professional solar company should be able to give some reasonable projections of the time need to recover your costs, and help you make an informed decision.
2. Increased Property Value and Rental Premium
From a strictly metrics-based viewpoint, energy cost savings should increase net operating income and therefore increase value.
On a more subjective scale, energy-efficient buildings are highly sought after by environmentally conscious businesses and tenants, as they offer lower operating costs for tenants as well as owners, and present a reduced environmental impact. Does that translate into sales and rental premiums?
Although it may be difficult to quantify, there seems to be widespread agreement that the so-called “green premium” is alive and well. The US Green Building Council cites significant sales premium in LEED-certified buildings and CBRE offers a detailed study of rent premiums. Such premiums are of course a function of location as well as property type and class, but in general they all seem to confirm that energy efficiency measures have a positive impact on asset value and on rent.
And on the other side of the coin is the so-called “brown discount.” The value of buildings that don’t measure up in regard to energy conservation may take a hit, sometimes up to 30%, due to the growing demand for “green” buildings.
3. Enhanced Tenant Satisfaction and Retention
Commercial tenants increasingly favor buildings that prioritize sustainability and energy efficiency. Implementing energy-saving improvements sends a strong message to tenants that the property owner is committed to providing a high-quality and sustainable environment.
By reducing energy costs and creating a comfortable and healthy indoor environment, commercial property owners can significantly enhance tenant satisfaction. Satisfied tenants are more likely to renew their leases, leading to higher occupancy rates and reduced turnover, which ultimately improves the property’s long-term financial stability.
4. Management Benefits
Energy efficiency measures can extend the lifespan of a building’s systems and increase its overall value. This can make the property more attractive to potential buyers or tenants, potentially leading to higher rental income or sale price.
5. Tax Incentives
The tax regs are always a moving target, but you can find the IRS regs for “Energy efficient commercial buildings deduction” as of this writing (1/2024) here. In short, it appears that eligible improvements for years 2023 and later are for interior lighting, HVAC, hot water systems, and building envelope. The deduction amounts are the lesser of:
The cost of the installed property, or
The savings per square foot calculated as:
$0.50 per square foot for a building with 25% energy savings
Plus $0.02 per square foot for each percentage point of energy savings above 25%
Up to a maximum of $1.00 per square foot for a building with 50% energy savings
A final note: Kermit the Frog didn’t find it easy to be green, but you might find it much more appealing. Energy-saving improvements in commercial properties can provide you with substantial financial returns and management benefits, making them worthwhile investments for you as a property owner.
Have you implemented any energy-saving improvement in your commercial property? Please share your experience.
— Frank Gallinelli
Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved
Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved