For years, investing in energy efficiency upgrades was thought of as a luxury by many property investors. However, that is starting to change as property developers are starting to make tons of money by going green.
While the reasons for this change are not always due to concerns about the environment. The result of this “green wave” is that operating costs are falling, yields are rising, and property owners are increasingly doing their part of the planet.
Looking back to the dark days of the recession this development might have been difficult to fathom as developers and tenants alike eschewed costly capital investments. Instead, everyone was trying to cut costs and what little energy efficiency-related investment took place was only on an as-needed basis.
Since then the move to greener more efficient buildings has cut across almost every sector as industrial developments and even self-storage properties are trying to decrease water and energy usage.
The result is something of a boom for contractors who specialize in this sort of work. This has led to some projects being delayed as developers and property managers wait for their contractors to become available.
Beyond this many tenants are now demanding energy efficiency upgrades as part of their leases. The reason is two-fold. First, an increasing number of companies have tied their brand image to being green and as such, they need their offices and other properties to reflect this.
The second reason is that the promotion of environmental standards by groups such as the Green Building Council helps to promote healthier workplaces. This not only helps employees to feel better while at work but can also increase productivity.
What’s in it for the landlords? Increased rental yields as developers can charge a premium for spaces in “green buildings” compared to those which are not. While some of these improvements will impact property developers’ capital allocation, there are several tax breaks and other benefits which can help to offset the upfront costs.
As such, developers large and small are lining up to reduce the energy footprints of their buildings. Besides upgrades, to the HVAC systems of their buildings, some are investing in wastewater systems and onsite energy generation and storage.
The latter can be used to reduce or even eliminate energy costs, and, in some cases, excess energy can be sold back to the grid. This creates an entirely new revenue stream for property owners – one which is less tied to the vacancy rates.
Wind and solar generation have become so popular that analysts point out that some school districts have made investments to find another way to raise money without needing to continuously increase local property taxes.
As making money by going green becomes the mainstream in the property sector, investment groups such as TIAA-CREF Global Real Estate (the real estate investment arm of the national teacher’s pension program) have begun to set aggressive targets. This includes a goal to cut energy use by close to 20 percent.
This is a program that started before the recession and has been so successful that the investment group has continued to use to it drive returns in its nearly $10 billion property portfolio.
Another institutional investor which is throwing its weight behind going green is CalPERS. Representing one of the largest pension funds in the U.S. this fund manages money for the retirement of thousands of state employees in California.
Given the size of its portfolio, the fund has also set aggressive targets for cutting energy-related expenses. The result help not only helped to benefit the fund’s stakeholders, but they have also done their part to improve the communities where their properties are located.
Beyond pension funds, property managers are also investing in energy efficiency. For example, reports indicate that Jones Lang LaSalle has saved close to $100 million per year in energy costs over the past few years.
Another way this has picked up speed is the pace of new buildings and redevelopments seeking LEED certification. The list of buildings that have achieved certification includes the refurbished Soldier Field in Chicago, the Salt Lake City Library, and One Bryant Park in New York City.
According to industry observers, this is a trend that is not expected to peter out. It is not uncommon for property managers to achieve savings of 20 percent or more for their investments in energy efficiency and this has a direct impact on the IRR and money-on-money return for investors.
Investors are making money by going green and if you are looking for a way to boost your yields, then you might want to consider making similar upgrades to the properties in your portfolio.