The Economics of Green Retrofits

The Economics of Green Retrofits

Nils Kok, PhDVisiting Scholar, University of California, BerkeleyAssistant Professor at the University of Maastricht

[email protected]

Norm Miller, PhDProfessor, Burnham-Moores Center for Real Estate

University of San [email protected]

Peter MorrisDavis Langdon, An AECOM Company

[email protected]

applewebdata://677DE29E-EB75-4C1B-8026-7509B7084555/[email protected]

mailto:[email protected]


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


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

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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%


Responses

Major improvements by certification levelMultiple responses allowed

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ion

syst

ems*

Mot

ion

sens

or d

etec

tors

Recyc

ling

cont

aine

rs

HVAC

Wat

er fl

ow sys

tem

s

Ligh

ting

0

4

8

12

16

20

24

Platinum Gold Silver Certified


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


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 (?)


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


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


Increased

No change

Impossi-ble to

Estimate24.0%

68.0%

8.0%

Rent increase following retrofitNo respondents indicated a decrease in rent


+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?


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


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


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)


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.


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


Cooling: Deeper Strategies• Deeper Strategies– Envelope sealing– Improve glazing: thermal & solar– Reinsulate exterior cladding– Chilled Beams or some form of radiant cooling



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)


Heating: Deeper Strategies• Deeper Strategies– Envelope sealing– Improve glazing: thermal & solar– Reinsulate exterior cladding



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


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


Major improvements during retrofitStrong focus on energy, but water is increasingly important

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ion

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Mot

ion

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Recyc

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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%

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

[email protected]

Norm Miller, PhDProfessor, Burnham-Moores Center for Real Estate

University of San [email protected]

Peter MorrisDavis Langdon, An AECOM Company

[email protected]


