A proven strategy for increasing the profitability of commercial real estate (CRE) is reducing wasted energy. That waste represents a significant unneeded expense as detailed by the U.S. Department of Energy:
“The average commercial building wastes 30 percent of the energy it consumes.”
Wasted energy represents money already in the budget which could be put to more productive use. It also represents a significant factor that should be taken into consideration when determining the timing of facility upgrades. The monthly cost of wasted energy adds up quickly when projects are put on hold for any length time. Calculating the monthly cost of delay can dramatically change the decision-making process. In many cases it ultimately costs a building owner more to do nothing rather than taking timely action.
An Untapped Asset
It also means that most commercial real estate owners have an untapped asset (the sum total of the waste associated with outdated technologies) that could be utilized to make a property more energy efficient, comfortable, productive, and ultimately more profitable! The increased profitability resulting from lower operating expenses and higher occupancy and lease rates typically realized from a more comfortable environment drives NOI and the resultant property value.
The cost of the waste tends to creep into buildings and businesses as technology ages and newer options become more efficient. One overlooked factor is the fact that outdated technologies tend to develop associated hidden costs that only grow as they age. Here are examples of those hidden costs:
- Increased Cost of Maintenance – often there is only enough budgeted money for repair of equipment that is long past the point where it should have been replaced. The cost of ongoing repairs can ultimately add up to more than the one-time cost of replacement.
- Diminished Occupant / Tenant Comfort – building envelope deterioration, coupled with inefficient HVAC, can result in an uncomfortable work environment which affects tenant satisfaction and productivity.
- Increased Noise Pollution – Aging and outdated technology tends to be noisy compared to more efficient models. While the HVAC system is the major contributor, windows, doors and building insulation are also factors. The resulting noise pollution has been shown to directly affect productivity and profitability.
- Disrupted Production – When a key component of production becomes undependable or prone to breakdowns, the resultant loss of production can be far greater than the cost of upgrading the equipment needed for dependable operations and maximum uptime.
- Frequency and Costs Associated with Replacements – If older technology has a short lifespan in comparison to advanced technology (i.e.,incandescent bulbs vs. long lasting LED) the cost and frequency of replacements can be greater than the cost of upgrading to newer technology.
“A strong body of literature demonstrates that substantial productivity gains can accrue from comprehensive energy efficiency improvements” Building Efficiency Initiative
How to Utilize the Hidden Asset Currently Funding Wasted Energy
The cost of delayed building upgrades is one of the many reasons behind the creation of a financing program for energy efficiency and water conservation known as Property Assessed Clean Energy (PACE). A key goal of the program is to take advantage of the savings associated with energy efficiency, as soon as possible, while eliminating the upfront financial burden that stifles most upgrade projects.
Here’s a short video that explains how the program works.
PACE allows a property owner to pay for energy efficiency and water conservation upgrades with a voluntary assessment added to the property taxes – similar to those levied for streets, sidewalks, sewers and other improvements. Unlike traditional methods of financing, PACE provides extended terms – 20 years or more – at fixed interest rates. This makes energy upgrades with relatively long payback periods such as solar and geothermal financially justified. It also eliminates the cost of delayed projects by making upgrades more financially affordable immediately.
The PACE financing option allows owners and tenants of commercial real estate to utilize the hidden asset represented by the cumulative cost of wasted energy and outdated equipment. When the PACE financing option is understood by project decision makers a common response is: “It will cost me more money if I continue using the equipment we currently have rather than upgrading to a higher efficiency product!”