Can Sustainability Add Value Beyond Energy Cost Savings?
Published on: Saturday, December 12th, 2015
The short answer: Yes, absolutely. Now settle in for the long answer. (Well, sort of long. This is a blog after all, and our attention spans aren’t what they used to be.)
Sustainability and energy efficiency can have a positive financial impact on property operations beyond energy costs, including the following:
- Maintenance: fewer service requests, longer equipment life;
- Marketing & Leasing: higher tenant demand, better tenant retention, higher rents, better tenants, more favorable market position;
- Legal & Risk Management: prevention of market obsolescence, preparation for regulations, decreased cash flow risk;
- Financial Operations: better cash flow, higher sales proceeds.
You may accept that the value impact of sustainability is generally positive, in the right market, and with the right owner, tenants, and properties. But can you quantify that impact?
Large sustainability and energy efficiency projects can lead to operational changes and alter the property’s market position. Real estate professionals have been determining the effects of these changes on asset value for eons. IREM has been teaching these methods almost as long.
You can assess the potential value impact of sustainability and energy efficiency projects using a discounted cash flow analysis (DCF). Each project will have potential benefits linked to specific DCF inputs such as rents and maintenance costs, as well as energy and water expenses. Comparing the potential impact on net present value to the project costs will help determine the potential return, so that you can make the business case to your clients and other stakeholders if the project makes financial sense.
Some preliminary qualitative analysis, including market research, is critical. Markets, tenants, and investors value sustainability and energy efficiency to different degrees, and some not at all. When considering a value-enhancing sustainability project, you must talk to local experts, your tenants, brokers, owners, and other knowledgeable people.
Simply put, sustainability and energy efficiency can be a significant opportunity to meet and exceed investment goals. You just have to analyze the impact based on a specific investment situation, property, market, and project.
IREM, along with Rocky Mountain Institute (RMI), can help you do this. The two organizations have partnered to bring you three online courses on valuing sustainability and energy efficiency projects based on RMI’s “How to Calculate and Present Deep Retrofit Value: A Guide for Investors.” The guide presents a systematic and reliable methodology for assessing the multiple benefits of proposed sustainability and energy efficiency projects.
The Analyzing and Presenting Deep Retrofit Value course series, which outlines this methodology in detail, has begun to roll out on the IREM website. The first course, “Enhancing Property Value with Deep Retrofits,” is now available. The third course in the series will include a spreadsheet tool to calculate the effects of sustainability and energy efficiency on net present value using a discounted cash flow analysis.
Comments and questions welcome. You can reach me at firstname.lastname@example.org
About the Author
Todd Feist is the Sustainability Program Manager at IREM Headquarters in Chicago. He develops classroom and online courses and helps manage the IREM Sustainability program, including the IREM Certified Sustainable Property certification.