The Strong Case for Deep Energy Retrofit Investments
Published on: Saturday, December 12th, 2015
Historically, investment in deep energy retrofits has been limited in large part by an insufficiently compelling business case. Investments made in energy efficiency today typically have to provide a 30 percent return on investment based on energy cost savings alone. Some deep energy retrofits approach or clear this hurdle, but many do not.
Real estate investors generally neglect the value beyond energy cost savings when they prepare and present capital requests for deep retrofits. The result: undervaluation of deep retrofit opportunities that leads to (unintended) underinvestment in efficient buildings, leaving millions on the table—and increasing carbon emissions in the atmosphere.
Incorporating the additional—albeit less tangible—value beyond energy cost savings into decision making is therefore critical to improving investor due diligence, enabling better assessments of the value proposition for deep retrofits, and, in turn, unlocking needed capital.
Success stories corroborate growing market evidence that energy cost savings represent just one driver motivating investment in deep energy retrofits. For example, Sharp Development recently repositioned a Class C- 1970s single-story office building in Silicon Valley into a Class B+ net-zero energy facility. Instead of taking a conventional approach to getting to Class B+, owner Kevin Bates emphasized energy efficiency and on-site energy generation. The net-zero facility strongly appealed to the local market, as demonstrated by a reduction in lease-up time from an expected 18 months to only 3 months and an increase in rent by $7.55 per square foot.
In April 2015, Rocky Mountain Institute (RMI) released a new practice guide for real estate investors to capture all value beyond energy cost savings resulting from the execution of a deep retrofit project, and address the failure of the market to fully recognize this value. How to Calculate and Present Deep Retrofit Value: A Guide For Investors provides a comprehensive deep retrofit value methodology and complements the 2014 practice guide RMI produced for owner-occupants.
Calculating and presenting five key sources of value beyond energy cost savings—including retrofit capital costs, non-energy operating costs, tenant revenues, sales revenues, and retrofit risk analysis—will help unveil the often overlooked benefits of investing in deep energy retrofits and promote increased investment.
You can also learn more by enrolling in the new interactive online course from the Institute of Real Estate Management (IREM). This is the first in a series of three deep retrofit value online courses—plus an accompanying tool for the third course—that IREM is developing in partnership with RMI based on the new practice guide. The courses will enable professionals to evaluate precisely how a deep retrofit project will contribute to the net present value of a real estate asset and to use that knowledge to build a strong business case and proposal.
Have you already taken these values into account and are interested in demonstrating the methodology? We’d like to hear from you. Contact RMI if you have a unique example you would like to share.
About the Authors
Michael Bendewald is a Manager on RMI’s Buildings Team, and has been with the institute since 2008. He currently leads the market delivery of the RMI practice guide on valuing energy efficiency and sustainability retrofits. View a full bio.
Douglas Miller is a Sr. Associate at RMI. He brings to RMI an interdisciplinary, international research and work background from across the environmental field. He joined RMI in November 2013. View a full bio.