In the past two weeks, a LinkedIn discussion on the BOMA (Buiding Owners and Managers Association International) group page received over 50 comments.
WHY REAL ESTATE OWNERS ARE HESITANT TO INVEST
1. Oftentimes Owners Pay and Tenants Benefit
The relationship between building owners and tenants can exist in one of two ways:
1. Utilities are not included in the tenants’ rent, and they are billed back for their consumption.
2. Utilities are included, and tenants are not responsible for how much they consume month to month.
Either way, if there is going to be a major building retrofit, the building owner will need to absorb the upfront cost, and tenants will receive the financial benefits. Building owner, Eric Dorf, owner of Dorf Associates, commented:
“Financially I can’t justify [an efficiency upgrade]. We would pay for the improvements and the tenant would reap the financial benefits. We would bear the entire cost, but would receive none of the savings, be unable to recoup the cost in higher rents, and not even have a meaningful marketing edge.”
Many building owners are concerned that tenants will not be willing to pay higher rent to absorb the costs of building improvements, and building owners don’t want to pay if they aren’t going to immediately see the cash benefit. That being said, sustainability improvements will benefit building owners by increasing property value and profitability.
2. Building Owners with Short Leases Look for Quick ROIs
In the long run, the bottom line and sustainability improvements are compatible, but building owners don’t always own buildings for long enough to get the full ROI. C-Level SaaS technology executive, Jim Charles, explained:
“In Multifamily, the CFO is looking for a 9 month or at best a 18 month ROI in this space. Since these properties are often bought and sold every 36 months it is difficult to tie down a CFO to this type of return that will be realized by a future owner.”
However, it is recognized that sustainable practices make buildings more marketable and more efficient, especially in commercial real estate.
Owners of older buildings often believe the investment in energy efficiency is going to be so high that they won’t see any significant return. This results from the misconception that older buildings cannot be as efficient as new buildings in the construction phase.
Manuel Fishman, a partner at Buchalter Nemer, with a background specializing in commercial real estate and the formation of entities for investors in real estate explained:
“Owners of first class commercial properties “get it” and understand the importance of incorporating energy savings methodologies in their annual capital budgets…Granted, older buildings have challenges, and as an industry I think we need to push for tax incentives to encourage owners of these buildings to upgrade these buildings.”
There are more and more laws that are pushing buildings to increase performance, and buildings, both young and old, that invest in energy efficiency, are improving.
LOOKING FORWARD: HOPES FOR ADOPTING ENERGY EFFICIENCY
1. Education is Needed to Show Energy Efficiency is Profitable
Energy efficiency is a work in progress, and it will not be adopted by the real estate industry overnight. Additionally, as technology is evolving, the industry is inundated with solutions that are challenging to sort through and take action on. Daniel Resnick, Business Development Manager at Green Street Energy, is one of many green energy services providers who believes education is the key to increasing energy efficiency investments.
Education is certainly important, but is it enough to drive building owners towards investments? As a result of industry-wide education, general budget plans must be redesigned to accelerate energy efficiency.
2. Building Owners Can Go After Low Hanging Fruit
Retrofits can be expensive and time consuming, and savings are not always returned to the investors, so it’s not surprising that people aren’t jumping at every opportunity to increase efficiency. However, there is a ton of low hanging fruit to go after before investing in any big energy projects. Simple operating changes can lower utility bills by up to 20%.
Low hanging fruit can be highly profitable, inexpensive to act on, and tenants will still see benefits, increasing their satisfaction along with building occupancy rates.
3. Tenants and Building Owners Can Split the Cost of Improvements
The trick to avoiding the split incentives problem between tenants and building owners is simple – you have to align their values. Give tenants some of the savings, and keep the rest to absorb the upfront cost, everyone wins. As Marc Lacombe, Founder of Almiranta Corporation explained, a lower bill is a lower bill.
“From a tenant’s point of view, they pay base rent plus expenses as a single invoice each month, so the landlord can reduce expenses by $1 a square foot and increase the base rent by say $0.50, the tenant still sees a fifty cents decrease in total rent, even if the landlord gets an extra fifty cents in his or her pockets.”
Currently, it seems as though the only way the majority of building owners are going to make investments in energy efficiency is if the upgrades are absolutely necessary. Either something needs to be completely dysfunctional, or the owner has to be actively fighting to find new tenants. However, there are ways to get around of many hesitations keeping people from investing in energy efficiency, such as going after low hanging fruit or finding ways to balance split incentives with tenants.
You don’t have to go on LinkedIn to know that energy efficiency is a hot topic, but this discussion did a great job of summing up the issues impeding its development. Have something to add? Either post on the discussion board or share your thoughts in the comments section below!
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