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:
2. Utilities are included, and tenants are not responsible for how much they consume month to month.
“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 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 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.”
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
3. Tenants and Building Owners Can Split the Cost of Improvements
“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.”