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Reducing Energy Waste Increases Real Estate Value
Wasted energy expense is subtracting more than $750 billion from commercial real estate values. This White Paper explores the opportunity to recover wasted energy expense and transform it into increased asset value.
A $750 Billion Equity Opportunity
According to the U.S. Department of Energy (DOE), more than 4.2 million commercial buildings waste an average 30% of the energy that owners and tenants pay for. During 2007 (latest figures), the DOE estimated the cost of that waste at $60.7 billion. At an 8.0% capitalization rate, $60.7 billion of wasted energy expense represents $750 billion of asset value.
Energy Star reports that much of that asset value can be recovered. In a 200,000-square foot office building that pays $2 per square foot in energy, a 10% reduction in energy cost translates into $40,000 in additional net operating income (NOI). In this Energy Star example, at an 8.0% cap rate, that new-found NOI translates into a $500,000 increase in asset value.
Our experience in performing eAuditPro™ energy audits, in 80 commercial buildings, identified energy cost-recovery opportunities ranging from 20% to 40%. Applying those findings to the Energy Star example, a 20% reduction in energy cost translates into a $1.0 million increase in asset value . . . a 30% reduction translates into a $1.5 million increase in asset value . . . and, a 40% reduction translates into a $2.0 million increase in asset value.
In the face of today’s stubbornly depressed commercial real estate values, it seems odd that very few owners have attempted to turn wasted energy expense into recovered asset value.
Lack of Owner Initiative is Curious
With $750 billion in recoverable asset value on the table, it is curious that few property owners have taken action to recover it.
A Deloitte survey, reSources 2012, found that 90% of companies surveyed had energy management goals; and more than two-thirds identified reducing energy cost as their primary motive. Yet, the survey also found that very few companies have made significant energy efficiency improvements [italics added for emphasis].
Making a similar point, a recent McGraw-Hill Construction report notes that:
“Despite the fact that retrofit activity remained active during the down economy, only a tiny portion of the U.S. building stock has been affected.”
Source: Business Case for Energy Efficient Building Retrofit and Renovation - 2011
In working with property owners, we find that lack of proactivity in reducing energy cost is generally the result of four assumptions:
1. Improving energy efficiency is perceived to be a complex process.
2. The commercial energy audit process is mysterious.
3. Making energy efficiency improvements is capital intensive.
4. Energy efficiency improvements cannot be made within the normal facilities management process.
Each of these assumptions is proving incorrect as facilities managers take control of their building’s energy efficiency process. They are making energy cost recovery happen, often with minimal (and sometimes no) capital investment.
Facilities Managers are Taking Charge
Energy cost recovery is happening as facilities managers and contractors collaborate through software enabled energy efficiency processes such as the following:
1. Establish Energy Cost Recovery Goals
When an owner and facility manager set energy cost recovery goals, projects are more likely to be successful.
2. Perform a Commercial Energy Audit
A hands-on commercial energy audit identifies where and how a building consumes (and wastes) energy. It provides information that is essential for any energy efficiency project because “You cannot manage what you do not measure.”
3. Identify Alternative Solutions
To obtain the best ROI (return on investment), a facility manager needs to consider the costs and benefits of a full range of potential solutions.
4. Analyze Financial Costs and Benefits
Obtaining the best ROI from an energy efficiency investment requires analyzing the costs and financial benefits of alternative solutions.
5. Present a Professional Recommendation
Real estate owners are impressed by thoughtful, thorough, professional investment recommendations. eAuditPro™ is next generation software that building owners and facilities managers are using increase commercial real estate value.
Using eAuditPro™, facility managers collaborate with contractors to do commercial energy audits, evaluate alternative cost-saving solutions, prepare financial analyses and download one-click professional recommendations. eAuditPro™ is simple, inexpensive and easy to use.
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