Energy Audits Gain Traction in U.S. Market: Will Momentum Continue?

It’s not easy going green, but more states, cities, commercial property owners and managers across the country are embracing strategies to make buildings energy-efficient. In increasing numbers, states and municipalities are adopting benchmarking programs that require building owners or managers to submit energy usage data into a computer program. This information can be used to determine a building’s “green rating” by comparing its metrics to those of similar buildings, like the MPG rating for the fuel efficiency of cars. These types of benchmarking programs sow the seeds for energy audits and in some cases, retrofits. Energy retrofits on trophy properties are making for big headlines, like the recent green retrofit of New York’s Empire State Building.

Behind this trend are a mix of regulatory and economic forces that are focusing attention on sustainability and energy use—and ultimately, creating opportunity for environmental due diligence professionals in the area of energy audits. Some large national firms have already established divisions dedicated to performing energy audits to assess a building’s energy efficiency, and recommending improvements that would make it more so. For some players, energy audits have become a growth niche market, but opportunities are not uniform across all markets.

The Green Law Drivers

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About 20 states, cities and municipalities have benchmarking laws on the books with different energy reporting requirements (see accompanying map). California, as is the case with many other types of regulation, was the leader on the green building front. Its Nonresidential Building Energy Use Disclosure Program (AB1103) requires building owners and operators to disclose certain building energy performance data to a prospective buyer, lessee or lender before the sale, lease, financing or refinancing of the building, effective July 1, 2013 for buildings over 50,000 sq. ft. New York City has required annual benchmarking for all commercial buildings larger than 50,000 sq. ft. since 2011. Additionally, New York City has a companion law that requires periodic energy audits and the ensuing work that will bring a building up to certain standards. Philadelphia, Washington, D.C., and Chicago are issuing similar laws for commercial buildings this year. All this legislative activity could make for hundreds of thousands of commercial buildings required to submit energy benchmarking data. And thousands of owners and managers across the U.S. are doing it at their buildings even without the threat of regulation.

By executive order, all federal agencies are required to reduce their energy use and carbon footprint. Laws in several states also require benchmarking for state-owned or leased buildings. “Federal agencies were required under executive order 13423 to benchmark and conduct energy audits of all covered facilities,” says Matthew Munter, senior vice president, EMG. “As a result, we have performed audits for single federal buildings as well as complete agency-wide audits for multiple properties. Recent projects include FEMA, Department of Energy and HUD.” Munter notes that HUD and most others consider water conservation part of an energy audit.

In 2012, HUD’s Office of Public and Indian Housing (HUD) released a new Physical Needs Assessment (PNA) tool that impacts every Public Housing Authority (PHA) in the U.S. and its territories. Ultimately, this means that PNAs for PHA sites will require an energy audit. “HUD has pending regulation that will require the energy audit to be completed in conjunction with the required five-year capital needs assessment and resulting capital plan,” says Munter. “This regulation is in final stages and was expected to be published in the federal register this spring, but was delayed by sequestration.”

Specifically, the HUD PNA tool is intended to:

  • Further the objectives of the Energy Policy Act;
  • Produce data on green activities for the Capital Fund in support of HUD’s High Priority Performance Goal to create energy-efficient housing;
  • Enable PHAs to better assess the position of their portfolios to take advantage of additional opportunities; and
  • Align the PNAs and Energy Audits to happen on the same cycle.

Investing In Sustainability

In addition to regulatory drivers, more investors have started to consider sustainability in their decision making. “Energy audits have been a fast growing and big part of our asset management business over the last five years,” says Munter. Studies have pointed to the advantages that sustainable buildings have over less energy-efficient properties in terms of lower operating costs, higher occupancy rates and better price appreciation, just to name a few.

Still, sustainability has not trumped location and quality as a primary consideration for investors–yet. That’s changing, says Nate Gillette, AIA, LEED-AP, CEM; vice president and director, Energy Finance Analytics, LLC. “The old real estate adage says it’s all about location, location, location, but it’s not anymore. Businesses considering multiple different spaces will take energy efficiency and green building into account almost every time. And why wouldn’t you? A building that is green gives companies marketing leverage, reduced operational costs and more productive employees.”

“It’s a win-win situation,” Gillette continues. “From my time in real estate development, I personally witnessed tenants who were happier in green and energy-efficient spaces, and turnover was lower than for traditionally built spaces. That’s a win for any developer.”

A survey in 2011 of green buildings in cities including Boston, Chicago, Dallas and Washington, D.C., found that the buildings had above-market occupancy and rental rates and an average reduction of energy costs of 21 percent. And during the economic downturn when greening’s appeal faded somewhat, green buildings still outperformed those of the general market. Not to mention that the pressures of the recession focused the light of scrutiny on operating costs and ways to reduce them.

Consider the numbers: According to Nils Kok, an internationally known benchmarking expert, green buildings collect rents that are 3 to 5 percent higher than otherwise identical buildings. Green building prices are 11 to 19 percent higher than their traditional counterparts (based on data for LEED and Energy Star-certified properties).

Energy Audits: A Growing Market?

But even as investors increasingly factor energy-efficiency considerations into their decision making, and more state and local government agencies adopt energy benchmarking regulations, the U.S. lags behind Europe and the U.K. on the sustainability front. One key difference is that across the pond, energy benchmarking laws have been in place on a national level since 2008 or 2009. Here in the U.S., states and municipal governments are the ones taking action so the pace of change is slower. Investors in Europe are also using the Global Real Estate Sustainability Benchmark (GRESB) rating system to determine the sustainability of properties they are acquiring. The system is pushing investors toward green buildings, according to NREI. In the U.S., only a few large public investors, like the California State Teachers Retirement Systems, and a number of niche green portfolio investors are specifically targeting green investments at this point.

Evidence that green building considerations are inching their way into investment decisions is coming in the form of another about-to-be-released index, the FTSE NAREIT USGBC Green Real Estate Index. A collaboration among FTSE Group, NAREIT and the USGBC, the index includes 78 publicly traded REITs and will provide investors with a credible set of criteria for identifying an environmentally responsible property using data back to 2008. The methodology utilizes both LEED and Energy Star designations, and all information is at the property level and validated by a third party.

Multinational corporations are also driving a growing interest in green property investment. Large firms like Bank of America, Proctor & Gamble and others are openly embracing energy-efficiency improvements as a way to provide better work spaces for employees and build or maintain a strong environmental image in a culture where that is increasingly important.

While energy efficiency is gaining traction in the U.S. market, energy audits have not become a booming business just yet. Making an argument for their place in the process shouldn’t be too difficult, though. “You start to get the most traction when you build a business case around being ‘green’ and highlight economic benefits as well as environmental benefits,” says Gillette. “If you can’t appeal to someone based on being environmentally friendly, you can certainly appeal to them about saving money. No one thinks that is a bad thing.”

Where might energy audits fit into the due diligence process? They may not be poised to become a standard addition to Phase I environmental site assessments just yet. “Outside of HUD and Fannie government guaranteed lending programs, we are not seeing demand for energy audits as part of lender due diligence,” says Munter. Instead, he notes, “Energy audits are sometimes stand-alone studies, but increasingly are being procured as part of a long range capital planning exercise.”

EnergyAudit---Image2And where there’s regulation, there’s a need for energy-related services so opportunities are greatest in metro areas that already have disclosure requirements on the books. Attention on a building’s energy footprint looks like it will only intensify, particularly as more European investors look to place their capital in U.S. commercial real estate, looking at the same metrics they are used to considering overseas. “Energy inefficient buildings are quickly giving way to their energy-efficient and green counterparts, and that will continue to regulate pricing and desirability in the market,” says Gillette.

So, while sustainability and energy performance are not yet a mainstream consideration in property investment decisions, momentum is certainly building. Energy audit opportunities exist and will likely continue to grow as more legislation is put forth and more investors and real estate firms consider a building’s energy rating in their decision-making.

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