Increasing Commercial Real Estate Profitability with Energy Efficiency Upgrades
- May 18, 2022 6:44 pm GMT
Due to the growing demand for sustainable buildings, the Commercial Real Estate (CRE) industry has a timely opportunity for increasing overall portfolio financial performance.
Property owners and managers who take advantage of this trend will find it easier to attract and retain tenants resulting in higher occupancy and lease rates, as well as incurring lower operating expenses. The resultant improvement in Net Operating Income (NOI) drives property values and marketability.
This trend is best illustrated by two recent quotes from industry publications. When viewed separately they don’t attract much attention. When viewed collectively they signify a timely strategy for forward thinking owners and investors in the CRE arena.
The first is from a document created by The Nuveen Company entitled Think office: The evolution of office investment opportunities. Here’s the quote:
“Real estate investors have a growing demand for sustainable buildings and investing responsibly is becoming a ‘must have’ in investment criteria. High-performing, energy-efficient, and healthy buildings not only reduce operating costs, but enhance business productivity through occupant well-being and attract tenants by offering a cutting-edge workplace experience."
Sustainable buildings incorporate “green” renovations, energy efficiency upgrades and environmentally friendly technologies. The main point of the document stresses that when energy efficiency initiatives are a component of a commercial building, it becomes more profitable and marketable. The value increases, and it’s easier to acquire tenants who stay longer. Investors achieve better results!
A significant barrier to the creation of sustainable buildings has typically been the upfront cost associated with needed upgrades. Improving a building’s energy efficiency often requires a complex set of resources, technologies and services which are capital-intensive. A focused, cost effective energy efficiency financing option is often the missing link. This is especially true if the proposed energy technology is perceived as “too cutting edge” such as energy renewal projects, i.e., solar and geothermal, which have longer payback periods than most energy efficiency upgrades
When the trend towards sustainable buildings is linked with energy-focused financing, a major barrier is removed and the opportunity becomes significantly easier to implement. The next quote is from an article by the organization Hotel Management. It illustrates a specific efficiency financing strategy:
“Simply put, C-PACE financing...is a low-cost, long-term financing tool designed to fund environmentally friendly features for renovation and development projects.”
PACE stands for Property Assessed Clean Energy. It is an “energy focused financing” option for clean energy projects! The “C” in C-PACE represents commercial, as opposed to residential, applications. It specifically funds the sustainability renovations that make commercial property more marketable and a better investment. PACE loans are repaid by a property tax assessment. This is how streets, sidewalks, sewers and other improvements are typically financed.
The terms of PACE loans are for 15 to 25 years at fixed interest rates. These terms are much more favorable than those of traditional funding options, and easily accommodate the longer payback periods of certain energy efficiency upgrades. PACE loans provide 100% financing, are non-recourse (the property secures the loan), “run with the land” therefore eliminating the need to pay off the loan if the property is sold. PACE loans can be considered “off-balance-sheet.” By not being shown as a long-term liability, this frees up the owner's borrowing capacity for other projects.
PACE is a game changer for Commercial Portfolio Managers, or property owners wherever PACE is available. The fact that PACE enables a building owner to undertake an energy efficiency project that is cash flow positive will resurrect many that have been shelved due to capital and ROI concerns, as well as open the door to many new ones.
Building owners and managers who use the unique benefits of PACE financing take advantage of the growing appeal of sustainable buildings stand to reap financial rewards.
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