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What Drives Investment in Building Energy Performance

Energy-efficient buildings have lower operating costs, but also tend to command higher rents and enjoy higher occupancy and tenant retention levels than traditional buildings. A recent Energy Efficiency Survey, developed by the Institute of Real Estate Management (IREM) in collaboration with the Institute for Market Transformation, looked at what motivates office building owners to improve energy performance. The survey focused on how financial methods used to evaluate capital expenditures impact decisions to invest in improving energy efficiency.

IREM and the Building Owners and Managers Association (BOMA) distributed the survey to their members and received 307 responses, which represented 1.7 percent of the total survey distribution. The survey found that most respondents use simple payback calculations to evaluate energy efficiency projects, usually basing decisions on recovering the investment in one to two years. The study revealed that this simple payback does not capture the full benefits of energy efficiency, like Net Present Value (NPV) analysis, which incorporates potential revenue increases from higher rental income.

The survey also found that building owners are more inclined to invest in energy-efficiency improvements if they can charge higher rents, particularly in split-incentive situations, where energy-cost savings accrue solely to tenants. Split incentives had posed a barrier to investing in improving energy efficiency, but this was overcome with the “green lease,” which requires tenants to participate in energy and water conservation programs.

More here.

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