Energy Efficiency in Commercial Real Estate

Roughly one-third of a commercial office building’s operating expenses relate to energy use. Now get this: according to Energy Star, the average commercial building captures only 70 percent of its energy usage and the remaining 30 percent is wasted! Furthermore, studies show that employees are more productive, healthier and happier in energy efficient buildings. Therefore, property owners and tenants stand to benefit when both parties commit to energy efficiency in commercial real estate.

Energy Efficiency Makes Business Sense

Whether it’s called energy efficiency, green building or sustainable design, the practice makes good business sense. Energy Star reports that energy efficient buildings rent for approximately three percent more per square foot. (And when an owner is ready to sell, an energy efficient property may go for up to 16 percent more.) Turns out tenants are willing to spend a bit more on rent for a building that offers a better indoor environment. Benefits include:

• Reduced operating costs
• Greater overall satisfaction among employees
• Increased productivity and greater rates of retention
• Reduced number of sick days
• Public perception that a company is a “good citizen”

For building owners, these benefits can translate into tenants that are willing to sign longer leases, which can result in reduced turnover.

Energy Efficiency and Net Operating Income

Improving a building’s energy use can also increase net operating income (NOI) and asset value. Energy Star research shows that a 10 percent drop in energy use could result in a 1.5 percent increase in NOI, and that figure may increase with greater energy savings.

So what does this mean in terms of real numbers? With a 10 percent reduction in energy use, a 200,000-square-foot office building paying $2 per square foot for energy costs could see an additional $40,000 of NOI. Factor in a cap rate of 8 percent and the asset value increase could reach $.5 million.

Energy Saving Tips

Whether you’re a landlord or a tenant, there are simple steps you can take in order to reduce monthly energy expenditures. Consider the following.

Daylight is Free! Make sure shelving and other office furnishings don’t block windows. Also, take full advantage of natural light. Office space that employees use daily should be located along the window perimeter while other spaces—the occasionally used conference room—can be located closer to the core.

Lighten Up. Remember to turn off lights when not in use or when there is sufficient natural light. Alternatively, there is motion-detection lighting. Also, consider replacing old light bulbs with compact fluorescents (CFLs) or limited-emitting diode (LED) bulbs.

HVAC can be Smart, too. Smart technology can be used to control heating and cooling. By closely monitoring the interior environment, this type of control system can ensure that heat or air conditioning is on only when needed.

Go Green. When selecting office equipment, look for Energy Star certification, which indicates greater efficiency. Similarly, laptops use 90 percent less energy than desktop computers; smaller monitors consume less power that larger ones; and laser jet printers are the most energy efficient choice.

The information contained in this article is general in nature and should not be construed as financial, tax or legal advice.  As with any financial or legal matter, consult your tax advisor and legal counsel.