Harvard economist Robert Stavins recently published a study assessing the impact of energy disclosure laws requiring real estate owners to perform periodic energy analysis on their buildings. As Boston considers passing its own energy benchmarking ordinance, Stavins studied other existing programs and concluded that "there is currently no real evidence that these mandatory programs lead to any changes whatsoever in energy use."
Then we read the fine print. The study, funded by the Greater Boston Real Estate Board, was neither peer-reviewed nor academically published. Oh boy.
So let’s take a step back and consider the following timeframes.
New York City’s and San Francisco’s energy benchmarking programs only went live requiring reporting a year ago; Seattle, Philadelphia and Austin have started within the last year; and Washington, D.C. and Minneapolis just launched in the last few months. Which means Boston’s Green Ribbon Commission is actually late to the party in pushing to get this new policy passed.
To convince a building owner to implement an energy efficiency upgrade often takes an average of twelve months. Then we install the project a few months later. Then the savings need to materialize and be measured. A utility study that independently measured results could probably be delivered a year after that -- then it could be given to Professor Stavin’s team so they could draw their own conclusions.
Get the picture? It takes at least a few years for this sort of adoption to be fully measurable.
The report also asserts that similar programs in Europe have no academic studies validating such a policy’s impact.
While many countries are implementing their own programs, most of these have also developed in the last few years. It may have been better to analyze the adoption in Australia, whose benchmarking ordinances were initially introduced in 1998, likely making it the world’s longest-standing program. And back here in the U.S., there are studies countering Stavins' “too early to tell” opinion: check out the Georgia Tech study, the California PUC study or the Facilities Manager review.
Pushing this argument further, Larry Harman’s Boston Globe editorial suggested that the new policy would “aggravate” Boston’s real estate owners. He opined that the policy of forcing expensive energy audits for buildings that are generally older than those in the rest of the country, with fines for non-compliance, would just be unfair.
Yes, Boston’s built environment may be old. But in real estate, reducing a building’s operating costs adds directly to the property’s income, thus increasing the value of that property. Massachusetts has some of the highest energy prices in the country and ranks number three (behind CA and NY) in providing taxpayer-funded energy-efficiency incentives. In our experience doing work across the country, the financial return for upgrading older buildings in Boston is probably one of the best in the U.S.
You can’t catalyze energy efficiency change if you don’t first measure and report energy consumption. Building energy benchmarking is only a first step, but it can change consumer psychology through new awareness, which in turn can drive behavior change and investment in energy efficiency.
Economists normally search for the social drivers. Stavins' colleagues down the hall in HBS’s marketing department must have already analyzed the now-famous Oberlin college dorm research study wherein dorm residents, given their own energy usage information, competed to reduce their consumption, as well as the consumer research confirming the reduction impact when consumers are told how much energy they consume relative to their neighbors. Putting a ranking on a commercial building does the same thing.
But Stavins comes at it from an economist’s viewpoint, not a consumer behavior angle, so we'll stick to the business and the financial implications.
Let’s consider a 250,000-square-foot office building in Boston.
At an average value of $250 per foot, the building would be worth around $62.5 million. Its annual real estate taxes might be $2 million, common area maintenance costs $2.5 million and utilities $1 million. Let’s assume the owners have 50 percent leverage and expect to make 15 percent on their equity, or $4.7 million in earnings per year.
Running an Energy Star Portfolio Manager model on this building might cost $2,000. A full-blown energy assessment (likely subsidized for 50 percent of its cost by the utility) might be another $5,000 to $10,000. (By the way, energy audit costs are only going down, as we now see a number of new startups focused on providing high-volume, low-cost energy audit tools.)
So over a five-year period, if the owner runs an Energy Star model every year and performs one energy assessment, the added cost for Boston’s energy benchmarking ordinance would be approximately $15,000 to $20,000.
A typical energy assessment for this size of building might identify HVAC and lighting upgrades that save 15 percent of the building’s utility costs ($150,000). The investment would be $450,000, but the utility would support a third of the project’s cost, producing a two-year payback on the owner’s net $300,000 investment. The study would likely identify no-cost behavior changes that save another 3 percent of the building’s energy costs ($30,000).
After the energy-efficiency upgrade and behavior change savings, the building now earns $4.9 million and is worth $2.4 million more using a Boston Class A cap rate of 7.5 percent. (Income taxes would also be reduced using Federal EPAct accelerated depreciation, but that’s icing on the cake.)
So let’s recap.
Boston implements a new real estate policy and this owner is forced to spend around $20,000 over five years to comply.
If the owner decides to invest nothing, the energy assessment alone will likely show a way to save $30,000 per year.
If the owner decides to invest in upgrades, the $320,000 investment over five years will add $180,000 in operating income each year, and increase the property’s value by over $2 million if the building is sold.
When you consider typical government compliance policies, does this one really seem that unfair?
Jon Guerster is the CEO of Groom Energy Solutions. This piece was originally published on Groom's blog.