Kick-Starting Energy Efficiency and Green Building in the Commercial Sector

GreenOrder

Kick-Starting Energy Efficiency and Green Building in the Commercial Sector

As the draft stimulus package (the American Recovery and Reinvestment Plan) winds its way through Congress, experts are noting that as expected there is a strong emphasis on energy efficiency and green jobs in the package, with a number of items directed at the building sector. Laudable as the proposals are, incentives targeting energy efficiency improvements in the commercial building sector seem to come up short.

The majority of the proposed stimulus dollars aimed at the building sector are focused on public building retrofits ($6 billion for federal building energy efficiency projects) and weatherization and efficiency in various parts of the housing sector (~$9.5 billion). These incentives have the potential to result in considerable environmental benefits while stimulating significant activity in the building retrofit sectors -- energy service companies, engineering consultants and energy efficient product manufacturers should be gearing up for significant work, particularly on the 75 percent of public buildings that President Obama has stated he wants to make more energy efficient.

The proposed stimulus appears to fall short in the commercial building sector (which includes roughly $4 trillion worth of buildings), however, where the historical tenant-landlord split incentive problems mean that a large effort is needed to change business as usual. While roughly $7 billion in State Energy Program funds and Energy Efficiency and Conservation Block Grants could be used at the state and local levels to impact the commercial building sector, there are many other programs that will likely consume a considerable portion of these funds leaving only a small portion for the commercial building sector. Savvy real estate owners and investors who already have an eye on energy efficiency will likely be able to identify and become eligible for additional incentive programs in their area, but it is unclear if the incentives will be widespread enough to change behavior among the majority of owners and operators who have not already seen the value in energy efficiency and adopted property management practices to reduce their energy use.

While the debate on the stimulus will surely go back and forth in the coming days and the proposals for building sector energy efficiency incentives will be adjusted, it is becoming increasing clear that the commercial real estate industry is sailing into a much larger financial storm.

The Real Estate Roundtable estimates that approximately $400 billion of commercial mortgages will mature in 2009 and need to be refinanced (I have a seen a range of estimates -- from $300 billion to $600 billion). With the questionable availability of financing, there is a very substantial risk that the government will need to bail out the real estate industry as it has done the financial sector -- with a direct injection of capital for loan guarantees or even the direct purchase of commercial real estate-backed debt. Already industry players are lining up and asking for this to happen.

While a bailout of the commercial real estate sector is surely controversial and debatable, it is looking more and more likely. Whether the money comes through TARP (the Troubled Assets Relief Program), TALF (Term Asset-Backed Securities Loan Facility), or some other yet to be named and abbreviated entity, it will likely be in a large enough sum to have an impact on the market, and hopefully structured in such a way so as not to reward past irresponsible lending, but provide enough liquidity to keep the market from completely collapsing.

Given this bigger picture, the new administration would do well to think about how to use such a bailout to have a much larger impact on the building sector beyond the basic energy efficiency incentives included in the stimulus package. This action would not only keep the industry afloat through the crisis, but would improve the overall efficiency of our building stock -- resulting in better ongoing economic performance.

One way to do this is to require that, for all buildings refinanced using loan money borrowed, guaranteed or otherwise backed by federal funds, the owner:
• Benchmark the building using the EPA Energy Star Portfolio Manager (free)
• Conduct a low cost building energy audit (cheap)
• Undertake any upgrades uncovered by the audit that have a payback of two years or less (makes good financial sense, and might make the owner eligible for incentives included in the stimulus bill).

A more aggressive stimulus could provide more attractive loan rates based on the percentage of improvement over the Energy Star benchmark achieved by the building year over year.

This would get a large number of building owners (many of whom have never thought about energy efficiency) benchmarking their buildings and adopting some of the basic best practices that are needed for them to start seeing the economic benefits of energy efficiency.

In addition to providing an incentive real estate owners can't refuse, the administration could use the broader financial bailout as a way to create tenant demand for energy efficient green buildings. For example what would happen if the government required that any financial institution, or other entity, receiving government TARP money or other bailout, adopt the General Services Administration's green building requirements? These requirements essentially state that any newly constructed buildings, or existing buildings in which they lease space, must strive to achieve LEED Silver. This would quickly create tenant demand for green spaces in major downtown markets across the country.

Buildings account for nearly 40 percent of our energy use and greenhouse gas emissions (and almost 70 percent of our electricity). The stimulus package should do a good job of reducing the impact of the public buildings. And if the administration is really serious about creating green jobs, stimulating the economy and creating a more energy efficient less polluting economy, we should consider taking some of these bolder steps to jumpstart the greening of commercial real estate as well.

Pete Atkin is an associate at GreenOrder, an LRN company. The strategy and management consulting firm has helped leading companies turn sustainability into business value since 2000. Have a question or thought to share with Pete about his posting? Email him by clicking here.