Good News for Building Energy Retrofits

Good News for Building Energy Retrofits

The U.S. construction industry needs all the good news it can get.Three years after the start of the economic downturn, conditions remain bleak. As reported in a new study by the American Institute of Architects [PDF], construction spending in the U.S. has declined by 27 percent since 2008, an economic loss of close to $300 billion. (An additional $470 billion in construction-related spending also has been lost.) Private construction projects have been particularly hard hit, declining by more than a third, while public construction is down roughly 10 percent.

The construction industry has been adversely affected by tightened financing conditions, AIA reports. As of mid-2011, the volume of outstanding construction and development loans was down by 15 percent from December 2010, and stood at less than half the volume outstanding at the close of 2008.

A poll of AIA's members indicates that about 21 percent of construction projects are stalled due to financing problems, versus 11 percent in 2008. About half the stalled projects are comparatively small, valued at $5 million or less, and 85 percent are under $25 million. Many of the stalled projects are slated for green certification (26.5 percent) and slightly over a third are renovations.

Against this discouraging backdrop, any good news is welcome. The following developments have cheered me as we enter the holiday season:

1. On December 2, President Obama announced the results of his Better Buildings Initiative. The President has issued a Presidential Memorandum directing federal agencies to enter into at least $2 billion in energy savings performance contracts over the next 2 years. The cost of the contracts, which will finance energy retrofits for federal buildings, will be recouped by energy savings. On top of that commitment, 60 private organizations have pledged almost $2 billion in capital for energy retrofits in the business sector.

Some of these projects may have happened in any case and the $4 billion volume is only a small fraction of U.S. construction spending lost since 2008. But the Better Buildings Initiative has put a much-needed focus on building energy retrofits as a vehicle for job creation and economic growth.

2. A $2 billion statewide PACE (property-assessed clean energy) program in Florida is being readied for operation in mid-2012, backed by a significant court decision validating the use of special tax assessments to back bonds financing commercial and residential energy retrofit loans. According to the court, PACE assessments are a valid use of government taxing authority. (A 2011 report of the Environmental Finance Advisory Board of the U.S Environmental Protection Agency, whose expert committee I chaired, makes the same point.)

The Florida ruling, binding on private lenders and government mortgage finance entities, including Fannie Mae and Freddie Mac, also prevents a financial institution from declaring a default or accelerating a loan because the property owner has participated in the Florida PACE program.

Construction financing alternatives such as the federal Better Buildings Initiative and Florida's PACE program are much-needed first steps to correct the U.S. construction financing shortfall. Even better, the payback and return data from such programs should serve as a template to help lenders develop new building energy retrofit finance platforms on a national scale.

Building construction photo via Shutterstock.