Transforming asset values through energy efficiency

Abstract

The prolonged office rental downturn has left many property managers struggling to maintain tenancy and rental rates in their buildings. Renovations for energy efficiency can also improve the tenant experience, potentially costing less than tenant replacement and preserving income levels. In most markets around the USA, tenants have the upper hand in lease negotiations, leading to higher than normal office rental turnover rates. For property managers, tenant turnover is an expensive proposition, leading to drastically lower net operating income and, thus, lower valuation of the real estate asset. Maintaining existing tenants has become a priority for property managers. Energy efficiency related projects can play an important role in maintaining tenancy and enticing tenant renewals. Reducing energy loads translates into either reduced landlord operating costs or reduced effective rent for tenants and, in many cases, both. Utility costs, almost exclusively energy, account for around 25 per cent of building operating costs. Reductions of utility expense by 50 per cent are quite achievable, translating to a reduction in operating costs of over 5 per cent. Energy focused capital projects can also enhance tenant space and amenities. Many projects that reduce operating costs through energy use reductions also directly affect tenants. Projects such as lighting upgrades and window replacement can be part of a tenant space improvement programme while also reducing overall energy use in the future. Savvy property managers will enter into tenant negotiations with a list of possible improvements, knowing what positive operating cost effects can be achieved with what they can offer a tenant to encourage lease renewal.