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Apr 23, 2014

Home Is Where the Energy-Efficient Heart Is

Why deep retrofits make financial sense

 

Let’s say you are a CFO or finance professional. How often do you think about your company’s real estate? The typical answer is “not often,” and when you do, it's probably just a headache—something is not working, there’s not enough space, there’s too much space, the real estate team wants more capital, or the Board wants something different (usually in a place where it’s impossible to find). Yet finance decision makers should think about real estate more often, because a company’s real estate footprint affects that company greatly, often in ways of which people are not aware.

Improving real estate through deep energy retrofits can bring great value to businesses. Finance decision makers need to think about the extra value deep energy retrofits can produce, beyond the obvious energy savings. Few of these benefits are clearly visible to the finance professional, but most should be.
RMI’s recent Deep Retrofit Value report frames and illustrates how to calculate these benefits—both the more obvious and observable and the less obvious that require more detailed research. The fact is that these value levers are things most companies not only do not think of often enough—many do not think of them at all.

The benefits of a high-quality office space

When we conduct business in a mediocre office space, we are generally unaware of what truly high-quality space feels like. Friends at Stockland, a large real estate development firm in Sydney, Australia, emphasized this when they showed me their fabulous, deep green retrofit of their own office space.

It was not cheap space—it frankly cost them a little extra upfront. As they make the case to clients of what to build and how to build it, they often find clients initially balk at the one, two, or three percent cost premium for going green (largely driven by expensive floor plate cuts to create better air flow and daylight, which the subsequent cost savings from equipment reductions cannot always offset). However, after a few minutes of a tour of the building, the clients say, “If I pay a tiny bit extra I get all this? A totally different feel, a work environment that attracts instead of repels, better comfort, fresher air? A place my customers want to visit? I’ll take two.”

Of course, customers often do not even have the words to describe how they feel or why that is the case. They just know, “This is worth it. This could be our home.” And Stockland wins twice. It gets more, better-quality business, and its employees get to spend their time in a comfortable, healthy building.

These ideas about spaces and how we relate to them and how they create value for companies are perhaps most evident when new real estate is being designed. But most of us occupy—and will continue to occupy—existing buildings, not new ones. Like Stockland’s pre-visit customers, most people are cautious about spending extra money on their buildings. Yet the fact is we are giving up a lot of benefits by not investing in existing buildings at a level that truly maximizes value. Some of these are the same benefits that Stockland’s customers saw when they walked through a deep retrofit. Should today’s businesses consider such retrofits for their own properties? And if so, when and at what price?

Calculating the benefits

RMI’s buildings work has been attacking these issues for several years. Our RetroFit Depot provides a plethora of information for people ready to do retrofits and wanting to learn how. But the answers to the questions above are best addressed by starting to think about value. RMI’s practice guide How to Calculate and Present Deep Retrofit Value details nine benefits that we categorize into three groups.

The first group relates to very traditional, “hard” real estate concerns: reduced development costs, operating costs, and project risks, as well as higher property-derived revenues like increased rents from leases. The Deep Retrofit Value report details these levers, how they largely revolve around risk management, and how deep energy retrofits can substantially lower risks. This is because the insights gained from the retrofit analysis will inform the operations and capital projects for the building over the next 10 years or more, optimizing where and how real estate dollars are spent. Comparing this energy retrofit approach to one-off, piecemeal, mismanaged, or last minute interventions—which inevitably result in too much expense, on a life-cycle basis, for too little quality—reveals how substantial deep retrofit value really is.

The second group is about employee-related benefits such as reduced recruiting efforts and costs and better employee retention. Though perceived to be intangible, firms like Google that are studying these matters intensively and firms the world over that have fully understood the role of “place” in employee comfort, satisfaction, and company culture have long known that investments here can pay off substantially. RMI’s report presents tools to use to better describe, make the case for, and in many cases quantify what these benefits might be worth—an ability that without which many services/employee-intensive businesses may soon lose competitive advantage.

The third and final group of benefits is also related to intangibles that many companies invest in every day, but are seldom correctly linked to buildings and space quality. These include promotional and marketing costs for corporate image and branding, the additional customer access (or in some segments the right to “play” at all) resulting from investing in genuinely and visibly deep-green buildings, and even company-wide risk mitigation. PNC Bank is a prime example—a Notre Dame study of the PNC branch portfolio found that consumers opened 458 more deposit accounts and deposited $3 million more in a LEED branch than in a non-LEED branch.

PNC, which among its numerous LEED buildings is also owner of the first net-zero-energy bank branch, also demonstrates that much more value is available using a portfolio approach rather than just focusing on one or two buildings.

All of these benefits are part of the daily discussion in finance departments in businesses around America. Sadly, the opportunity that provides them—making significant upgrades to buildings, including deep and insightful changes to energy efficiency—is seldom part of those exchanges. RMI strongly recommends linking deep energy retrofits and energy planning to the benefits of excellent building space, and giving your team a great home. After all, your team’s home is where their energy-efficient heart is.

Image courtesy of Shutterstock.

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