Building Efficiency Cuts Costs and Boosts ROI

October 6, 2016 By Richard Gerbe

Richard Gerbe

This article is part of a series on Why Building Efficiency Matters.

Commercial buildings are incredibly inefficient, resulting in massive amounts of wasted energy, resources and expenditures. In fact, the average commercial building wastes about 30 percent of the energy used to run it. And since operations of commercial buildings account for 19 percent of the energy and 36 percent of the electricity used in the U.S. annually, and cost more than $190 billion in energy every year, improving building efficiency can go a long way in curbing energy consumption and costs.

What does this mean for financial savings and return on investment (ROI)? The Rocky Mountain Institute found that energy costs can be reduced by $1.9 trillion with building-efficiency investments of $0.5 trillion (2010 present value), which translates into a 38 percent reduction in energy costs, a net savings of $1.4 trillion and a nearly triple ROI. Further, the U.S. Green Building Council (USGBC) found that green-building owners boosted their ROI by 19.2 percent for existing projects and 9.9 percent for new ones.

How can building-efficiency measures cut costs and realize such significant ROI upturns? The answer is by reducing operating expenses, increasing property value and improving business productivity – therefore showing that building efficiency matters. Here’s how these achievements can be accomplished:

Reducing Operating Expenses

Inefficient building operations are the main culprit of energy waste, and therefore represent the low-hanging fruit of where costs can be recuperated through efficiency measures. And it all starts with the heating, ventilation and air conditioning (HVAC) system’s heating and cooling efforts, which represent about 41 percent of the total energy used by commercial buildings in the U.S. Therefore, increasing HVAC efficiency can have the most impact on cutting down the resources used to run a building.

In fact, the USGBC found that LEED-certified buildings have been proven to use 25 percent less energy and realize a 19 percent reduction in aggregate operational costs in comparison to conventional buildings. This results in operating expenses being decreased by 13.6 percent for new construction and 8.5 percent for existing building projects. What’s more, green buildings can qualify for numerous efficiency rebates that can serve to further boost cost savings.

Increasing Property Value

Building owners who invest in building-efficiency measures can substantially increase property value, especially when an aging HVAC system can be upgraded. This is done by: 1) Increasing net operating income (NOI), which is total income minus operating costs and 2) Decreasing the capitalization rate (cap rate), which is the ratio of NOI to property asset value. The cap rate is the anticipated risk-adjusted return used by real estate professionals to measure the relative worth of a building’s cash flows.

What does this mean for property value? NOI is increased – and thus improved – since building efficiency lowers energy and operating expenses, as well as expands lease potential due to tenants’ willingness to pay more for a greener building. The cap rate is decreased – and thus improved since a higher cap rate indicates a higher-risk investment – since enhanced building efficiency minimizes risk by limiting exposure to fluctuating energy prices and regulatory issues, which can spur volatility in cash flows.

This adds up to tremendous value for building owners. For example, the Energy Efficient Buildings Hub found that green buildings can increase rents by six percent and sales prices by 15 percent. Specifically in Los Angeles, a study found that rents for conventional buildings are at $2.16/sq. ft., whereas LEED buildings can generate $2.91/sq. ft. And on the sales side in Los Angeles, conventional buildings sell for $244/sq. ft. and LEED buildings can fetch $329/sq. ft.

Improving Business Productivity

The productivity of a business can be directly correlated to building efficiency since research has shown that high-performance buildings boost staff effectiveness and curb absenteeism. For example, one study found that more rigorous environmental standards increase labor productivity by 16 percent. Another study found that U.S. businesses could save as much as $58 billion in lost sick time and an additional $200 billion in worker performance if improvements were made to indoor air quality.”

A more efficient building is also important for a company’s brand and recruiting efforts. Being housed in a green building demonstrates a company’s commitment to not only a more sustainable world, but also to employee satisfaction by creating a healthier work environment. And the data back this up since a study found that 94 percent of employees are happier at work with better indoor environmental quality.

In Sum

Waste is the name of the game when it comes to the operations of commercial buildings in the U.S., resulting in countless sums of lost resources and investments. But, it doesn’t have to be this way. Implementing building-efficiency initiatives is the simplest and most effective means of reversing the inefficient course commercial buildings are on today, thus leading to lower costs and greater ROI for building owners.

Richard Gerbe is a 2016 Consulting-Specifying Engineer 40 Under 40 Award Winner and Co-Founder of HIGHMARK, a pioneer in building efficiency focusing on HVAC, energy services and water management. For more information, visit: www.highmark-ny.com.

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  14. David W. McNamara (Project Leader) and Brock Birkenfeld, Peter Brown, Nicole Kresse, Justin Sullivan, Philippe Thiam (Authors), Quantifying the Hidden Benefits of High-Performance Building, International Society of Sustainability Professionals, December 2011, https://www.sustainabilityprofessionals.org/system/files/Valuing%20Green%20Building.pdf.

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