In a recent blog, How Many Miles Per Gallon Does Your Building Get? The Ratings Game Comes to Buildings, NAIOP member Seth Jaffe of Foley Hoag makes some observations about the recent report issued by the Institute for Market Transformation. The report describes the existing efforts to rate the energy efficiency of commercial buildings in the country.
Although I appreciate the reasonable dose of skepticism that he expresses, I am a bit more doubtful of the intent of the pilot program originally drafted by our state Department of Energy Resources. The DOER report, issued in December 2010, states that the intent of an energy rating program is to devalue properties that are less energy efficient (e.g. older building in Gateway Cities) so that there would be an “incentive” for owners to upgrade their buildings prior to financing or sale. This is not the same goal as providing information so that a building owner can make the best economic analysis to determine which energy efficiencies make financial sense.
The decision to invest in building upgrades is dependent on a number of factors including market rents, educated tenants, costs and benefits of efficiency measures, availability of capital, competition, etc.
New buildings are now much more energy efficient than their predecessors. Developers over the past five years have produced many buildings with LEED certifications. That said, we all know that the big challenge is with less efficient existing buildings.
However, the best incentive for upgrading that building stock will be an improving economy. As demand for space increases, rents move up, energy costs continue to rise, and the price of efficiency technologies drop, we will see a major investment in building upgrades.
As we have said before, mandates are not the answer. The market will lead the way and there is no doubt that, on this particular issue, regulators will do more damage trying to push businesses into expenditures ahead of their economic feasibility.