The real estate industry has always had two competing imperatives – build and maintain. Decarbonization and energy efficiency projects usually fall to the “maintain” department, while the heaviest capital budgets are reserved for “build” projects.
In a recent LinkedIn post, Brendan Wallace, the head of leading real estate technology investment firm Fifth Wall, estimates “the industry has put off about two decades of energy maintenance on their assets” in order to focus on relieving short-term pressures like occupancy rate targets and asset valuations. Meanwhile, decarbonization efforts are consistently sidelined unless required by tenants who themselves have prioritized a reduction in the carbon output of their supply chains.
The Tipping Scales
The scales will soon begin to tip, though, in jurisdictions that charge owners for their buildings’ inefficiency. “The introduction of carbon fines,” says Wallace, “and carbon neutrality laws will likely lead to a shift in owner behavior, as they begin to see the financial impact of non-compliance on their bottom line.”
It’s like a real estate tax, he says, which makes it possible to apply a capitalization rate on the fines as owners watch the impact on cash flows. This is a problem with an obvious solution – get into compliance quickly. But the sheer volume of that 20 years of deferred maintenance makes it an expensive one for even the most well-intentioned owners.
There is absolutely a retrofitting imperative in the places where the fines are largest, but there isn’t enough money in the margins to haphazardly reallocate to a never-ending list. Owners need to know where to start and they need to see returns quickly. A quick analysis of operational data by a keen energy engineer will uncover high-value, easy-to-remediate issues that can be used to establish a repeatable energy retrofit process for real estate operations teams. Like anything, it’s about getting started but with the surety that you’re moving in the right direction. In some cases, initial energy conservation and compliance measures can pay for themselves and even fund the expansion of retrofit efforts across a portfolio.
InSite has this experience, working with leading owners in healthcare, hospitality and commercial real estate long before these new real estate taxes were even a motivator. With a reliable, data-driven process, our energy engineers prioritize maintenance efforts against the factors that matter most to you. If you’re concerned about carbon fines in regions across your portfolio and unsure where to start on your deferred maintenance backlog, we can help.
