1. The Economics of Green
Retrofits
Nils Kok, PhD
Visiting Scholar, University of California, Berkeley
Assistant Professor at the University of Maastricht
n.kok@maastrichtuniversity.nl
Norm Miller, PhD
Professor, Burnham-Moores Center for Real Estate
University of San Diego
nmiller@sandiego.edu
Peter Morris
Davis Langdon, An AECOM Company
pmorris@davislangdon.us

2. Overview
Green retrofits are taking the lead
• Context: the future is in the past
– Most buildings that will be here in 20 years are already here
– Historically we build new about 2% of the stock each year
• In this session we examine the majority of the renovated
office buildings that became LEED under EBOM
– Note: today most (87%) LEED EB buildings are Energy Star labeled,
something not true prior to 2008
– We provide both a market perspective (survey) as well as market
verified (hard data) analysis of benefits and costs
• Most of the costs in green retrofits are energy related,
but the benefits of greening go beyond energy costs

3. Green talk…and green walk
Financial crisis has slightly dented interest…
6,000 30,000
5,000 25,000
4,000 20,000
3,000 15,000
Counts of the usage of "green building"
in the popular press
2,000 Visitors at "Greenbuild" conference 10,000
1,000 5,000
0 0
2005 2006 2007 2008 2009 2010

4. Green building in the marketplace
…but LEED and Energy-Star-ratings have “exploded”

5. Green building in the marketplace
…but LEED and Energy-Star-ratings have “exploded”

6. The focus has shifted
LEED EB certification now outpaces LEED NC
450
400
350
300
Square Feet (in million)
250
200
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
New Construction (NC) Existing Buildings (EB)

7. A gentle reminder…
2007 – 2009 office market dynamics
Office rents, vacancy rate, and unemployment
Office rents –30%
Vacancy rate +40%
Unemployment +115%

8. The “economics” are ever more important
Financial implications of “greening” buildings
A higher initial outlay…
– Not clear how much higher (0 – 20%)
– But we know to hit LEED Silver is very modest
– “Smarter” building managers, software
… may be compensated subsequently
– Direct cost savings
• Energy savings (up to 35%)
• Emission reduction
– Increased rents, faster absorption, lower turnover
• Reputation
• Corporate preferences (IAQ, corporate policies)
– Lower risk
• Increased economic lives
• Lower risk (reduced depreciation)

9. What do we know so far?
Effects on demand side have been well-documented
Some evidence on a “green” premium:
– Eichholtz, Kok and Quigley (2010, 2011)
– Fuerst and McAllister (2011, 2009)
– Miller, Florance and Spivey (2009)
Some evidence on health and productivity
— Singh, Syal, Grady, and Korkmaz (2010, Am J Public Health)
— Miller, Pogue, Gough, Davis (2009)
Continuing Operations and Management Studies by CBRE & USD
But limited systematic evidence on costs
– Case studies on the economic implications focus often on new buildings
And most research focused on new construction (LEED NC)
– Comparing apples with oranges

10. This study
”The economics of green retrofits”
Identify office buildings built before 1990:
– Multi-tenant
– Renovated to LEED EB:O&M standards
– 2005 – 2010 period
– Matched age and size of samples
Examine:
– Survey attitudes and typical improvements
– Impact on rents and occupancy
– Cost of typical improvements and possible return results

11. Sampling methodology
Pre-1990 office buildings in 14 MSAs
• LEED vs. Non-LEED office building samples
– LEED and Non-LEED building samples drawn from the same 14 major
U.S. markets where we had the largest number of renovated
properties. The total filtered sample included 374 properties.
• Data Source: Costar
• LEED building criteria: Existing, class A or B, built prior to
1990, minimum 15,000 square feet, multi-tenant only
• Non-LEED building criteria: existing, class A or B, built prior to
1990; earliest year built and minimum size varied by market
to match average size and age of buildings in LEED
sample, multi-tenant only.

12. LEED EB:O&M sample locations
Geographically diversified across the US

13. Survey of LEED EB managers and owners
• Survey of LEED EB:O&M building property managers
and owners
• Survey link emailed to 317 property managers in
Costar LEED sample (same sample as above but
some managers oversaw more than one building)
• 41 responses received back (13% response rate).

14. Survey respondents by LEED certification
25% certified, but “Gold” is the standard
5.0% Platinum
Certified
22.5%
47.5%
25.0%
Gold
Silver
Source: Survey of LEED buildings in 14 major U.S. markets

15. Percent improvements related to sustainability
vs. improvements to merely remain competitive
Impossible to
Separate
18.2%
30% or Less
36.3%
100% 13.6%
22.7% 9.0%
40%-60%
70%-90%
Source: Survey of LEED buildings in 14 major U.S. markets

16. Major improvements during retrofit
Strong focus on energy, but water is increasingly important
100%
87.5%
83.3% 83.3%
80%
70.8%
60%
54.2%
41.7%
40%
29.2%
20% 16.7%
8.3%
4.2%
0%
Windows Insulation Floors Roof Irrigation Motion Recycling Water Flow HVAC Lighting
Systems* Detectors Containers Systems
Source: Survey of LEED buildings in 14 major U.S. markets *Includes rain capture systems

17. Major improvements by certification level
Multiple responses allowed
Responses
24
20
16
12
8
4
0
Platinum Gold Silver Certified
Source: Survey of LEED buildings in 14 major U.S. markets *Includes rain capture systems

18. Savings on expense items after LEED retrofit
Reductions in energy and water expenses are universal
100%
100%
95.5%
82.4%
80%
60%
40%
20% 17.6%
4.5% *
0%
0%
Water Energy Other Operating Expenses
*“Other” responses:
Source: Survey of LEED buildings in 14 major U.S. markets Yes No waste removal, recycling,
janitorial, landscaping

19. Change in operating expenses following LEED retrofit
9% noticed an increase (?)
Increased
Impossible to
Estimate
9.1%
18.2%
13.6%
No Change 59.1%
Decreased
Source: Survey of LEED buildings in 14 major U.S. markets

20. Expected ROI sustainable-related improvements
Complex for most respondents
30% or Less
22.3%
55.6%
11.2%
Impossible to
40%-60%
Estimate
11.1%
100%
Source: Survey of LEED buildings in 14 major U.S. markets Note: No responses in
70%-90% range

21. Expected payback in years
on sustainable-related improvements
Impossible
to Estimate
13.6%
Less than 5
10+ Years 9.1% Years
45.4%
31.8%
5 to 10
Years
Source: Survey of LEED buildings in 14 major U.S. markets

22. Market implications?
What does this mean for building owners?
• Why go “green”?
– Regulation
– Stay competitive (tenant demand)
– Improve asset
• The split-incentive problem
– Benefits flow to tenants
– But this should be reflected in rents

23. Rent increase following retrofit
No respondents indicated a decrease in rent
8.0% Increased
Impossible to
Estimate
24.0%
68.0%
No change
Source: Survey of LEED buildings in 14 major U.S. markets

24. Current rental level
Compared to similar but non-LEED buildings
+1% to 5%
21.7%
56.5%
17.4%
No Difference
+6% to 10%
4.3%
+11% to 15%
Source: Survey of LEED buildings in 14 major U.S. markets

25. This is what the data tells us…
Average rents on all LEED EB versus non-LEED with
renovations since 2005
$50.00
Rents Non LEED
$45.00
Rents EBOM
$40.00
$35.00
$30.00
$25.00
$20.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

27. Effects differ per market
LEED EB vs. Non-LEED average rents, 2011, by market
$70
$60
$50
$40
$30
$20
$10
$0
LEED Non-LEED
Source: Costar; criteria: existing buildings, class A or B, built before 1990

28. Effects differ per market
LEED vs. Non-LEED percent leased, 2011, by market
100%
90%
80%
70%
60%
LEED Non-LEED
Source: Costar; criteria: existing buildings, class A or B, built before 1990

29. Let’s dig a little deeper…
LEED and non-LEED are quite similar

30. Model specification
Standard hedonic pricing model
 The market implications of “green” certification in commercial
office properties:
(1)
 Rin is the rent or effective rent per sq.ft.
 Xi is a vector of hedonic characteristics
 Size, age, renovation, class, amenities, public transport, …
 City cn dummies to control for location – 14 separate dummies in the
sample

31. LEED EB certification and office rents
Public transportation matters…

32. LEED EB certification and office rents
Achieved rents higher by about 7 percent

33. LEED EB certification and office rents
Achieved rents higher by about 7 percent

34. LEED EB certification and effective cash flows
Effective rents higher by about 9 percent

35. Financial implications
Eco-investment real estate sector is not only “doing good”
 Ceteris paribus, green buildings
1. Have higher rents by 7% or about $2 per sq.ft.
2. Have higher effective rents by 9% or about $3 per sq.ft.
 Effects go beyond energy efficiency alone
 Respondents indicate investments pass ROI hurdle
 The missing analytical piece…what is the cost of “greening”
properties?

36. Total dollar amount invested in retrofit
Thousands
$2,500
$2,093,846
$2,000
$1,500
$1,000
$438,957
$500
$0
Median Mean
Source: Survey of LEED buildings in 14 major U.S. markets

37. Where’s the capital cost in greening building?
It’s about energy (mostly)
• “Greening” commercial property
– Green cleaning
– Water re/use and reduction
– Transportation
– Recycling
– Energy use
• Optimization/management
• Lighting, heating, cooling, ventilation, plug-load

38. Where does the energy go?
Standard Office Building
• 500,000 GSF
• 12 Stories
• Skin Area:135,200
• Skin Ratio: 0.271
• Lighting load normalized
at 10.7 kBtu/SF/yr
• Plug load normalized
At 15.34 kBtu/SF/yr

39. Where does the energy go?
Miami Anchorage
(Colder climates as you move to the right on the horizontal axis)

40. Where does the energy go?
Matching the Energy Star Score with Energy Consumption

41. How do you get to the target?
Reducing the ES Score from 50 to 80, 90, 95, 100

42. How do you get to the reduction target?
Primary strategies
• Plug load
• Lighting
• Ventilation
• Cooling
• Heating

43. How do you get to the reduction target?
Plug Load
• Baseline: 10 – 20 kBtu/SF/Yr
• Current best practice: 4 – 10 kBtu/SF/Yr
– Energy star/best in class appliances
– Reduced equipment quantity
– Occupancy sensors
• Reduction: 6 – 15 kBtu/SF/Yr
• Cost: negligible if managed in equipment life cycle

44. How do you get to the reduction target?
Lighting
• Baseline: 10 – 15 kBtu/SF/Yr (1.25W/SF)
• Current best practice: 4 – 7 kBtu/SF/Yr
– T8/T5 Lights
– Motion sensors/day lighting control
– Task lighting
• Reduction: 6 – 8 kBtu/SF/Yr
• Cost: $3 - $5/SF (mainly for controls)

45. How do you get to the reduction target?
Ventilation
• Baseline: 6 – 10 kBtu/SF/Yr (1.25W/SF)
• Current best practice: 3 – 6 kBtu/SF/Yr
– Seal ducts
– Optimize/commission air handlers
– Optimize/commission terminal units
– Balance heating & cooling requirements
• Reduction: 4 – 5 kBtu/SF/Yr
• Cost: $2 - $5/SF
• Note: Operable windows are also a possibility but this tends to be a fairly
expensive option.

46. How do you get to the reduction target?
Cooling: Basic Strategies
• Baseline: 15 – 40 kBtu/SF/Yr (Except zones 6 – 8)
• Current best practice: 10 – 20kBtu/SF/Yr
– Replace/Optimize primary equipment
– Improve controls
– Optimize/commission terminal units
– Balance heating & cooling requirements
• Reduction: 10 – 15 kBtu/SF/Yr
• Cost: $3 - $7/SF

47. How do you get to the reduction target?
Cooling: Deeper Strategies
• Deeper Strategies
– Envelope sealing
– Improve glazing: thermal & solar
– Reinsulate exterior cladding
– Chilled Beams or some form of radiant cooling
• Reduction: 10 – 25 kBtu/SF/Yr
• Cost: $10 - $75/SF

48. How do you get to the reduction target?
Heating: Basic Strategies
• Baseline: 5 – 15 kBtu/SF/Yr (Except zones 6 – 8)
• Current best practice: 2 – 8kBtu/SF/Yr
– Replace/Optimize primary equipment
– Improve controls
– Optimize/commission terminal units
– Balance heating & cooling requirements
• Reduction: 3 – 10 kBtu/SF/Yr
• Cost: $1 - $2/SF (over cooling cost)

49. How do you get to the reduction target?
Heating: Deeper Strategies
• Deeper Strategies
– Envelope sealing
– Improve glazing: thermal & solar
– Reinsulate exterior cladding
• Reduction: 2 – 10 kBtu/SF/Yr
• Cost: $10 - $75/SF

50. How do you get to the reduction target?
kBtu/SF/Yr Cost/SF
(Reduction)
Plug load 6 – 15 0
Lighting 6-8 $3 - $5
Ventilation 4–5 $2 - $5
Cooling 10 - 15 $3 - $7
Heating 3 - 10 $1 - $2
Total 30 - 50 $10 - $20

51. How do you get to the reduction target from 50?

52. How do you get to the reduction target from 60?

53. How much do you save? That depends on where you are!

54. How much do you save?

55. How much do you save?
Capitalized Value Impact = $8 to $15/SF
from simply the energy savings

56. Expected payback in years on
sustainability-related improvements
Impossible
to Estimate
13.6%
Less than 5
10+ Years 9.1% Years
45.4%
31.8%
5 to 10
Years
Source: Survey of LEED buildings in 14 major U.S. markets

57. Major improvements during retrofit
Strong focus on energy, but water is increasingly important
100%
87.5%
83.3% 83.3%
80%
70.8%
60%
54.2%
41.7%
40%
29.2%
20% 16.7%
8.3%
4.2%
0%
Windows Insulation Floors Roof Irrigation Motion Recycling Water Flow HVAC Lighting
Systems* Detectors Containers Systems
Source: Survey of LEED buildings in 14 major U.S. markets *Includes rain capture systems

58. Reduction in the carbon footprint?

59. Summing up
The cost-benefit trade-off
• Assuming a triple-net rental contract:
– Benefits
• $2/sf rent increase, $2.7/sf cash flow increase
• At current cap rates of 6.5% this translates into
$30/sf – $40/sf of value increase
• Additional energy costs value impacts in the range of $8 to $15
which accrue to the landlord if a full service lease.
– Costs
• $10-$20/sf for an energy retrofit saving 30-50kBTu, on average
– Other considerations
• Lower insurance costs (i.e., Fireman’s Fund)
• Reduced tenant turnover will save leasing commissions
• Doing good by carbon footprint reduction!

60. Summing up
The cost-benefit trade-off
• The energy part of “green” retrofits seems to make
financial sense
– On average, benefits outweigh costs especially for the
low hanging fruit -- quicker payback options
– Deeper retrofits make sense in raising the overall
quality and competitiveness of the building in a time of
lower opportunity costs – that is after losing a major
tenant when occupancy is low
• Split incentives are not necessarily impediment
– Rents increase, occupancy rates increase
– More use of full service leases
– More evolution of green leases

61. Concluding thoughts
• Our research shows:
– Green retrofits happen, even without accurate knowledge
of ROI
– Data suggests that average benefits exceed average costs
• Negative investment yields for most assets in current market
– Increases attractiveness of energy efficiency
• Reduces fat tail risk (hedge)
• Should have lower return threshold
• Payback versus return – are investments capitalized?
• What other aspects of “green” are priced?

62. Thank you…
…more at PL12 (The Retrofit Triangle) @4pm
Nils Kok, PhD
Visiting Scholar, University of California, Berkeley
Assistant Professor at the University of Maastricht
n.kok@maastrichtuniversity.nl
www.nilskok.com
Norm Miller, PhD
Professor, Burnham-Moores Center for Real Estate
University of San Diego
nmiller@sandiego.edu
Peter Morris
Davis Langdon, An AECOM Company
pmorris@davislangdon.us