Report details how to determine the full value of investments in building efficiency
Report details how to determine the full value of investments in building efficiency
On January 22, 2014 the Rocky Mountain Institute released a report, “How to Calculate and Present Deep Retrofit Value: A Guide for Owner-Occupants,” that defines the non-energy costs and benefits, risk reductions and overall value of deep energy retrofits.
Deep energy retrofits provide substantially greater energy savings—often reducing a building’s energy consumption by up to 50 percent—than traditional retrofits and other building efficiency upgrades. While deep energy retrofits in the United States and around the world are attractive investments, they still receive far less attention and capital than they deserve. This is partly due to a narrow definition of their value, typically focused on energy cost savings alone, as well as the confusion and uncertainty around how to calculate, present and justify such additional value streams as part of a retrofit capital request.
This report provides a structured and evidence-based methodology for determining the costs and savings of many other value streams, from additional operating cost savings categories to revenue drivers like employee comfort, health and productivity, and even market and reputation risk mitigation.
When planned and executed properly, a deep retrofit can decrease company and property operating costs, help manage enterprise risk, and enable bigger and more sustainable company revenues, all of which lead to higher property and company value. The guide reviews a set of value elements to illustrate how the economics of investing in building energy efficiency can dramatically improve when all value that is created is recognized. Nearly all retrofit stakeholders can tap into these value streams, including corporate real estate managers, building owners, occupants, lenders, developers, corporate sustainability offices, energy managers, government entities, and the full range of sustainability and real estate service providers.
“By systematically assessing the additional value streams in the deep energy retrofit process, building or facility managers can make a strong case for deep energy retrofits in a way that unlocks value for the entire building or portfolio of buildings, instead of just doing tiny, short term projects capturing ‘low-hanging’ energy savings with very short payback periods but not improving the employee environment or reducing risks,” said Scott Muldavin, an RMI senior advisor.
The report is the latest installment of resources RMI has provided for driving the greater adoption of deep retrofits, and accelerating overall retrofit activity. RMI is seeking partners who will use this report to refine their retrofit decision making, test enhanced retrofit strategies, and drive energy efficiency even deeper on new projects. In addition, RMI is currently working with CoreNet Global—the world’s leading association for corporate real estate professionals, service providers, and economic developers—to identify more examples and best practices for getting to deeper levels of energy savings.
Retrofit development costs are complicated to calculate and present accurately, and are often misunderstood and misrepresented due to the general difficulties of cost forecasting, made more difficult when new products, systems, and contracts are used. Further complicating the analysis is that it is often difficult to properly allocate the energy/sustainability retrofit costs, as they are generally an incremental portion of the total retrofit development budget....
Many of the most prominent studies looking at green premium costs are based on new construction, and do not well represent existing buildings. Evidence from new building developments, and the experience and claims of major contractors, suggest retrofit cost premiums for high levels of sustainability may be 10 percent
or more (compared with the cost of a major renovation) with greater cost volatility.
But ... many retrofit projects have little cost premium if timed correctly with other capital improvement projects and if the project follows best practices....
The total retrofit development cost budget for all of the planned upgrades is called the gross retrofit cost. The gross cost of deep retrofits will vary greatly based on a wide range of factors, including building type, project team experience, project location, site conditions, the varying ways energy use reductions are achieved, and the significant underlying variances in building age, construction type, and other variables. An article in the Journal of Sustainable Real Estate stated that the gross cost of a retrofit of all major energy-using systems in a typical 500,000-square-foot office building is $10–$20 per square foot. Case studies of recent deep retrofits of office buildings revealed an energy-efficiency cost premium of $3–$31 per square foot.
Subsidies and Incentives for offsetting deep retrofit costs included the following
Subsidies and Incentives
Tax Credits & Incentives
■ Federal IRC 48 provides a 30-percent tax credit for qualifying renewable energy projects.
■ Georgia provides an income tax credit for lighting retrofits and other energy-efficiency projects.
■ Oregon offers business energy tax credits for investments in sustainable buildings or renewable energy.
Grants, Rebates, and Other Financial Subsidies
■ A Pennsylvania program offers up to $2 million grants for high-performance building programs.
■ Numerous California utilities offer incentives up to $500,000 when building efficiency exceeds a threshold, with an additional $50,000 for enhanced commissioning, certification, and monitoring.
■ Anchorage refunds permitting fees for LEED projects.
■ Seattle, Chicago, San Diego, San Antonio, and Santa Barbara County offer expedited permitting or permit assistance.
■ An April 2012 study by Resources for the Future identified 226 government and utilities-related energy efficiency financing programs on the books in 2011, over 150 of which covered commercial properties.
■ Approximately 30 states have passed legislation authorizing PACE loans and many localities—including San Francisco, Washington, D.C., Los Angeles, Cleveland, Miami, New Orleans, and Madison—have programs underway.
Reduced Maintenance Costs
Based on ... experience and studies on the correlation between green buildings and maintenance costs, green buildings generally cost less to maintain than the average building (in the range of 5–10 percent).
■ A 2008 Leonardo Academy study found that properties certified with LEED for Existing Buildings (LEED-EB) had a median maintenance and repair (not including janitorial) cost of $1.17 per square foot compared to the regional average of $1.52 per square foot. After accounting for slightly higher janitorial costs ($1.24 vs. $1.14 per square foot), the overall cost of maintenance was $0.25 per square foot cheaper, or a 9 percent annual maintenance cost savings.
■ According to a 2010 Aberdeen Group study, adopting a data and performance management strategy can cut 14 percent or more of maintenance costs, allowing for visibility and routine tracking of key performance metrics such as operating costs, budget, and energy consumption; and increased collaboration between departmental stakeholders.
■ Today, Liberty Mutual Insurance, Fireman’s Fund, and others offer pricing discounts to qualifying green commercial properties.
■ In the event of major loss or damage, several providers now provide products that cover the added expense of sustainability upgrades and certification.
■ For the Chubb Group of Insurance Companies, expanded coverage for sustainability upgrades does not require a higher premium. Instead, the coverage is based on a higher property asset value, effectively producing a lower premium cost relative to coverage.
■ The Hanover Insurance Company gave a 10 percent discount on homeowner property insurance premiums to homeowners with solar and energy-efﬁcient homes in six states circa 1980 with the justiﬁcation that the heating systems had fewer running hours, resulting in a reduced ﬁre hazard.16
■ The Lawrence Berkeley National Laboratory website highlights other ways insurance companies are going green.
Churn rate is the frequency with which building occupants are moved, either internally or externally, including those who move but stay within a company, and those who leave a company and are replaced. Median annual churn rates in corporations are around 45 percent, with median move costs per person at around $400.18 For a company with 10,000 employees, the median annual cost would therefore be $1.8 million.
Deep retrofits can affect churn rate costs in two ways: (1) Deep retrofits may result in a decline in churn rates because of increased occupant comfort and satisfaction and (2) Deep retrofits often incorporate systems, such as underfloor air and moveable partitions, or flexible, open design layouts, which reduce the costs of accommodating churn.
■ Five studies demonstrate an average 80 percent reduction in churn costs due to underfloor air.
■ The GSA Adaptable Workplace Lab showed that using easily reconfigured furniture could save 90 percent of reconfiguration costs and reduce reconfiguration time from days to hours.
■ The Pennsylvania Department of Environmental Protection reduced average churn costs from $2,500 to $250 per workstation by using more flexible building and furniture systems in its high-performance green buildings.
■ The deep retrofit of the Deutsche Bank Twin Towers reduced mechanical equipment enough to free up an entire floor in one building, which was converted to audio-visual meeting rooms.
■ The U.S. Patent and Trademark Office eliminated three floors of office space and saved $1.5 million per year in rent by incorporating telework and office sharing into its new building program.
■ Cisco Systems realized significant cost savings after utilizing shared workspaces
Risk is one of the most important factors in any deep energy retrofit capital decision. Deep retrofits are often subject to the standard and relatively high real estate risks of a “to-be-built” project where development costs and future operating cost savings that determine return on investment (ROI) are forecast. These normally high risks can be compounded by additional risks including new products and systems, system interoperability problems, new specialized service providers, new contracts and design processes, complex financing requirements, and potential energy savings underperformance from building energy simulation models.
Retrofit investors have limited investment to that which can be paid back through energy savings in approximately 3.5 years on average, indicating a simple return requirement of over 28 percent. ... If [a] ... risk assessment can reduce the required return rate by even a few percentage points, dramatic value increases and deeper retrofits will be possible. Equally important, risk-averse senior decision makers will become more likely to approve deep investment if uncertainty about outcomes is reduced....An annual $1,000 retrofit cash flow benefit valued assuming a 10 percent return requirement would be worth $10,000. The same $1,000 cash flow valued using a 5 percent return requirement (due to perceived lower risks) would be worth $20,000, a 100 percent value increase.
Retrofit Related Health Effects
■ Throughout the normal range of ventilation rates encountered in buildings, increased ventilation rates are, on average, associated with fewer adverse health effects and with superior work and school performance.
■ In offices, a 35 percent decrease in short-term absence was associated with a doubling of ventilation rates from 25 to 50 cubic feet per minute (cfm) per person.
■ Many studies have found that occupants of office buildings with above-average ventilation rates (up to 40 cfm per person) have 10 to 80 percent fewer sick building symptoms at work.
■ Substantially higher rates of respiratory illness (e.g., 50–370 percent) in high-density buildings (barracks, jails, nursing homes, and health care facilities) have been associated with very low ventilation rates.
■ Building dampness and mold in homes were associated with a 30–50 percent increase in a variety of respiratory and asthma-related health outcomes.
Value from reduced absenteeism will vary based primarily on employee salaries and the amount of reduction in absenteeism, but a growing body of evidence shows that healthier indoor environments reduce absenteeism by 15–40 percent.
■ A Canadian study revealed that approximately one-third of employees’ sick leave can be attributed to symptoms caused by poor indoor air quality.
■ A study sponsored in part by commercial real estate giant Cushman & Wakefield reported 30 percent fewer sick days among one company’s employees, and discovered a 10 percent increase in net revenue per employee in another company after each office moved to LEED-certified office buildings.
■ A 2007 study by an Australian law firm found sick days reduced by 39 percent overall, to 0.28 days per month, after moving to a highly-rated green building.40
■ A survey of 534 tenants in 154 office buildings in 2009 found that tenants in LEED or Energy Star buildings reported an average of 2.88 less sick days per year resulting in an average impact of $1,228 per worker or $4.91 dollars per square foot.*
■ A 2000 study by Clements and Croome found that buildings with advanced management (building intelligence) had decreased rates of illness and absenteeism.
■ A survey of three case studies by Rocky Mountain Institute suggested that better lighting and HVAC systems could reduce absenteeism 15–25 percent.41
■ A study of 31 green buildings from the City of Seattle found absenteeism reduced by 40 percent.42
Employees often come to work when sick, or work from home when sick, reducing their overall effectiveness. The U.S. Department of Labor estimates that Americans work seven days per year while sick. For those days, the Institute for Health and Productivity Studies estimates a 12–20 percent decrease in productivity.... To calculate presenteeism, start with the average salary of employees. Assuming seven days of working while sick per employee, and a 12–20 percent reduction in productivity, the average cost of presenteeism is roughly 0.34 to 0.56 percent of total salaries.... Using an estimate (similar to the one for absenteeism) of the reduced days of sickness due to an improved workplace, that total cost can be reduced up to 50 percent.
Recruiting and Retention Cost Savings
One rule of thumb for businesses is that the full cost of replacing an employee is one and a half times their annual salary (detailed studies show a range between 70 and 200 percent). The cost of an outside recruiter would typically range from 20 to 40 percent of first year salary. Alternatively, the staff time to conduct the search needs to be considered. Add to this the employer costs to retain and manage the recruiter, conduct interviews, train the new employee, and accept lower first-year productivity.
Retaining existing staff also requires a costly set of company actions such as keeping up the firm’s reputation and maintaining benefits and the work environment at high levels.... Retrofits can reduce these costs by improving employee satisfaction with their company/job by creating attractive and healthy office environments, improving propertylevel energy/sustainability ratings.... The evidence cited in the Health Costs section above, as well as the related absenteeism research, provides the foundation for the healthy office. Particular retrofit outcomes like daylighting, high levels of ventilation, air quality, improved temperature control, and views of nature are also important.
■ In a survey of 1,065 tenants in 156 buildings managed by the real estate services firm CBRE, 34 percent of office tenants agreed that green office space is important to recruiting, while 14 percent disagreed. Additionally, 62 percent of office tenants agreed that green office space created a positive public image for firm’s owners and stakeholders, while only 5 percent disagreed....
■ Based on a survey of tenants seeking office space, a healthy indoor environment was cited as the most important factor with a total score of 4.51 on a scale of 1 to 5, with 5 being the highest. Daylight and view in the office ranked second at 4.19, and lighting controls, fixtures, and practices to conserve energy ranked fifth and sixth from 3.74 to 3.77. Nearly 95 percent of building managers surveyed reported higher tenant satisfaction immediately after green upgrades.
■ When specifically examining the factors motivating investments to increase building performance, building owners and managers cited occupant health and well being as most important (83.3 percent), improved indoor air quality/environmental quality second (82.7 percent), and lowering operating costs third (77.3 percent).
■ Occupants in 22 retrofitted GSA buildings reported 27 percent higher occupant satisfaction than the national average for U.S. commercial buildings and the top third of the buildings scored 76 percent higher than the national average.
■ 79 percent of employees surveyed were willing to forego income to work for a firm with a credible sustainability strategy; while 80 percent said they felt greater motivation and loyalty toward their company due to its sustainability initiatives.
■ In a ranking of the importance of key green building features to building managers, healthy indoor air quality was cited 97 percent, comfortable indoor air temperatures 96 percent, daylight and views 86 percent, and energy conservation 73 percent, indicating the importance of occupant satisfaction to productivity-related building outcomes.
Examples of Employee Productivity Gains
■ In a survey of over 2,000 tenants who moved into 154 LEED or ENERGY STAR buildings, 55 percent of the 534 responses received agreed or strongly agreed that employees were more productive, while 45 percent suggested no change.
■ Professor David Wyon found a 20 to 70 percent linear relationship between dissatisfaction regarding indoor air quality (IAQ) and worker performance. The magnitude of the performance impact of IAQ varies and can go as high as 6 to 9 percent—meaning that improved IAQ can provide meaningful improvements to worker productivity. ...
■ Adrian Leaman of the Usable Buildings Trust in England assessed the potential impact buildings have on worker performance ranging from a positive 12.5 percent (improved performance) to a negative 17 percent (hampered performance), for an overall 30 percent change in worker performance between the best and worst buildings.
■ Thirteen studies suggest individual productivity gains from HVAC improvements, and 14 studies link temperature control to performance gains of 0.2–7 percent.
■ Work performance may be improved from a few percent to possibly as much as 10 percent by providing superior indoor environmental quality (IEQ).
■ Better perceived indoor air quality is correlated with improvements in office work tasks, with approximately a 1 percent increase in task performance per each 10 percent decrease in the percentage of occupants dissatisfied with indoor air quality.
■ A majority of studies indicate that performance (speed and accuracy) of office work tasks is usually highest when the air temperature maximizes comfort.
■ Performance (speed and accuracy) of typical office tasks improves with increased ventilation rate, with an approximate 0.8 percent increase in performance for each 10 cfm per person increase in ventilation rate (for initial ventilation rates between 14 and 30 cfm per person).
■ A large-scale survey of office worker exposure to light during the winter in Sweden shows that mood and vitality were enhanced in healthy people with higher levels of exposure to bright daylight.
■ One study shows that a half-hour exposure to bright daylight by sitting adjacent to windows reduced afternoon sleepiness in healthy adult subjects. Daylight levels ranged from about 1000 lux to over 4000 lux, depending on sky conditions. The study also found that daylight was almost as effective as a short nap in reducing normal post lunchtime drowsiness and increasing alertness.
■ A study that used a controlled setting with a 3-hour exposure of bright electric light (3000 lux) found significant reductions in anxiety among healthy adult subjects following the light exposure on three consecutive days. The researchers suggest that the effect may be mediated by serotonin.
■ Across 17 studies from 1934–1997, experts agreed that good daylighting “improves tests scores, reduces off-task behavior, and plays a significant role in the achievement of students.”
■ Five daylighting studies cited by Carnegie Mellon showed average productivity gains of 5.5 percent.71
■ A Walmart study in which only half of the store was daylit found that the sales per square foot were significantly higher for departments located in the daylit sections of stores—regardless of which half was daylit. In addition, sales in daylit departments of this new store were markedly higher than sales in the same department in other non-daylit stores.
■ In environments with many stimuli and patterns, the patterns that are most likely to hold our attention and induce a relaxed response are fractal patterns commonly found in nature.
■ On average, patients whose hospital windows overlooked a scene of nature were released after 7.96 days, compared with the 8.71 days it took for patients whose views were of the hospital’s exterior walls to recover sufficiently to be released—a decrease of 8.5 percent.
■ A study found a decreased length of stay for patients in sunny, daylit hospital rooms, when compared with those in dull rooms with artificial lighting.
Calculating the value of improved worker recruiting and retention due to a deep retrofit requires extrapolation, as the number of relevant studies is limited.
1. Use either an estimate of 1.5 times the average salary as a recruiting cost, or more conservatively (or less specifically) use 2011 U.S. average survey data from the Society of Human Resource Management showing average recruiting costs of $3,196 per employee.*
2. Multiply this number by the average number of staff leaving the organization over each year (14 percent is a common data point, depending on the company) for a baseline.
3. Use reasonable assertions of 10 percent reduction in staff turnover to calculate an estimate of potential cost savings.
The fundamental value proposition from reducing absenteeism is based on the fact that companies, on average, spend 112 times the amount of money on people as on energy costs in the workplace. Accordingly, building-related investments that reduce planned employee absenteeism are highly valuable. Value from reduced absenteeism will vary based primarily on employee salaries and the amount of reduction in absenteeism, but a growing body of evidence shows that healthier indoor environments reduce absenteeism by 15–40 percent.
Increased Access to Markets
■ A 2011 McKinsey survey of 1,946 executives showed that companies are moving beyond reputation management and finding ways to use sustainability to drive growth. While only 28 percent of companies are leveraging sustainability to reach new markets or customers, those companies are the likeliest to say they have competitive advantage—suggesting that company sustainability provides competitive advantage for new market access.
■ According to a 2012 MIT/BCG report, 41 percent of nearly 3,000 executives cite customer preference for sustainable products and services as a factor leading to changes in the business model.
■ Ernst & Young and GreenBiz’s 2011 report found that 87 percent and 80 percent of 272 leaders in corporate environmental sustainability cite changes in customer demand and new revenue opportunities, respectively, as key considerations in pursuing sustainability initiatives.
■ In a 2012 survey, 83 percent of respondents said they are either working directly with their suppliers or are discussing with them how to measure sustainability impacts.
Increased Worker Performance and Sales
■ Hewitt & Associates looked at 230 workplaces with more than 100,000 employees and found that the more a company actively pursues worthy environmental and social efforts, the more engaged its employees are.
■ The Society for Human Resources Management found that morale was 55 percent higher in companies that have strong sustainability programs than in companies that have poor ones.92
■ A 2012 study of 494 facilities of PNC Bank, a large U.S. financial firm, found a positive correlation between sustainable properties (i.e. LEED certified) and revenues when controlling for external factors including location and income levels. Compared to non-LEED certified facilities, LEED certified facilities annually opened up 458 more consumer deposit accounts and had $3,032,000 more in consumer deposit balance per facility per year. LEED certified facilities also opened up 25.5 more consumer loan accounts and had $994,900 more in loan balance per facility per year. The researchers posited that the difference stemmed from employees feeling more engaged with the company mission while working in a green building and as a result providing better customer service that increases customer satisfaction and improves sales.
The report also presents a sample summary of a deep retrofit value report to provide an illustration of how the calculations and analyses completed for each of the nine value elements come together in a document to support deep retrofit investment decisions. The sample report ... is based on an actual property, although many of the occupant- and property-level assumptions are hypothetical for illustrative purposes.... For most situations, a deep retrofit value report will be structured around the nine value elements and will typically supplement an analysis of return, payback, or net present value based on energy and other cost factors. The [summary is based on] 20-story, 300,000-square-foot office building in Southern California is a conventional (non-green) office building built in the mid-1980s, and is owned and occupied by a large engineering firm. The Company has 1,500 employees, annual revenues of $225 million, and salary costs of $110 million. The firm pays $8,000 per employee in health costs, while the employee pays $10,000.
The project, assessed on energy cost savings alone, offers a simple payback of 13 years and a negative $2.25 million in NPV. With the low-end of the potential values beyond energy cost savings, the expected benefit is $3.36 million, and with the maximum potential value increases the project is worth $16.83 million. Most of the largest (and most variable) benefits are due to improved employee health and productivity. Without a full consideration of the project, the client would likely have ignored a highly profitable retrofit, and continued operating an inefficient and undesirable building.
The full report is available free of charge at http://www.rmi.org/retrofit_depot_deepretrofitvalue
RMI Rocky Mountain Institute http://www.rmi.org has advanced market-based solutions that transform global energy use to create a clean, prosperous and secure future. An independent, nonprofit think-and-do tank, RMI engages with businesses, communities and institutions to accelerate and scale replicable solutions that drive the cost-effective shift from fossil fuels to efficiency and renewables.
Press Release dated January 22, 2014