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Why Green Buildings deliver a higher ROI for Property Owners

Why Green Buildings deliver a higher ROI for Property Owners

Green building strategies such as retrofits and energy efficiency improvements can save property owners operating costs. However, new research suggests sustainable real estate also earns a higher ROI. 

Growing awareness of the negative environmental impacts and health risks of standard building practices has led to higher valuations for certified green buildings. This gap is likely to grow in favor of environmentally friendly buildings with increased demand from investors, buyers and renters alike. 

How Sustainable Real Estate Reduces Risk

As climate risks intensify, buildings have entered the spotlight both for their vulnerability and contribution to climate change. 

According to Cervest, an AI climate risk platform, 88% of large companies have had physical assets affected by extreme weather. These risks have the potential to lead to higher operating costs and repairs for damages. Further, a report from the Urban Land Institute and global real estate investment firm Heitman warns that “failure to address and mitigate climate risks may result in increased exposure to loss as a result of assets suffering from reduced liquidity and lower income, which will negatively affect investment returns.”

This is no small burden, given the immense value real estate assets represent. The real estate sector totals $200 trillion in nationwide wealth, accounting for 60% of national, corporate, and individual wealth. 

Buildings also play an outsized role in driving climate change. Roughly two-thirds of greenhouse gas (GHG) emissions are generated in urban areas, and 40% of these emissions come from buildings. 

To address buildings’ contribution to climate change, some states have begun to enforce regulations aimed to lower their energy use intensity (EUI) and GHG emissions. 

  • California adopted its CalGreen Building Code in 2009 which has a minimum energy efficiency standard which new buildings must meet. 
  • New York, through Local Law 95 and 97, grades larger buildings on their energy efficiency and sets emissions limits backed up by fines

By making improvements ahead of regulations, building owners in other states may benefit from tax incentives and higher ratings, as well. 

Many property buyers and renters not only prefer green buildings as a healthier, low-risk choice, they’re also willing to pay more for this value.  

A rendering of JPMorgan's new 60 story, all-electric headquarters in midtown Manhattan (source: DBOX for Foster + Partners)

Growing demand for greener, healthier, sustainable real estate

Research links green building improvements to stronger perceived value across the board. Corporate investors, building owners, homeowners and renters alike show demand for low-emissions and resource efficient building features.  

US homeowners show a strong preference for environmentally friendly homes: 73% would pay more for this type of home, and 38.5% have purchased them. 

Renters show a similar trend. They favor LEED-certified buildings, which collect 3.7% higher rent and maintain 4% higher occupancies. The same goes for buildings certified by ENERGY STAR, which collect 2.7% higher rent and have 9.5% higher occupancies on average. Improving rental value and occupancy can raise a building’s value by 8-10%.  

As buildings with green building features grow in value, the reverse is true for those without them. Older buildings with a high carbon footprint could depreciate in value in just five years, according to London-based advising firm Carbon Intelligence.  

There are numerous health improvements associated with building electrification, too. The World Health Organization (WHO) estimates that 4.2 million premature deaths are caused by outdoor air pollution. Approximately 100,000 preventable deaths from air pollution occur each year in the US. 

Indoor air pollution health risks are harder to quantify, but research suggests that gas-powered heaters and appliances contribute to asthma and respiratory illness more than previously thought. A UCLA study found that one hour of cooking with a gas-powered stove increased the nitrous oxide levels above the ambient air levels California considers safe 90% of the time. 

Green Building Strategies to improve ROI

Green building certifications: Similar to an organic food label, green building certifications are a convenient way to demonstrate a building’s green attributes. A third-party rating system offers a trusted verification for the environmental value a building offers. Here are some of the most widely recognized green building certificates: 

  • Leadership in Energy and Environmental Design (LEED) 
  • Building Research Establishment Environmental Assessment Method (BREEM) 
  • ENERGY STAR for buildings

Heat pumps: Air-source heat pumps, which use electricity to provide both heating and cooling, are on average 50% more energy efficient than furnaces or baseboard heating systems, according to the Department of Energy (DOE). While this technology is not new, recent advances have made air-source heat pumps suitable for use in areas with sub-freezing temperatures. Heat pump water heaters are also increasingly cost-effective against gas or electric resistance water heaters. 

Heat pumps can significantly reduce a building’s carbon footprint versus gas-powered furnaces, particularly when drawing from a clean energy source. Gas-powered furnaces emit most of their CO2 from burning fuel, but heat pumps don’t burn fuel to create heat, they move heat from outside to inside. Gas furnaces also leak unburned methane during fire-ups, in addition to leaks along the pipeline; this is particularly detrimental to the environment, as methane heats the atmosphere 80 times more than carbon dioxide (CO2).

Even if they don’t rely on renewable energy sources, heat pumps will still significantly reduce building greenhouse gas emissions, thanks to their efficiency, which can translate into energy bill savings of 20-70%

Renewable energy: As large-scale solar and wind projects expand, more areas have access to renewable energy. However, renewable energy still only accounts for a fraction of the available supply from utilities. 

Building owners can opt to produce their own renewable energy by installing a roof-top solar system, taking advantage of local and federal tax credits to reduce upfront cost. As a distributed generation energy source, a PV system can also earn credits for any energy it supplies to the grid, because most states offer a net-metering tariff rate. 

On-site renewable energy has additional benefits as well. Systems with microgrid inverters can act as a back-up energy source in the event of blackouts. Building operators can also minimize a building’s emissions and negative health impacts by pairing renewable energy with all-electric appliances and HVAC units.  

Insulation, window glazing, sun shading, and cool roofs: Protecting a building from the variance of external temperature is hugely important for reducing the energy a building uses. A wide range of building improvement strategies are available to minimize these impacts. 

By optimizing a building’s wall insulation, adding reflective window glazing onto window surfaces, shading windows and roofs from the sun, and using rooftop building materials that have reflective surfaces property owners can reduce heat absorption from sunlight in summer and improve heat retention in winter.  

LED Lights and energy efficient appliances: Choosing appliances with high ENERGY STAR ratings and swapping light fixtures with LEDs can instantly reduce the energy your building uses. 

Smart thermostats and sensors: Energy inefficiencies also arise from building operations, so installing smart thermostat and sensor technologies to limit energy use by gating temperatures at a certain level or automatically switching off lights and appliances after periods of inactivity can greatly cut down on excess energy use.  

Our BlocPower experts can walk you through the different options for making the most beneficial, cost effective upgrades. Get in touch to find out which green building strategies are right for your property.