Thawing the Market for Commercial Energy Efficiency

Scaling the mountain of creating a large energy-efficiency market for commercial buildings in the United States is a daunting task, according to a March report from Institute for Market Transformation (IMT). This report, “Energy Efficiency Finance for Commercial Buildings: Insights from Lenders,” reveals structural and outreach problems have largely frozen massive investment opportunities – close to $72 billion.

Argentina's Upsala Glacier
This photo from NASA depicts Upsala glacier in Argentina.

“The key finding of our study was that lenders perceive a low level of demand for energy-efficiency finance,” said Leonard Kolstad, senior program associate at IMT. “That’s something we expected.”

What factors are at the root of this apathy? Building owners are highly skeptical energy retrofits will deliver reliable returns on investment, according to an article Clean Energy Finance Forum published in January 2015.

IMT staff interviewed decision makers from 30 banks to learn what obstacles exist and what can be done to build this market. This yielded many recommendations.

“We have not had anyone say, ‘I need a loan because I want to make my building more energy-efficient.’ What they do say is, ‘I bought this older building and I want to renovate it,’” said one of the many interviewees who provided on-the-record comments that were anonymized. “Sometimes, that includes HVAC and lighting systems and other efficiency measures. But we have never had someone ask for money specifically for energy efficiency. It’s always driven by other building improvements.”

Other research on commercial energy efficiency bears this out. It is uncommon for building owners to seek out energy efficiency on its own.

“Building owners sometimes see energy-efficiency retrofitting as a luxury they can’t afford,” a second interviewee said. “We have a particular niche, affordable housing, which has a whole host of physical preservation issues that a property owner or landlord might put ahead of energy efficiency. Landlords and operators in the affordable space are getting more interested, but the market needs to develop further to identify the best options for affordable owners.”

“One of the ideas is having a one-stop shop of energy-efficiency services where a company can provide financial assistance and technical assistance and really take the burden to investigate the options off of the property owner,” Kolstad said. He also recommends scaling up commercial property-assessed clean energy if possible.  

Why is it that there is so little dialogue about the side benefits of energy efficiency for commercial building owners? The answer is unclear. It appears that there is a massive shortage of large-scale public outreach that builds the perceived value of commercial energy efficiency.

Recent research has shown that commercial property owners can raise their rents after conducting energy-efficiency retrofits.

But according to Kolstad, it seems as if the message that tenants like energy efficiency and will pay a premium for it has not percolated into the market.

Lack of outreach seems to be a persistent problem. Almost all of the interviewees said their banks were not affiliated with any government or utility energy-efficiency programs, so there is little collaboration taking place to build this conversation.

Unfortunately, the current economic climate has had a chilling effect on banks’ willingness to expand financing opportunities of this type.

“The problems stem back to the larger economic climate as banks find themselves in a prolonged low-interest rate environment, where banks are focused on expense reduction. Often this means reducing staff. So the bandwidth to launch new products is minimal,” a third interviewee said. “I’m not just speaking for our bank. I believe this is a general perception of the industry.”

Around 83 percent of lenders said their banks did not offer financing geared toward building energy efficiency, as far as they knew.

How Do Structural Obstacles Block Investment?

Icy spiderweb
This photo shows ice on a spider web.

The interviews yielded another result that was not surprising. Structural obstacles within the banking industry are holding back investment in commercial energy efficiency in so many ways that it is as if a spider web of limitations was restricting deal flow.

“If there’s a way to encourage banks to adjust their underwriting practices and their appraisal practices to address building energy efficiency, that really has the potential to scale the market,” Kolstad said.

It may also be possible to build energy-efficiency goals for commercial building loans into banks’ environmental, social and governance (ESG) policies. This innovation has not yet taken place in any of the banks where the interviewees work.

“Fannie Mae is offering interest-rate reductions for buildings with green certifications,” Kolstad said. “Can commercial lenders do something similar? What would it take for them to incorporate projected energy costs?”  

Lenders could also adopt underwriting procedures that account for the anticipated savings from energy efficiency, the way Fannie Mae is doing with multifamily buildings. That could result in a framework for effective financing.

Can a New Appraisal Process Thaw the Market?

Jökulsárlón Lagoon
This photo depicts Iceland's Jökulsárlón Lagoon.

Since the market is currently largely frozen, but needs to thaw for economic and environmental reasons, the report recommends changing the appraisal process to account for the value added by high-performance building features and other efficiency improvements. The Appraisal Foundation’s new set of guidelines for high-performance buildings could be used as a basis for evaluation. 

If the federal government developed an appraiser certification for evaluation of high-performance buildings, that might impact the market positively.

According to Kolstad, IMT has been offering training opportunities for appraisers. Other organizations such as federal banking regulators, the Office of the Comptroller of the Currency, American Bankers’ Association, and Mortgage Bankers Association could also play a role in making appraisals more energy-efficiency-friendly.

How Can Data Reassure Lenders?

Will financial savings match their projections? Interviewees said they are very concerned about this.  They said they would welcome additional data – especially if it is reviewed by third parties.

Right now, there are many limitations regarding data sharing. Some building managers are unfamiliar with how to handle these data and respond to them.

An interviewee said one bank is starting to write performance benchmarking into appraisal requirements, but has not implemented it across the board.

“Benchmarking data are valuable to us because we have staff who know what to do with it,” an interviewee said. “We see it as our job to take that information to loan officers and ultimately convince borrowers to do something smart with it.” 

If using benchmarking data leads to energy audits, that can sometimes delay the process of financing.

High-performance building incentives, increased tenant expectations, new construction, and a demand for repurposing old buildings can sometimes help to thaw the market and put deals in motion, according to the report.

If decision makers take the lead in setting up structures that will allow deals to move forward, that will allow lenders to buy in and invest. And if programs communicate the benefits of energy efficiency that are most important to property owners, that might help to unfreeze the market as well.

Note: A paragraph about federal regulatory energy policy and a sentence about commercial building owners sharing energy-performance data have been removed from this article.

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