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Beyond the Tip of the Energy Iceberg: Why Retrofits Create More Value Than You Think

By Scott Muldavin

Buildings in the U.S. consume a heck of a lot of energy—they use 42 percent of the nation’s primary energy and 72 percent of its electricity. Much of that energy is needlessly wasted through inefficient design and operation. That’s why we forecast an opportunity to reduce buildings’ energy consumption by 54–69 percent over business-as-usual projections through 2050, resulting in absolute energy consumption in 2050 that would be 40–60 percent less than in 2010, despite a 70-percent bigger building stock.

Financial cost reductions alone make a strong argument for pursuing this future with superefficient buildings. For example, RMI’s analysis found that an incremental investment of $0.5 trillion between now and 2050 could save a total of $1.9 trillion in energy costs. A joint Rockefeller Foundation / Deutsche Bank Group 2012 study similarly found energy savings worth four times their cost under an even tighter ten-year time frame: an investment of $279 billion could yield more than $1 trillion in energy cost savings.

Whether in such large-scale studies or stories about individual projects, the focus is almost always on lower energy costs. For example, when Reuters reported last year on the iconic Empire State Building’s deep energy retrofit—whose energy design RMI co-led—they again focused on energy cost reductions, noting that the building had saved $2.41 million in its first full year following the completion of the retrofit, ahead of schedule en route to an anticipated $4.4 million of annual operating cost savings.


A focus exclusively on saved energy costs ignores or overlooks other important values—“value beyond energy cost savings” (VBECS). Numerous studies and surveys note that, compared to market averages, energy-efficient green buildings boast reduced absenteeism, better employee health, higher occupancy rates, increased rental rates and sales prices, and decreased financial and regulatory risk.

We ignore these additional values—a robust land of opportunity that sits just below the surface, beneath the saved-energy-cost tip of the value iceberg—to our own detriment. If we are to make the nation’s building stock significantly more energy efficient sooner than later, VBECS must be taken into account as an important driving force. Otherwise, deep retrofits—and the energy investment opportunities they entail—will remain under-prioritized. Value derived from saved energy cost is necessary but sometimes not sufficient to motivate investors, especially when investors’ values align differently than those of building occupants.

Today, most building investors ignore the non-energy value created by retrofits, instead basing their decisions on simple payback—weighing upfront investments in energy efficiency against anticipated savings in energy cost—and require an average payback period of only 3.4 years. Even current industry best practice analysis (life-cycle cost analysis, or LCCA) only incorporates saved energy and operating costs, plus capital cost avoidance over the life of improvements, while still largely ignoring other values as well as risk.


Rather than examine energy costs in isolation, our approach assesses how energy and sustainability improvements add value to all parts of a property or company. This approach is not revolutionary, but rather more comprehensive, applying industry-accepted valuation methods to the full set of retrofit value contributions, including saved energy costs, health and productivity benefits, reputation and leadership, and risk reduction.

Energy investment (and resultant property outcomes) should be treated as one of many factors that influence value, including location, tenant mix, quality of design, and more. Evaluating retrofits within the broader context of property/company value enables a logical, defensible calculation and assessment of a deep retrofit’s relative contribution to value. Previous attempts to value energy retrofits have ignored retrofits’ value contributions and overlooked standard approaches to valuing properties and companies.

For example, risk is one of the most important factors in any deep energy retrofit capital decision and has a direct tie to VBECS. Most commercial property valuations look at a stream of cashflows over time, with an assumed sale of the property in the future (net operating income in the last year divided by a capitalization rate). This string of cashflows is converted to a present value by applying a discount rate, which is simply the rate of return required to attract an investor to the stream of cashflows. Thus if retrofit investors think a project has high risk, they will require a high rate of return (discount rate) to attract them to invest. The higher the discount rate, the lower the value, and the less likely that a deep retrofit will be funded. This is where VBECS’ integration of risk into decision-making can have a real impact.

Risk is not a soft, indirect, or non-financial consideration, but one of the most important value elements in a deep energy retrofit investment. For example, an annual $1,000 retrofit cashflow benefit with a five percent return requirement would be valued at $20,000, approximately 100 percent higher than the same $1,000 cashflow benefit valued assuming a 10 percent return requirement. Simply put, even if your VBECS analysis does nothing else but clearly identify risks and discuss how they can be managed and/or mitigated, you will have successfully applied important value concepts in a way that is not typically done well, or at all, today. If your risk assessment can reduce required returns by even a few percentage points, it makes deep retrofits possible so the dramatic gains can be realized.


A growing body of statistical evidence suggests that green office buildings can command rent premiums of 3–6 percent and sales price premiums of 10 percent or more. The health, productivity, and recruiting advantages for occupants of energy-efficient and sustainable properties are also becoming better known. Yet authoritative guidance on how to calculate and present such value beyond energy cost savings for specific property retrofit decisions has not yet been available. RMI’s VBECS project is working to fill this gap.

The project integrates sustainable building valuation and underwriting with RMI’s historic strengths in identifying and deploying beyond-best-practice building technology, design, and retrofit execution. The first phase of that work, to be published later this summer, is a significant advance from earlier work because it explicitly separates occupant and investor value models (see Retrofit Value Model at right) , more directly links specific energy efficiency measures to value, and focuses on a structured process for calculating and presenting retrofit value.

RMI’s Retrofit Value Models clarify how energy and sustainability improvements—as well as the processes delivering them—produce value. Retrofit value for occupants is driven by the value created in the enterprise (such as a business) occupying the property. Retrofit value for investors, on the other hand, is driven by reduced energy and other operating costs, and revenue gains from tenants who value sustainability/energy efficiency and are willing to pay for it (through higher rents, faster lease-up, higher retention, and other ways that enable the investor to monetize tenant demand).

Our retrofit models specifically address the links between specific retrofit strategies and values that derive from those strategies. Making those connections clearer is an important component of any valuation, especially one that aims to include VBECS accurately and more fully.

Many energy improvements have discernable impacts on staff or enterprise outcomes—beyond their energy savings—and many do not. For example, a space that is retrofitted with operable windows to provide natural ventilation can increase occupant satisfaction and performance as well as save energy for cooling. In contrast, a heat recovery system also saves cooling and heating energy, but does not change ventilation or occupant comfort in any way. Few if any industry efforts exist to shed light on such causal relationships between retrofit measures and occupant or enterprise value.


Evidence demonstrating retrofit value beyond energy costs savings is substantial, and examples abound:

  • A large public pension fund decided to increase construction costs one percent to employ underfloor ventilation, based on an analysis of potential health and productivity gains of its workers in the building and potential reductions in churn (internal move) costs.
  • A large government agency developed an integrated cost-benefit model to incorporate non-energy-cost benefits into its analysis of green roofs.
  • Major real estate investment trusts (REITs) and pharmaceutical companies have cited recruiting and retention of workers as the primary factor supporting net-zero energy buildings and high levels of sustainability.
  • A major telecommunications company looking at potential investments in deep energy savings found that potential health cost savings were more than triple the energy cost savings.
  • A large international financial organization recently focused its VBECS retrofit analysis on risk, preparing substantial analysis of potential business interruption, cost overruns, execution timing, occupant and manager engagement, and strategies for risk mitigation.

VBECS risk analysis is also being regularly applied by occupants and investors worried about the risk of not taking action—and losing potential recruiting and retention benefits, or losing tenants, especially when the cost/hassle premiums of deep retrofits are rapidly declining.


While industry participants have different requirements of value knowledge, deep and broad energy investment in real estate will be limited until the value and risk of energy retrofits can be integrated into decision-making.

Many capital providers, such as pension funds, REITs, and corporations have taken the first steps—assessing energy performance, replacing inefficient lighting, and improving operations and maintenance practices. But thoughtful calculation and presentation of value is required to increase the depth and breadth of investment.

Commercial property sales and leasing brokers, architects, engineers, and nonprofit energy advocates all play a critical role in advising clients on their energy efficiency/sustainability choices in their real estate decisions. The inability to integrate value and risk into their discussions—and in the case of architects, engineers, and consultants, into their calculations and recommendations—limits both the breadth and depth of adoption.

Government agencies such as the General Services Administration and the Department of Defense have focused on the “value” and non-energy-cost benefits of sustainability investment to support their continued investment in higher levels of energy efficiency and sustainability. This trend for governments to support their investments with value arguments is expected to grow.

You might expect VBECS issues to present less opportunity for Property Assessed Clean Energy (PACE) promoters, energy service companies (ESCOs), and utility sponsors because they all base their lending and service offerings on saved energy costs alone. But you’d be wrong. In fact, value has become a central consideration in the future success of PACE and related programs.

The main issue has been demand for the programs by borrowers. The rates look good, and the longer loan terms are positive, but borrowers need to be “sold” on the potential value benefits of the investments, with a particular focus on risk mitigation and management. These same issues are also important to convince first mortgage holders to approve the secondary liens usually required or sought.

Every retrofit or renewable investment has someone (typically multiple someones) charged with taking a hard look at a project’s assumptions. Due diligence analysts and underwriters do not need “empirical” or statistics-based evidence to prove every point, but they do need structured analytic valuation and risk assessment methodologies rigorously applied by professionals.

Sustainability and energy efficiency have become central concerns to regulators, employees, customers, clients, boards, and other stakeholders. Maximizing recognition of value by all stakeholders requires understanding what aspects of sustainable value are most critical to different stakeholder groups and clearly communicating these values.

The real estate industry has dramatically evolved over the past 10 years to the point where many profit-minded corporations and investors are striving to be more energy efficient and sustainable. Finally, with the introduction of RMI’s Retrofit Value Models and the efforts of many companies and nonprofits, these investors now have a way to turn their implicit understanding of the deep retrofit value into explicit value analysis compelling to senior decision-makers, unlocking vast capital resources to enhance the world’s use of its resources. If we’re going to drive much greater investment in a dramatically more energy-efficient building stock, value beyond energy cost savings must be a part of that conversation.

Scott Muldavin, CRE, FRICS is a senior advisor for RMI.


Office Building image courtesy of Shutterstock/YanLev.
Interior office space image courtesy of Shutterstock/Li Chaoshu.

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