In this series of commentaries, wanted to share some thoughts on the importance incorporating energy consumption and Operations & Maintenance (O&M) costs (i.e. an efficiently designed project) when making investment decisions on real estate development projects; why it is does not always happen, and how to do something about it.
Episode 1 (1-Dec-2020):
A truly comprehensive financial model for any upcoming real estate development project should take into account both the immediate construction costs (CapEx) as well as the reasonably discounted value of future operations and maintenance costs (OpEx). This constitutes a Total Life Cycle cost model that should be the norm for any project being built.
This applies equally to both speculative projects that are built to be sold or rented (e.g. homes and apartments), as well as those which are built with the intention to operate (e.g. schools, malls).
Sadly, while there are many publications, conferences and corporate proclamations about the value and importance of sustainability and Total Life Cycle costs, only a very few truly trend-setting developers consider the true importance of OpEx – and in particular energy efficiency - in their investment decisions.
The percentage of sustainably designed projects, on a per m2 or ft2 basis compared to conventional design, remains glaringly lower than it should be.
Let’s look at LEED (arguably the world’s most popular green/sustainable certification system). According to the US Green Building Council, there are ~80,000 LEED certified buildings worldwide. That is only slightly more than the number of buildings in Manhattan. And when compared to the number of buildings that need to be built worldwide every day – 13,000 buildings per day worldwide, LEED is certifying an average of 25 buildings per day. At that rate, we’re not going to make the impact we need and must achieve.
According to the University of Michigan’s Center for Sustainable Systems, “Operational energy represents 80-90% of a building’s life cycle energy consumption. In under 2.5 years of operation, a UM [University of Michigan] campus building with an estimated lifespan of 75 years consumed more energy than material production and construction combined.”
An inefficient engineering design for any project is wasteful. It will not only place an excessive financial burden on project’s lenders, owners, tenants, facility managers and utility companies, it ultimately costs city planners, society and the environment dearly. In other words, you, me and everyone else are paying the full true price of inefficient design.
However, with the recognition of the risks and dangers of climate change, things are changing. But it should not take a planetary disaster to motivate us to the right thing.
Episode 2: to follow