CBRE Exec on Green Buildings: Financing, New Technologies, and New Trends

As the world’s largest commercial real estate services firm, as well as the biggest real estate investment manager on the planet, CBRE is well positioned to see emerging trends in building efficiency, green building and financing of energy efficiency projects. And Peter Scarpelli is right there at the forefront, as the global director for energy and sustainability for Los Angeles-based CBRE.

We chatted with Scarpelli to get his thoughts on where the industry is headed and what the future holds for energy efficiency. It’s definitely a growth market, he says, with new technologies and new financing options emerging on a regular basis.

Key Drivers of Efficiency

Companies have shown a “dramatic increase” in their climate change-related disclosures since 2010, Scarpelli says. That was the year the  SEC issued interpretive guidance to public companies on what they need to disclose to investors regarding the environmental impact of their operating business.

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The agency’s action pushed many public companies to set carbon reduction goals.  As just one example. 81% of the 500 largest public companies in the world now engage with the Carbon Disclosure Project (CDP) to measure their carbon footprint.

A common goal that companies have pledged to meet is reducing their greenhouse gas emissions or overall energy use, such as a 20% reduction by 2020. And the movement continues: just last month, 81 companies signed the American Business Act on Climate Pledge, committing to reducing emissions, use more renewable energy and embrace more clean technologies.

Indeed, companies are increasingly investing in energy efficiency initiatives in order to achieve their target carbon reduction commitment goals, Scarpelli says.

“There’s a direct correlation to lowering carbon by having lower energy consumption,” he says. “But simultaneously, if you have lower consumption you also have lower bills, which is effectively how these projects get paid for.”

Regulations are also driving efficiency. “There are numerous regulatory drivers that are causing people to engage more frequently in energy efficiency scenarios,” Scarpelli says. Benchmarking laws and other disclosure requirements are a good example: those often require building owners to disclose their Energy Star score to people who are going to lease the buildings, he points out.

In fact, over the past two years, many cities across the U.S. have adopted building disclosure requirements. Nationwide, 14 cities, two states, and one county. have passed policies requiring benchmarking and transparency for large buildings.

Overcoming Financing Challenges

Energy efficiency projects are generally initiated by a company’s sustainability manager or energy manager, who are pushing these projects as part of their company’s goals. But identifying  a project is just the start, Scarpelli notes: then they need to figure out how to go fund it.

What often happens, he says, is that an energy efficiency project “gets put into the capital stack and it ends up competing for internal capital. It’s competing against a client who is building a great new R&D project that is going to be the next big revenue driver for the company.” That can mean that, even if the project gets funding, it may not get the funding level it needs.

That may be giving rise to new behaviors. “What I think is happening today that is extremely new, like in the last few months, I’m starting to see clients explore third-party financing structures, because they know that they need to hit their carbon reduction commitments,” Scarpelli says.

Current financing options include the utility energy services contract and other similar funding options that have been widely used for decades in the public sector, he says. Utility energy service contracts allow federal agencies to pursue energy efficiency project with no upfront capital costs, and can also let a city government pay for a project over time using the savings on utility bills.

“And what we see now is the evolution over the last several years of the Efficiency Services Agreement (ESA), which creates an opportunity for the private sector to do these projects.” ESAs enable third-party ownership of a project, and offer a clear structure for outside capital to invest in the energy savings potential of a building. The property owner does not have to provide up-front capital, and because the deals are structured as service agreements, not debt, it doesn’t affect the company’s borrowing capacity.

“These service agreements open the gate to implementing energy conservation measures,” Scarpelli says.

A number of companies are now offering energy services agreements, including Hannon Armstrong, Deutsche Bank and Metris. Scarpelli has seen some of these third-party financing options with “significant” sizes of $10 million to $50 million, he says.

“I think the jury is still out as to whether the finance teams or the treasury teams will ultimately do it.  Or whether they will just say, ‘Let’s use our own money,’” he says. “I don’t know the answer to that question.  But I do know the dialogue has increased dramatically.”

Efficiency Technologies Gaining Traction

Falling LED prices are drawing more and more business users to install the lighting technology, Scarpelli says. Another major trend he’s seeing is “the drive into the smart building space, using data analytics to find waste in the consumption patterns of a building. That has become a new tool in managing operating costs, he says.

Data analytics has huge potential. “It will help find things that human beings have a hard time finding on their own,” Scarpelli says. “It can identify common human errors in the operation of a building that can cause inefficiencies, such as having the heating and cooling running simultaneously in order to make the room temperature 72 degrees.”

In fact, he adds, data analytics is “the fastest growing tool in the marketplace right now, because it enables information to guide people’s decision making rather than relying on gut checks.”

Yet another trend, one that’s been developing over the past two years, is related to “wellness,” Scarpelli says. “There’s empirical studies that would indicate that the office of the future has a wellness quotient to it. And that wellness quotient has two drivers: employee health but also a business benefit related to productivity.”

Data analytics are also helping breathe new life into the field of indoor air quality, or IAQ. “You can monitor air quality through CO2 sensors in the building automation system,” he says, noting that that technology has been around for two or three decades. “I think what’s new, frankly, is migrating to the smart building structure where you are using data analytics, and I think the data analytics creates the greater utilization of IAQ because it can find problems faster.”

CBRE Acquisitions in the Efficiency Space

In April, CBRE acquired Environmental Systems Inc., a Wisconsin-based company that  provides technology and services for systems integration, building automation, energy management and other services. ESI provides analytics-driven managed services at more than 2,800 sites across the country, totaling more than 180 million square feet.

CBRE is moving quickly to offer ESI services to its own properties. “We are rolling ESI out to many of our clients in a variety of building scenarios,” Scarpelli says. “From a small bank branch up to a large 60 story office tower and data centers. In the last six months we have engaged probably 15 different clients in this process. I think it’s the most important innovation in the marketplace in the last 24 months,” he says.

More recently, CBRE acquired Global Workplace Solutions from Johnson Controls in September. Global Workplace is said to be the largest provider of facilities management services outside the U.S. and had $3 billion in revenue last year. ..

According to CBRE, the two recent acquisitions are a key part of its commitment to provide integrated facilities management services, including energy and sustainability products and services, to its clients.

Energy Efficiency in China

CBRE is also keeping tabs on developments in China, where it already has a huge presence. It’s been operating in the country since 1988, and has clients in more than 100 cities, as well as regional hubs in Beijing, Shanghai, Guangzhou, Wuhan and Chengdu.

That presence seems likely to expand.

“The Chinese government certainly has created policies to help drive efficiency inside commercial facilities in order to improve their environmental air quality and other things,” Scarpelli says. “Quite frankly, it’s to keep up with capacity.  They are building cities as fast as we are building buildings.  In order to keep up with that capacity, efficiency requirements are almost a necessity in order to manage the supply load.”

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