As global electricity demand continues to rise, so have energy prices. The Energy Information Administration (EIA) predicts that over the next 25 years, planet-wide energy consumption will increase by more than 50% from current levels. This echoes similar projections from a variety of energy industry insiders and public policy makers. With buildings responsible for nearly 70% of the United State's electricity demand and 50% of our natural gas requirements, energy efficient real estate is becoming more important than ever in combating these rising costs. (For background reading, check out What Does It Mean To Be Green?)


IN PICTURES: Top 10 Green Industries

New Survey on Energy Efficiency of Buildings
Energy efficiency measures might be more of a slam dunk for both building owners and investors versus alternative energy sources such as the Market Vectors Solar Energy ETF (NYSE:KWT). Think-tank McKinsey estimates that over the next 10 years, the United States could reduce its annual energy consumption by 23% by using an assortment of efficiency measures. This 23% reduction would ultimately deliver savings of about $1.2 trillion for the economy. President Obama's recent unveiling of plans to reduce energy usage in the commercial real estate sector by 20% through 2020 helps underscore the economic opportunity in retrofitting U.S. buildings. Moreover, those retrofitted buildings might be worth more to real estate investors.

A new survey by CoreNet Global and Jones Lang LaSalle shows a building's sustainability strategy is becoming increasingly important for corporate executives when considering office location. The report showed that 92% of leasing and corporate executives consider sustainability criteria when choosing office locations. The kicker is that more than 50% would pay more for that "green leased space", up from only 37% in 2009.

The survey also reported that higher rent offset by lower energy costs is also something respondents are considering. With "green leased space" potentially commanding higher rental rates than traditional commercial buildings, it'll be interesting to see what major office REIT's like SL Green (NYSE:SLG) or Boston Properties (NYSE:BXP) do with regard to upgrading their facilities.

An Energy-Efficient Portfolio
The Jones LaSalle report shows that property owners have real financial motivation to add efficiency measures to their buildings. Individual REITs that command energy efficient portfolios will be able to receive higher rents for their properties. With less than one billion of the approximately 70 billion square feet of office space in the United States having undergone retrofits, the potential in the sector is huge. For investors in the space, the potential is just as big. The PowerShares Cleantech Fund (NYSE:PZD) can be used as a play on the burgeoning energy efficiency market as the bulk of its 71 holdings in electrical and industrial companies.

Inefficient incandescent light bulbs cost businesses and taxpayers around $18 billion in energy bills each year. By switching to long-lasting, energy efficient LED bulbs, facilities can save on energy costs and labor. Conglomerate Tyco Electronics (NYSE:TEL) unveiled its Nevalo system, a set of plug-and-play, solid-state lighting systems for established retail stores, hotels and other public locations. This moves Tyco closer to being a major green electronics player like Philips (NYSE:PHG).

In dense urban settings and cities, nearly 80% of energy consumption and 20% of greenhouse gas emissions come from commercial buildings. Companies specializing in advanced HVAC systems should see their profits soar as their technologies are adopted. Johnson Controls' (NYSE:JCI) retrofit of the Empire State building produced a 38% savings in energy costs for the older structure. Companies like Honeywell (NYSE:HON) and Ingersoll-Rand (NYSE:IR) will also benefit.

Bottom Line
Along with rising energy costs, interest in energy efficient office buildings is also increasing. The recent Jones LaSalle survey shows that corporate America is willing to pay more for "green leased" space in order to save on energy costs over the long run. This survey highlights the growth potential for companies that specialize in energy efficiency retrofits or systems. Investors should consider the sector for a portfolio weighting. (For related reading, see Go Green With Socially Responsible Investing.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  2. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Clinical Trials

    Learn more about the BioShares Biotechnology Clinical Trials Fund, a new and innovative fund focusing on breakthroughs in the health industry.
  3. Mutual Funds & ETFs

    ETF Analysis: First Trust NYSE Arca Biotech

    Learn more about the First Trust NYSE Arca Biotechnology Fund, a highly rated exchange-traded fund in the biotech space.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares KBW Bank

    Consider an examination and analysis of the PowerShares KBW Bank Portfolio ETF, considered one of the primary financial sector ETFs.
  5. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  7. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  10. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!