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.
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.)
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