Institutional Real Estate, Inc.

NAREIM Dialogues Spring 2018

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Page 38 of 51

NAREIM DIALOGUES SPRING 2018 37 creates real financial value. If you look at building energy efficiency opportunities, there are billions of dollars in value from wasted energy that can be harvested. Granted, tapping those reserves isn't easy. Efficiency is scattered across multiple building systems and processes — single point solutions like swapping out old lighting fixtures, replacing a chiller, updating a roof system, or changing management practices can require major capital expenditures, disruptive construction projects and, depending on lease structures, take time to produce a positive return — if a return materializes at all. Creating significant value from efficiency requires vast amounts of original, building- specific data so that you can uncover and continuously correct hidden inefficiencies in existing, interconnected building systems. With such nuanced data, small tweaks across many different building systems can yield 10-30 percent energy savings, and more importantly for many landlords, boost net operating income. Again, this is similar to the oil industry, where expert businesses have emerged specifically to identify, value and then extract reserves for their clients. Real estate needs the same kind of approach – and, like oil, investors can now look at efficiency as potential value creation and not as marginal cost savings. Real estate investors care the most about the overall value of the buildings, expending the brunt of their worry on maximizing NOI to improve the equation coupled with a cap rate. While energy might seem like a small variable, generating even $0.50 energy savings per square foot tapping into Efficiency Reserves can, if done correctly so that it can be capped at disposition even in NNN buildings, increase the overall value of a building by $5 – $10 per square foot— while making important progress against climate change. In a 100,000 square foot building, this would result in $1 million dollars in financial value and 3,000 tons of carbon dioxide eliminated. Multiply this by a portfolio of 1,000 buildings, and you've just generated $1 billion in financial value, and eliminated 3 million tons of carbon dioxide — about the same as cutting the emissions from electricity use from half a million homes in one year. That's a lot of green. Data-enabled 'Efficiency Production' Traditionally, the concept of energy efficiency has been a relatively passive affair. You screw in a few LEDs, purchase ENERGY STAR-friendly products, add a green roof or bike racks, check the boxes to make your building LEED-certified, and call it a day. But these measures only scratch the surface of the opportunity. By collecting and analyzing more data than ever before, sustainability and efficiency can be viewed as prospecting for value. In a tight market priced near to perfection, these Efficiency Reserves can be the difference that creates alpha. While commercial real estate has been able to weather the Information Age thus far without too much trouble, technology now is disrupting the status quo. Businesses and consumers spend $450 billion powering these buildings each year, with up to 30 percent of that energy and money wasted on delivery and management of energy. What if we could convert this wasted energy into revenue? Again, thanks to data, we can. The Efficiency Production process works by deploying hundreds of physical sensors throughout a commercial building in a way which doesn't disrupt operations but allows for the collection of huge amounts of quality thermodynamic data pertaining to the building's heaviest energy users: heating, cooling, ventilation and lighting systems. All of this information, along with supplementary data from the Building Management System (BMS), utility, and weather satellites, is fed into CLUES®, Carbon Lighthouse's proprietary software platform, to create a kind of MRI of your building. This lets us identify how to best optimize the equipment you already have in a way that improves overall system efficiency, without costly equipment replacement or upfront cost. With this MRI "baseline", we can model which corrective actions will produce the highest returns. After we've implemented the changes, we use data to monitor the energy performance over time, which is how we Efficiency Producers to take corrective action as soon as there is a problem, guaranteeing continued financial value even in the face of inevitable building drift. Energy efficiency is not a 'one-and-done' deal; it requires continuous action. While Carbon Lighthouse coined the term 'Efficiency Production', it is increasingly being deployed across portfolios nationwide by owners and real estate investors who see the massive market opportunity of Efficiency Reserves — $100 billion in the U.S. market alone in the form of wasted energy. Capitalism will save the planet The beauty of efficiency in all of its forms is that it's about making better use of the resources we have to create better outcomes. Real estate investors have plenty to worry about on the climate front — in 2017 alone, extreme weather events such as Hurricanes Harvey, Irma, and Maria inflicted billions of dollars in damages on the built environment, before even accounting for lost rents. And, as the planet continues to warm, the costs associated with these unpredictable weather risks will only increase. There is a common belief that the environment and the economy are mutually exclusive pursuits. Technological improvements over the past decade have rendered that belief outdated and incorrect, and the data proves it. When wasted energy is turned into revenue, we remove a chunk of the 20 percent of global emissions coming from commercial buildings. So far, Efficiency Production has eliminated the equivalent of six power plants (with nine more on the way) while tapping the value of millions of dollars worth of Efficiency Reserves for real estate investors. Those who predict the future will inherit it Success in the real estate industry comes down to the ability to make accurate predictions. It's the real estate investor's job to predict the future of the market, and in this endeavor data is a powerful ally. Making useful predictions depends on the quality and quantity of the available data. We live in the Information Age, and data reigns. Those investors who learn how to collect, analyze and act on data will reap the financial rewards. In an industry struggling to solve the value creation problem, data offers an opportunity to find and tap new revenue streams that haven't ever been possible before. The successful will profit while making a tangible impact on climate change. How we now collect, analyze and act on data has changed the game. There's untapped value waiting in your building. Will you reach for it? 0123456789 0123456789 0123456789 0123456789 0123456789 ©

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