The influence of energy considerations on decision making by institutional real estate owners in the U.S

Renewable and Sustainable Energy Reviews 94 (2018) 275–284

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The influence of energy considerations on decision making by institutional real estate owners in the U.S Pernille H. Christensena, Spenser J. Robinsonb,

⁎,1

T

, Robert A. Simonsc

a

University of Technology Sydney, Australia Central Michigan University, United States c Cleveland State University, United States b

A R T I C LE I N FO

A B S T R A C T

JEL Codes: Q01 Q56 R30 R33

Large bodies of literature investigate the energy and resource impact of green buildings on consumers, environment, rent and society. However, little research exists that examines the habits and decision-making preferences of owners who operate and invest in these buildings. Industry interviews with senior-level representatives of U.S.-based institutional real estate owners (e.g. REITs, Pension Funds, Opportunity Funds, and Investment Managers) were conducted to assess energy reporting, data tracking, labeling preferences and upgrade decision making. The interviews revealed that EnergyStar and GRESB are primary reporting outlets, with LEED also relevant. Energy tracking mechanisms were quite disparate, ranging from custom built systems, EnergyStar Manager, third party providers or limited tracking. Upgrades were primarily driven by cost-benefit analysis and not sustainability-related motivations. This research shows that energy efficiency and tracking mechanisms have become the norm for institutional owners and investors.

Keywords: Commercial real estate Sustainable buildings LEED EnergyStar Interview method Investment Green buildings Energy performance

1. Introduction Institutional building owners represent one of the largest blocks of building stock ownership, and their energy-related decisions have large cumulative effects on global energy consumption [28]. They are an important class of property owners representing over USD $20 Trillion investable dollars [59], and significantly influence both the domestic U.S. and global markets. Incentives promote green buildings [36], which affects both capital investment and operational decisions in free capital markets. Gaining a deeper understanding of the attitudes, motivations and incentives that influence the ways that institutional real estate owners consider energy consumption will help understand drivers of organizational change [1,25]. The focus of this research therefore investigates U.S. institutional real estate investors’ motivations for pursuing energy-related strategies. While the focus on U.S.-based institutional investors may be a limiting factor for global generalization, the scale and scope of the U.S. market, coupled with its impact on global markets, make the research findings meaningful. A few studies have previously been conducted that aim at offering insight into the drivers and motivations of institutional investors. Pivo ⁎

1

[38] used a Delphi approach to gain insight into the Responsible Property Investing practices of institutional owners. However, changing attitudes and realities around sustainable real estate and energy infrastructure investment post global financial crisis (GFC) necessitates an update to his study. Christensen (2012) conducted a study of public and private investors, property developers, property management and corporate tenants to investigate decision making strategies related to implementing sustainability strategies in property after the GFC. The study focused more broadly on the drivers for pursuing sustainability and what sustainability attributes influence decision making, whereas this study specifically investigates energy-related decision-making strategies of institutional investors. Significant bodies of research have emerged on the effect of private sector (LEED, BREAMM) and public sector (EnergyStar, Energy Performance Certificates, NABERS) eco-labels on energy consumption, financial returns, and environmental social governance (ESG). Braun, Cajias and Hohenstatt [2] find that societal awareness, reflected through google searches, impacts overall adoption of eco-labels by organizations. Eco-labeling and energy rating schemes can create awareness about consumption practices in buildings, and provide an

Corresponding author. E-mail addresses: [email protected] (P.H. Christensen), [email protected] (S.J. Robinson), [email protected] (R.A. Simons). The authors thank CBRE for their generous support of the project as part of the Real Green Research Challenge.

https://doi.org/10.1016/j.rser.2018.05.061 Received 22 September 2017; Received in revised form 12 May 2018; Accepted 28 May 2018 1364-0321/ © 2018 Elsevier Ltd. All rights reserved.

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incentive for owners to conduct energy reducing activities. This research extends recent European studies investigating property owners’ perception of value creation from environmental certification of buildings (e.g. [4–6]), and offers insight into the motivations of U.S. institutional investors through a qualitative exploration of their energy related eco-label practices. In contrast to Europe and Australia, the United States has few governmental requirements mandating eco-labels, and most of these are at the local level2 (Eisenberg, 2016). For U.S. owner-investors, mandatory energy disclosure requirements lag behind their developed world counterparts. At the time of this writing, less than 1% of municipalities in the United States have energy disclosure requirements [10]. In these locations, energy disclosures are primarily linked to the EnergyStar program, and predominately apply to commercial building stock. They are utilized in ways similar to the mandatory EPCs in the EU [20,27] or NABERS in Australia [22,23]. Eco-labels in this context act as proxies for greenhouse gas (GHG) emissions abatement which are a component of many of these policy tools. The roll-out of energy disclosure programs is still in its infancy in the U.S., and little research has been conducted to assess and understand the impact of these programs on energy efficiency or on the uptake of energy-efficiency measures for effected real estate. However, research investigating the impact of European energy- related regulatory policies demonstrate the potential for such policies to improve energy efficiency in buildings [48]. Without regulatory mandates in the U.S., the adoption of eco-labels in the U.S. may instead be driven by potential green premiums, potential costs savings, and environmental social governance (ESG) concerns. The potential for green premiums continues to exist, albeit in a changing state of likelihood. When eco-labeled buildings entered the market in the early 2000's a number of studies found green premiums associated with obtainment of these eco-labels [18,19,47,60]. An ensuing body of research argued that as technological and price diffusion occurs, those premiums may not be persistent over time and property characteristics [8,12,14,24,30,39,42,44]. This has created an environment with less certain rental or sales-driven returns to owners and investors for energy and eco-label investments, possibly impacting whether green premiums remain a significant driver for pursuing ecolabeling and energy ratings. Instead of top-line increases in revenue from increased rental income and/or return on sale, the literature suggests that institutional owners may be driven by potential costs savings. For some investors, eco-labels may act as signals for energy efficiency and as proxies for greenhouse gas (GHG) emissions abatement [26]. However, these signals are only a step towards understanding owner motivation for energy retrofit and upgrade decisions [32]. Because energy costs can be volatile, expected returns on energy retrofits depend to some extent on the variation of expected savings. Thus, modeling applications of techniques or construction materials ([33,49,50,7]; Vimpari & Junnila, [57]). Kontokosta [31] indicates that reliance on energy intensity alone improperly gauges the overall energy consumption of a building, therefore making expected returns through energy savings difficult to forecast. Specific to operational savings in eco-labels, Newsham, Mancini, & Birt [34] find evidence that energy savings exist in LEED buildings, Conversely, Scofield [51] argues that their findings do not effectively control for square footage, and suggests that no energy savings exist. More recently, Uğur and Leblebici [56] observe 30–40% energy savings in a Norwegian case study with 7–10% construction premiums. Given the nuanced and varied findings, expected return forecasts may limit operational savings as a sole incentive for pursuing energy efficiency retrofits and/or eco-labeling. Given the uncertainty of both direct revenue premiums and costs savings, the impetus for institutional investors to pursue energy-

efficiency strategies may be ESG-related.3 Corporate CSR motivations often drive tenants’ desire occupy eco-labeled buildings [18,39,53]. The design and operation of green buildings heavily impact consumer preferences in choosing office space [61]. Attracting quality tenants can reduce the holding risk for properties; meeting the ESG-related demands of high-quality tenants may therefore be a motiving factor for institutional investors to pursue energy-efficiency strategies [10]. Research shows landlords prefer to mitigate risk over maximize gain in a number of scenarios [62]. Other potential financial motivations for pursuing ESG- related strategies also exist. Cajias, Geiger & Bienert [5] find that listed real estate companies with high ESG scores outperform others, while Della Croce [15] finds that ESG is a motivating factor in infrastructure investment. The primary CSR/ESG motivations of institutional property owners remain an incomplete picture, however, particularly considering that their actions are voluntary and profitdriven. The opacity of institutional owner motivation is in part because asking or contract rents constitute most of the sustainable real estate research data to investigate potential motivations for pursuing energy retrofits and/or eco-labels. Although revealed and/or asking rents offers empirical evidence of market habits, they only permit indirect inference of motivation and do not consider liquidity issues [9]. Brown et al. [3,4,35] emphasize need for further study into owners’ and managers’ perception of value creation via the adoption of eco-labels. Other recent research also calls for improved understanding and alignment of institutional investors energy usage [32], their management strategies [41] and understanding of the preferences driving the adoption of eco-labels [26]. In addition to the identified gap in the literature concerning institutional owner motivation, a research grant to develop a new green office building rating system supported this paper. The development of the rating system required a robust, overarching mixed-methods research design. A crossover analysis strategy was created specifically for the development of new real estate products, and the interviews conducted as part of this research align with Phase 7 of this product development process (detailed in [11]). The first industry-driven portion of the project entailed a series of focus groups with tenants, brokers, and property managers, which identified 18 relevant sustainability and energy-efficiency attributes that influence decision making [53]. The results were used to develop a U.S. national survey aimed at estimating tenants’ stated willingness to pay (WTP) for these building features (results are detailed in Robinson, Simons, Lee and Kern [46]). The research team acknowledged that the contingent valuation methods used to estimate tenants’ stated WTP may not uniformly equate to revealed preferences in the marketplace. Therefore, to complement the survey data, most of the 18 building attributes were appended onto a data set that included tenant rent rolls. Econometric analysis revealed existing market generated premiums for many of these building-level features [45]. The interviews which provide the content for this paper were designed to understand the energyrelated strategies of the institutional owners, who ultimately purchase eco-labels. In this context, this research seeks to directly inquire (rather than by inference) into the energy-efficiency motivations of institutional owners, and address the following research questions:

2 Notable exceptions are a requirement for Federal leases to be in LEED buildings and Washington D.C. requiring LEED certifications for all new office construction.

3 Corporate Social Responsibility (CSR) represents a more commonly used United States term for Environmental Social Governance (ESG).

What are the attitudes, motivations and incentives that influence institutional real estate owners’ decisions about energy aspects such as energy upgrades and eco-labeling? How do energy-related factors influence property purchase, renovation, and management decision making for institutional real estate owners in the US?

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decision making? What tools and processes are used to inform decisions? Finally we moved to (c) reflections about energy-related decision strategies and their impact on purchase, renovation and management decisions. Interviews lasted approximately 30–60 min, which is shorter than recommended by Seidman. However, due to the focused nature of the interview questions, this was found to be sufficient time to reach a point that no new information was being offered.

The remainder of the paper is organized in four sections. The research design and methodology are discussed, followed by main findings, limitations of the research, and ending with a discussion of the relevance of the research to industry and next steps. 2. Research design and methodology 2.1. Research approach

2.3. The sampling process

A qualitative approach using semi-structured interviews with industry experts is used to gain in-depth insight into the specific decision processes and strategies of institutional investors for energy-related real estate decisions, as this method is best suited to fulfilling the research aims (for more detailed, methods context, see [17,29,43,58]). The research questions include both exploratory (seeking to gain understanding), and explanatory (striving to uncover new insights into how decision strategies of institutional investors for commercial office buildings are influenced by energy-related factors) questions. This approach aligns with the interpretive and constructivist paradigms [13,16,40]. Due to the emphasis placed on interpretation of textual data in the analytical approach, the researchers consider this to be interpretive research. The data coding process reflects the research team's understanding of how respondents perceive the impact of energy-related characteristics and eco-labels on investor decision making, and we acknowledge it may be possible to make alternative interpretations.

A purposeful sampling was used to select participants for the indepth interviews. This non-probability sampling technique “seeks to maximize the depth and richness of the data to address the research question” ([17], pp. 317) and was the strategy best aligned with the objectives of this research. An initial list of 50 purposively-selected prospective interview participants was identified via researcher contacts and industry networks to create a representative sample of highlevel institutional real estate decision makers. Upon completion, 34 interviews were conducted and all except one interviewee consented to the recording and subsequent transcription of their interview. The 33 consenting, anonymized interview transcriptions became the primary data set for the comparative content analysis and represent an overall participation rate of about 70% of the sample frame. The participants represent a rich and diverse sample of institutional owners managing large portfolios and provide a fertile ground to gain insights into the behaviors of institutional investors regarding energy usage and labeling preferences. While strict nondisclosure requirements protecting the anonymity of respondents and their data prevent us from providing specific details, the typical respondent (representing over two thirds of the sample) controlled a portfolio of 20–60 office buildings with a typical building size of 250,000 square feet (about 22,000 m2) representing several major U.S. markets. A few respondents were narrowly-purposed entities that managed half a dozen buildings in a single U.S. state or market. Finally, a few respondents were sustainability industry consultants who advised major portfolio managers. As shown in Fig. 1, nearly 80% of the participants are classified as either senior leadership (CEO, COO, President, EVP, etc.) or senior executive (Executive Director, Senior Vice President, etc.), with the remaining 20% identifying themselves as senior manager level decision makers (Director, Vice President, etc.). All participants are highly knowledgeable regarding their company operations and processes, and all were actively involved in making decisions related to energy performance and reporting for their organization. Interestingly, the results did not vary by ‘leadership tier’ of the participant; therefore, the key findings

2.2. Data acquisition: Interview protocol The interview protocol, was designed to govern the execution of the interview process and increase the quality and reliability of the data. It included a procedural guide for directing the research team through the interview process [29] and outlined when to email participants prior to the interview, included scripts for all communications with participants, steps to obtain confirm informed consent prior to starting the audio recording, and directives on how to conclude the interview with an invitation to participate in a follow-up focus group discussion. The interview protocol was developed through a four-stage process to assure alignment of interview questions with the research objectives, inquiry-based conversation during the interview (vs. formal Q&A interview sessions), reliability of the interview as a data collection instrument through a third-party review of the protocol (as prescribed by [37]), and external validity of the protocol via a three-interview pilot study. All interviews were conducted via telephone by a single lead interviewer, and were recorded. Two principal investigators alternated administering interviews, thus restricting the variation for all interviews to no more than two voices. A secondary listener participated on each call to take notes and to ensure that the protocol was consistently followed. To ensure that the flow of the interview questions was both conversational in nature and inquiry-driven, a combination of content mapping questions, to raise and broadly explore investor motivations (e.g. Why do you consider energy in buildings?), and content mining questions, to understand how these motivations influenced decision strategies (e.g. How does the existence or absence of eco-labels influence purchase/renovation decisions?) were posed to the respondents. Probe questions (e.g. … in what way?) were used as responsive, follow-up questions to elicit more information, description, and explanation related to a particular aspect of the interviewee's response. All interview questions were assessed for clarity, simplicity and answerability, and their structure was analyzed to ensure none were leading in nature or contained any embedded assumptions (in accordance with [50,70]). The interview structure was a modified Seidman's semi-structured interview protocol (see [52] for the original protocol) and funneled discussion from (a) introductions/ understanding the participant's role in decision making; to (b) Nuts and Bolts: Do they consider energy in

Fig. 1. Job classifications of participants by Leadership (CEO or comparable), Senior Executive (Executive Director or comparable) or Senior Manager (Director, Vice President or comparable). 277

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data analysis, thereby reinforcing methodological rigor. In addition, the enhanced transparency created by using NVivo in the dialogue between researcher and the textual data improves confirmability of the findings. The analysis was performed simultaneously on the complete set of the qualitative data in three stages using a constant comparison analysis method. An abductive strategy for the constant comparison analysis was undertaken, meaning some themes were identified prior to start of the analysis, so that relevant data could be coded deductively in the data set. Other themes were developed from the data inductively. The aim of the first stage was simply to review and aggregate the data in such a way to facilitate further analysis. As a small-n sample with a high degree of consistency in the responses among the participants, the first stage of the analysis entailed open-coding of the data to identify which pre-identified codes4 would be useful in the NVivo coding process. The dataset was then manually sorted in NVivo by the research team using a cross-sectional method and the dataset is deductively tagged, or coded, using these pre-identified codes. Simultaneously, the research team identified new themes inductively during this stage, and these new themes were iteratively coded throughout the entire dataset. At the end of this stage, the coded data fragments were synthesized into larger chunks of data around broader concepts. After this stage, inter-rated reliability of the coding process was tested by having multiple coders review and code several transcripts using both the pre-defined and inductively developed codes and were also asked if any additional codes needed to be created to fully represent the range perspectives in the dataset. In the second stage, the synthesized data chunks were reviewed and analyzed using both a cross-sectional 'code and retrieve' method, and in-situ, non-cross-sectional analysis to prepare descriptive accounts of each concept (as guided by Mason, 2002). Key dimensions of each were identified, and the range and diversity of each was mapped to better understand both the distinctiveness of each data ‘chunk’ and the unique decision processes, or characteristics, described within them. Higherlevel themes were then created to again define smaller meaningful parts (‘chunks’). The descriptive findings in Section 3 present these final key themes, or lessons, from the analysis. Finally, in stage three, additional codes aligning with the research objectives were developed to create linkages between ideas and topics communicated by the interviewees and the research objectives. To transition the analysis from descriptive [themes] to explanatory [linkages], NVivo concept and cluster mapping tools were used to identify data patterns of association and linkages among the themes. These patterns and linkages were then analyzed to develop an understanding of, and explanations about, the interrelationships between different contributory factors and how those interrelationships influenced the decision processes of institutional investors. The presentation of the Conclusions in Section 5 communicate the linkages identified in this final analysis stage. It is important to note that the analytic process described above is an iterative process (see Fig. 3 for flowchart and analytic process); as the themes were refined, dimensions clarified, explanations developed, and patterns identified, the research team constantly revisited the synthesized dataset to search for new ideas, checked their codification assumptions, and identified underlying factors related to the participant's decision process. Ritchie and Lewis [43] note the analytic process is non-linear and present a depiction of the five iterative stages of data analysis stages and the processes involved in qualitative analysis (see Box 8.1). Their five stages include:

Fig. 2. Company type of participants as institutional investment, tax deferred groups such as REIT/Pension Fund, and consulting/advisory.

presented in Section 4 consolidate the data from all the interviews into a single dataset. Participants were generally dispersed across the United States, although their portfolios primarily represented urban office buildings. The real estate assets represented by the sample were concentrated somewhat more heavily on the east and west coasts. Where relevant, information relating to specific geographic anomalies has been included in the discussion of findings in Section 3. Company type was dominated by institutional investment firms, representing nearly 70% of the sample (Fig. 2). The majority of these firms directly own and/or operate real estate. The few that do not directly own real estate have significant influence on the real estate decisions made by others as a result of their industry role. Within this substratum of institutional investment firms, the majority are opportunity funds and/or manage real estate funds for others. The mission statements of these firms ranged from long-term buy and hold to opportunistic repositioning. This is reflective of the fact that the companies ranged from large holding companies affiliated with multi-national lending institutions to regional firms with under $2 billion in assets. The next largest group, composing 20% of participants, represented real estate investment trusts (REITs) and pension funds. REITs and pension funds were grouped together due to the similarity in their tax treatment and general investment strategy. The final 10% of participants represented service or advisory firms who work with the preceding groups, but do not directly allocate funds for their own or other accounts. Participants in this group were selected for participation because they either had significant input into the decision making by firms who directly own or manage real property, and/or occasionally had decision making powers fully outsourced to them. In this way, this group can be considered significant decision influencers. The results were remarkably consistent across these three company profiles, so for ease of communication, the respondents’ answers were consolidated into a single dataset, and the results in Section 4 are therefore not differentiated by ‘investor type’. 2.4. Data analysis: Applying a comparative content analysis approach Following Sinkovics, Penz and Ghauri [55], the content analysis of the interview transcripts was conducted using NVivo software to help to substantiate the analysis and interpretation of the transcribed interview data. Consistent with other qualitative papers, analysis focused on themes and repeated concepts throughout the interviews (e.g. [10]). The analysis emphasized an attempt to understand the perspectives of the respondents from their answers. NVivo software was used because it formalizes the review of textual data and the interpretation of textual

1. Generating themes and concepts; 2. Assigning meaning; 3. Assigning data to themes/concepts to portray meaning;

4 Pre-identified codes were developed from the results of earlier phases of this research, see Robinson, Simons, Lee and Kern [46] for a full discussion.

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Fig. 3. Research methodology flowchart and analytic process (attached separately as ppt and pdf for editorial ability to manipulate).

4. Refining and distilling more abstract concepts; and 5. Assigning data to refined concepts to portray meaning.

quote represents the perspective of different participants.

Movement between the data and the analytic concepts helped the research team improve our research's analytic account, while movement up and down the analytical hierarchy (linking and nesting concepts in terms of their level of generality into themes) was critical to ensure a thorough qualitative analysis of the dataset. As noted earlier, this paper presents the findings of Stage 7 (Validate Feedback: Qualitative Analysis Phase of Qualitative Data) of a 10-Stage MarketDriven Product Development and Construct Validation Methodology. For a more detailed discussion of the research methodology for the larger project within which this research sits, see Christensen, Robinson and Simons [11].

3.1. Why consider energy? All decisions for an asset are ultimately made with the goal of maintaining its competitiveness within the local market. This means that the priorities of institutional investors related to energy requirements may differ from one market to another, and may vary due to both size and geography of the marketplace. One industry expert explained that “in certain markets like Washington D.C., for example, where you have quite a heavy concentration of LEED-certified properties, and a tenant base including the federal government that has a LEED goal as their standard, [decisions] become much more about just being asset competitive.” The consideration to keep the asset competitive expands beyond eco-label considerations (e.g. LEED) and includes energy efficiency considerations as well as other ‘green’ attributes. Thus, the decision to include a significant number of energy performance improvements is more likely to be made in markets where tenant demand for such features is high, enabling investors to keep assets viable and relevant in that competitive space. Whether the energy-related expectations of a marketplace include specific requirements for energy performance, achievement of particular LEED certification or EnergyStar-rating, a green lease, or some other characteristic, it must be noted that the relevant attributes, and the value placed upon them by property investor/ managers, commonly vary between markets. Some participants highlighted the importance of considering not just energy and environmental features in the strategic purchase, renovation and management decision processes, but that maintaining a holistic strategy (including economic, environmental, social and governance factors) was needed, noting that energy “is part of a larger picture. It's not necessarily viewed as a separate distinct activity.” Institutional focus on energy monitoring and improvement spanned all groups regardless of their preference for specific eco-labels. A key energy-related decision driver relates to strategic asset management and the opportunity to improve the operational efficiency and overall

3. Key findings In keeping with the interpretive approach used in the analysis, the descriptive results of the textual analysis are presented here as key findings with the aim of better understanding institutional owners’ strategic objectives for considering energy efficiency attributes and ecolabels, how they conduct data management and reporting, how energyrelated knowledge relates to organizational energy objectives, and determining the influence that energy has on property purchase, renovation and management decision-making. The deep analysis of interrelationships between contributory factors, with associated explanatory discussion, is presented in Section 5 Throughout this section quotes have been included, with permission, to highlight key statements. Although we are unable to offer descriptive statistics for each sections, or direct references to the participants making the comment, due to ethics compliance requirements, we would note that each participant's perspective has been reflected within the overall discussion, as well as in the quotes selected for each section. No more than two quotes have been included from any single participant. When multiple quotes are used in a paragraph or sub-section, each 279

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expected level of certification achievement varies by market location and local demand for eco-ratings. Most participants with this perspective conceded they would consider purchasing a non-certified building, but noted that the time and improvement costs associated with retrofitting the building to achieve a LEED-certification would need to be included in acquisition calculations. One participant explained that they would first “do a gap analysis on the building to look at its feasibility for achieving those EnergyStar and LEED, and then we underwrite the costs to that in the original underwriting.” In contrast, the other main group considered capturing value-add opportunities as the basis of their business model; therefore, they look to buy buildings with curable defects that can be addressed through building up-fits and Capex (capital expenditures). After bringing properties up to their highest and best use, this group repositions the asset within the market to capture the value-add. Value-add decisions related to certifications, and the level of LEED or EnergyStar achievement, was driven purely by market demand and cost effectiveness. One interviewee commented that “the lack of [an eco-rating] could be a factor in buying an asset. I mean, when you have the opportunity to improve the performance of the building or increase the value that can be a strategy in of itself.” Interestingly, this group generally preferred a lack of eco-certifications when purchasing existing buildings, as they viewed the opportunity of achieving a certification as a significant opportunity to achieve a positive bottom-line impact. However, for all new build acquisitions, this group expected an eco-certification to have been achieved. A much smaller third group was neutral on the issue of the influence of eco-labels on the decision process, stating that they didn’t think “the labels have anything to do with the decision to buy. My issue is: do we know what we’re getting?” This group indicated that eco-labels had no significant influence on their acquisition decisions because they were unconvinced that eco-labels accurately capture building performance. Instead, this group emphasized the importance of their in-house assessment methods for understanding opportunities to improve building performance.

performance of assets. Through effective asset management, building managers and engineers can identify and take advantage of value-add opportunities through proactive planning, improved energy (and water) efficiency and waste reduction. Implementing operational efficiency initiatives in strategic asset management “is a strategy to be able to improve the cash flow of the building based on improving its operations and maintenance, and much of that is related to energy (and water) efficiency.” Several strategic energy-related improvements were discussed in terms of aligning effective asset management with value-add opportunities. The most common of these strategies included:

• Performing a gap analysis or energy audit to assess a building's • •

current level of efficiency, and using that review to align retrofit opportunities with the asset business plan and guide renovation decisions; Reviewing the market outlook and business plan for the building to make decisions about energy projects on a project-to-project or market-by-market basis; and Proactively identifying and planning for up-fit opportunities.

At the heart of each of these strategies was the goal to improve operational efficiency, and in some cases to achieve performance excellence, often attained by achieving a particular eco-rating. A key theme that emerged during this discussion was that opportunities to better manage electricity and water are perceived as “huge value-add creators” because of the impact utilities can have on value through their impact on the Net Operating Income (NOI) of a building. Of course, the extent of this effect depends on whether the building has a gross or net lease structure with respect to utility reimbursement. Decisions to pursue energy efficiency projects are primarily the result of positive cost-benefit analysis calculations, payback period assessment, and/or estimated return on investment (ROI) for the implementation. One interviewee noted that for a “decision [to] be made, it needs to generate a return on the bottom line. That's a given.” Operational efficiency measures and other ‘low-hanging fruit’ (i.e. smaller, simple, low- or no-cost improvements) were unanimously implemented as a first step to improve performance, with other improvements requiring significant capital investments only considered thereafter. Projects with a 3-year payback or less, with a defined investment cap based on a review of project size, or with a defined cost/impact balance were most likely to be considered as priority value-add projects.

3.3. Data management and reporting Several energy-related criteria were unanimously tracked and reported by all participants, and unsurprisingly, all relate to key aspects of operational efficiency. The attributes most commonly measured and tracked by almost all participants include:

3.2. Eco-label preferences: A split decision

• Energy efficiency and conservation (measured by intensity and usage rates); • Energy renewables (measured by type, intensity and usage rates); and • Carbon emissions & offsets.

Eco-label certification was a contested value-add proposition among the participants. Interestingly, there were two clear - and opposing positions related this theme, with each equally representing just under half of the group. For one group, a LEED, EnergyStar or other ‘eco’rating was expected for all new build purchases and preferred for existing building acquisitions. This group saw the certification as a necessary condition of acquisition, because they believe the eco-label represents a benchmark of building excellence and/or previous asset management success. This was clearly communicated by one participant who explained, “We potentially can get more aggressive on pricing [in the acquisition of] a LEED-certified property. We generally look at LEED certification as being one indicator of the quality of how the property has been managed before us and/or how it was built.” Many in this group also considered LEED certification as one of the best tools for marketing a building and gaining higher quality tenants (in most markets), which they considered an additional value-add proposition. Interestingly, the level of LEED certification (e.g. Certified, Silver, Gold or Platinum) was less important than the achievement of any LEED certification, as none of the members of this group specified a minimum threshold of LEED certification that would need to be achieved. Thus, we deduce that the

Most participants participate in the Global Real Estate Sustainability Benchmark (GRESB) reporting. They indicated that GRESB reporting requirements significantly influence what data they collect, the metrics they use to benchmark and track performance of these attributes, and how they report and communicate to stakeholders about asset performance. As GRESB has become the leading sustainability benchmarking standard in the industry over the past decade, it has had an increasing influence on reporting guidelines and has helped normalize data metrics and measures in the industry. GRESB differs from LEED (and other similar eco-certifications) in that GRESB represents a holistic sustainability measurement of a company's real estate portfolio. It covers the full range of ESG related components in both management and the physical assets. By contrast, LEED focuses on an asset level certification, while LEED does cover a number of ESG components from materials sourcing to energy

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efficiency, and focuses primarily on the individual asset.5 LEED buildings in a portfolio undoubtedly raise its GRESB rating. However, companies with a strategic focus on sustainability could score highly on GRESB with buildings that may never qualify for a LEED rating. Several participants acknowledged that the standardization of measures and metrics has improved their ability to compare asset performance across their portfolios. GRESB considers a broad range of building attributes, behavioral attributes and governance attributes, but does not require participants to report on all attributes. However, the 2017 GRESB report notes that most participants do report on each of the Key Performance Indicators (KPIs), which include energy, CO2, water and waste. The emphasis on these KPIs by participants in this research is mirrored in the 2017 GRESB report, which found a like-forlike increase in efficiency for these KPIs in North America by 2.5%, 2.9%, 1.3%, and 37.6%, respectively. The 2017 GRESB report identifies intensified tenant engagement as one factor for the improvement in performance, noting an increase in the distribution of tenant engagement guides (from 22% in 2012–63% of participants in 2017) and in the organization of tenant engagement meetings (from 37% in 2012–76% of participants in 2017). By engaging tenants in a dialogue about the environmental performance of the building, asset managers are able to slowly improve the behavioral responses of some tenants. In addition, the 2017 report notes a significant increase in participants with sustainability clauses in their lease contracts (from 23% in 2012 to 80% in 2017). EnergyStar Portfolio Manager was the preferred tool for monitoring operational efficiency and managing water and energy (and related greenhouse gas emissions) for buildings. It was noted that EnergyStar Portfolio Manager will soon be expanding to include a waste-tracking function, and several participants anticipate an increase in waste-related data gathering and management in the industry due to the already high uptake of EnergyStar benchmarking for energy and water in most markets. With the roll-out of the LEED requirement for (re)commissioning as part of re-certification every five years, several participants also expressed a belief that re-certification requirements for eco-labels might begin to have a larger influence on how data are collected, managed and reported. Among the externally developed software packages, several participants spoke highly of Goby's SeaSuite™ Software and service platform, noting that it “feeds data regarding energy consumption, water consumption, and waste diversion for all of our buildings in our entire portfolio. And that's used primarily to report to GRESB to participate in that survey on a portfolio and company basis and then we also use their system to track sustainable purchases and green cleaning and things like that for ongoing LEED certification process.” Another tool utilized by several participants is the Greenprint Environmental Management Platform, developed by the Urban Land Institute (ULI), which tracks, reports, benchmarks, and analyses energy, carbon emissions, water, and waste performance at the property, fund, and portfolio levels. One participant noted that the Greenprint tool “will do an analysis and then actually will generate a carbon footprint on an asset-by-asset basis, and they also deliver to us a property report, which is basically a graphic interpretation of that data that the property manager has provided … it's a tool to allow property managers to discuss and demonstrate the system and the successes that they’ve been having and/or some of the challenges they’ve been having.” Participants indicated they appreciated the ease of understanding the data analysis outputs of this tool and how it facilitated discussion among stakeholders and decision-makers at multiple levels of their organization. One participant's organization used BOMA 360, “a holistic building performance program,” because they felt it aligned with their philosophy of considering energy as one facet of the larger complex sustainability

issue, which in turn needs to be considered and measured in a multifaceted manner. In addition to the tools above which are sponsored by major industry organizations, a surprising array of data collection and management processes and tools were developed in-house to respond to the specific needs and demands of various organizational decision processes. Among these was a range of internally-developed and proprietary web-based management and reporting tools. Most of these enable the auto-transfer of data from individual assets (e.g. energy consumption) to portfolio managers, who then enter the data into EnergyStar Portfolio Manager (or equivalent), and make the information downloadable for use by building managers and engineers at the property level. These internal data collection and sharing tools were all developed to assist building managers and engineers in identifying inefficiencies in building operations, and to improve resolutions outcomes on these issues. One participant described their internallydeveloped energy reporting system as “web-based. The properties can make suggestions for energy and water conservation and then those projects that get entered into the database, they move through a life cycle where they are identified as an opportunity to be recommended by the team to where it's approved by the asset manager. And then, once it's completed, it gets captured and we put dates down from that project and keep track of the energy savings going forward, and the carbon offset.” As noted from the comments above, many of the tools offer similar data management and reporting structures, and can help facilitate decision making at various levels of the property, asset and portfolio management levels. The variety of tools enable institutional investors, in slightly different ways or using different interfaces, to:

• Complete energy and performance audits; • Improve their understanding of the data analysis outputs via easily understood graphic outputs; • Consolidate data from multiple assets of a portfolio for ease of GRESB (or other similar) reporting; • Facilitate discussion among stakeholders and decision-makers at multiple levels of their organization; • Make better informed decisions related to how, when and what kind of maintenance planning should be undertaken; and • Maintain an inventory of operational efficiency actions; and • Economize on data gathering structures by having a platform that can provide inputs to more than one reporting system.

Some participants also used their data to feed into real-time energy consumption dashboards. Such dashboards are used to communicate with tenants in real-time with the aim of educating tenants about how individual and group actions impact the overall performance of the building and thereby creating behavioral change. The desire to affect behavioral change, ideally with a bottom-line impact, crossed over both groups that valued specific eco-labels and those that did not. 3.4. Strategic implementation and management processes Two disparate management strategies were identified as the primary strategic processes for the implementation of energy and sustainability action plans. A priori intuition suggests that larger firms would craft more specialized management plans across their portfolio and within markets, but this outcome was not evident. Roughly half of the institutional investors developed formalized processes for decision making and benchmarking, such as internal guidelines, policies, procedures and/or programs. Although some institutional investors applied these processes across all markets noting that their “implementation is consistent across markets and across property sectors”, others indicated that the processes were adjusted based on local market demand, size and/or geography, with one participant acknowledging “… it's kind of by market, I would say … It [varies] by market and by class of property.” However, participants generally agreed that the actual

5 USGBC does maintain a LEED neighborhood level certification which is outside the scope of this discussion. See Freybote, Sun and Yang [24] for further discussion of this certification.

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the acquisition stage, while available local eco-incentives (e.g. financing options/utility rebates to offset investments) were more influential in renovation decisions. Some regulatory requirements and incentives also included unique reporting requirements (e.g. energy disclosure certificates), which some participants felt had the potential to positively or negatively impact occupier decision-making, thereby impacting the asset's financial viability.

measures and metrics remained the same across most markets. How the KPIs were weighted in the decision process, however, was more likely to vary by market. As one participant noted, “[we] keep the same factors in mind but we prioritize it differently across the market.” In contrast, the other (roughly) half of the participants indicated that they had no formalized processes in place within their organization. Energy-related decisions were instead made on a building-bybuilding basis and were heavily influenced by current local market demand pressures for each project/building. These interviewees heavily emphasized their fiduciary responsibility to shareholders, and linked this to a belief that is important not to make decisions unilaterally across markets. This group felt strongly that specific market demands should be used to decide what actions were required to maximize each asset's competitiveness in that marketplace (see Section 3.5 below for more details). An interesting sub-theme emerged during the conversations about the use of, and perceived reliance upon, technology. There was a prevailing opinion that the industry has a “fixation with technology. You’ll hear many people speak to the cost of being sustainable and I feel that is really inhibiting the implementation of sustainable practices. My earlier example of the lighting. There is no cost to be sure that you turn your lights off after everyone leaves, so that's a no-cost opportunity to reduce your energy use … I think [there is] a lack of knowledge, it's a lack of understanding of what it means to operate sustainably and it's holding back its implementation.” Another exciting theme that emerged was about the role of transparency in strategic asset management, and how the real estate industry is moving toward valuing more transparency. One respondent noted that “having more transparency around not just building performance from an efficiency standpoint or a cost standpoint, but more transparency about how the building is run and operating in the context of overall sustainability attributes that we’ve been talking about, I think would be the biggest helping factor… because then people would make decisions, without having to ask, it would just be part of the criteria.” Increased transparency within organizations, and across the industry more broadly, was perceived as something that will improve the decision process for all stakeholders and drive an increase in the uptake of energy efficiency-related attributes.

3.5.2. Impact of energy and eco-labels on the renovation decision process Energy-related considerations, in conjunction with several other sustainability measures, were considered by most participants to be part of the annual business planning for on-going investments and may therefore be more influential in the renovation and retrofit decision process than at the acquisition stage. Acquisition of existing properties with curable defects were deemed preferable when low-risk value-add opportunities for the renovation process were identified, like the resolution of ‘low-hanging fruit’ defects. Such improvements are often low-dollar investments that enable repositioning of the property. Acquiring an eco-label (LEED, if it makes sense in the local market; EnergyStar for all) was also considered helpful when repositioning a property. Being able to advertise a building's energy improvements and new eco-certification(s) was perceived as having a significant positive impact on an asset's leasing potential and for attracting quality tenants, especially for publicly traded companies with CSR plans that feature green occupancy goals. For acquisitions of existing buildings and/or when repositioning an on-going investment, participants indicated an increased likelihood that they would complete a comprehensive building study as part of the decision process, including a full energy audit and a review of a comprehensive suite of retrofit options. There was consensus among participants that low- to no-cost actions to improve operational efficiency would be identified as priority projects, followed by projects with payback periods of less than three years or a capex under $100,000.

4. Research limitations Certain limitations impact the generalizability of these research results. The participants consisted of U.S. institutional investor representatives. This group owns, operates and influences significant global capital investment in real estate. Despite the global impact of this investment group, the attitudes, motivations, decision processes and strategies may be more relevant for U.S. markets than for global ones. Although the individuals with whom we spoke were all senior representative of their firms and qualified to speak for firm level strategies and operating procedures, they may bring some level of personal bias. The organizational ESG-policies may also influence their perception of decision making ‘on the ground.’ Efforts were made to uncover such potential biases during the interview by asking probe questions for clarification whenever needed. Furthermore, the smaller n-sample included in this qualitative study may not be fully representative of the entire industry, despite efforts to develop a robust and representative sample. Finally, the research team took every formal and many informal measures to ensure objectivity in interview design, execution, and interpretation. Regardless, as this is part of a larger research stream designed to develop a new eco-label more broadly applicable to all buildings, researcher bias could slightly color the results. Simons, Robinson and Lee [54] discusses the proposed eco-label system. Still, the general themes and prevalence of the energy-related initiatives presented may be considered to be a robust example of best energy practices among institutional investment leaders in the U.S. at this point in time (2017), thus providing a benchmark to which future activity can be compared.

3.5. Impact on purchase and renovation considerations 3.5.1. Impact of energy and eco-labels on the purchase decision process Emphasizing that energy efficiency and eco-labeling decisions are not about altruism, all participants generally considered it to be part of a fund managers’ fiduciary responsibilities to include operational efficiency considerations in the property acquisition decision process. One participant stated that “we think that it is our fiduciary responsibility to our clients and investors and we have always … concentrated on making sure those buildings are operating efficiently and effectively and are operating in the manner that they are supposed to.” Supporting this statement was an overwhelming emphasis by most participants that energy usage and conservation considerations were only influential in decision making if the fund manager believed that they could significantly impact the economic viability of the property, regardless whether that impact was positive or negative. Participants indicated that for new build acquisitions, energy ratings were often used to anticipate energy efficiency and performance. As such, energy audits were rarely performed prior to acquisition of new builds. Energy considerations were primary integrated into the acquisition decision process when they demonstrated an impact on the bottom line by affecting operational efficiency, tenant retention or when they offered potential value-add opportunities. Another set of decision criteria which many participants indicated as influential in the decision process for both purchase and retrofit decisions pertain to the regulatory environment governing the market and available incentives. Restrictive regulatory requirements (e.g. building codes & green building regulations) were most influential at 282

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data requirements through software may help lessen the “green data overload” that overwhelmed some participants.

5. Discussion The energy-related findings from this research provide a rich framework for insights into the energy operations and preferences of large scale property owners, investors, and managers, as well as how energy improvements fit into the strategic decision-making process related to overall asset sustainability. The findings answer the research questions by shedding new light on the attitudes, motivations and incentives that influence institutional real estate owners’ decisions about energy upgrades and/or eco-labeling, and how these influence property purchase, renovation, and management decision-making. A key theme repeated in several parts of the analysis is that opportunities exist for energy-related features and initiatives to create value at real estate acquisition, during ownership, and through superior management of electricity and building heating and cooling processes. The absence or achievement of an eco-label is central to decision making among a large part of our sample because it is perceived as an opportunity to create or harness value. Energy-conscious capital upgrades, energy performance management, and tracking of energy-related data also play a major role in strategic property management and add to the bottom line through efficient building operations. The results from this U.S.-based research may be best able to be applied in other market environments that do not have strong government oversight of energy and environmental building requirements and/or required performance disclosure.

5.3. Energy acquisition and retrofit decisions are ultimately financial decisions The institutional investment community now recognizes the value of pursuing excellence in energy performance, and striving for energy efficiency has become the norm in institutional ownership. However, the vast majority of energy acquisition, retrofit and upgrade decisions were made primarily as financial decisions, although more noble goals, such as the desire to contribute to improving the planet, were sometimes considered. Typically, some sort of cost-benefit analysis or other financial analysis, such as a return on investment (ROI) or simple payback period calculation, was the primary decision metric for whether or not to pursue energy upgrades. Considering the sophistication of the respondent pool, the researchers were surprised at the low-tech (e.g., payback period rather than discounted cash flow modeling) decision rules applied to green office investments made on the margin, particularly when many of the firms were using very sophisticated energy data tracking and management tools. To continue encouraging energy-related upgrades, industry leaders, professional bodies and academics need to continue to build the financial business case for upgrading buildings in terms of energy, water, waste, and other sustainability features. Without regulatory intervention, continuing to demonstrate how such upgrades can increase profits may be the most viable strategy to influence U.S. market uptake.

5.1. Divergent perspectives about HOW eco-labels add value Given the financial and fiduciary motivations for pursuing energy efficiency, most firms believed eco-labels and energy ratings add value. Firms managing office portfolios considered eco-labels during the acquisition process, although there were two divergent views of how ecolabels factor into the decision process. Some preferred purchasing prelabeled assets, while others sought opportunities to up-fit buildings and achieve an eco-label subsequent to acquisition as a value-add proposition when repositioning the asset. Some executives viewed eco-labels as a market signal that helped generate income, while others saw the process of eco-labeling as a helpful tool to identify inefficiencies and opportunities to improve energy performance. Regardless of their position as to whether eco-labels act as valueadd or management signals, a number of respondents questioned whether eco-labels actually produce the outcomes to which they claim. As one interviewee candidly stated, “I think what's lacking is an understanding of whether or not the certifications have anything to do with our environmental challenges… and the extent to which they have anything to do with our environmental challenges.”

5.4. Barriers to implementation One barrier related to increasing the uptake of energy efficiency (and other sustainability-related) upgrades was a lack of knowledge and understanding related to the cost of upgrades and what role technology need play. Uncertainty in the outcomes of individual retrofit decisions and the broader impact of eco-labels inhibit decision-making. Overcoming this gap in knowledge should be a priority interest to energy-conscious government agencies (for example energy and environment), as well as to university and industry researchers. 5.5. Future research opportunities Going forward, researchers should continue to reduce industry uncertainty and close the knowledge gap. Studies on energy- and sustainability-related processes (including data tracking, property management and building acquisition practices), specifically those focused on improving the understanding of cost-benefit ratios for the installation of various types of green features, would be helpful to decision makers. One ongoing issue would be whether, in their search for profits, competing firms would share their data openly, hold data close as proprietary trade secrets or share them semi-openly through a third party, such as USGBC. Without data sharing in some form, the adoption of green office management best practice is likely to be slowed. Another area of future research could be to better explore the divergence in opinion of the value add opportunity related to some of these eco-labels. How can the administrators of eco-labels, and in the supporting eco-system, effectively communicate value? Furthermore, several firms also stated that regulatory incentives may impact their decisions and this is an area for future research.

5.2. Energy and sustainability tracking is the new normal Ongoing energy and sustainability tracking appeared to be part of the normal operating procedure for most of these institutional firms, a stark contrast to even a decade ago. Nearly all firms actively pursue ways to increase operational efficiencies, with energy a key component of that process. Most commercial office portfolio managers tracked energy efficiency, as well as water conservation and waste reduction & recycling. Many also looked at carbon emissions and offsets. The purpose of tracking these factors ranged from enhancing internal efficiency to complying with the reporting requirements of certifying bodies, such as GRESB or LEED. EnergyStar Portfolio Manager was by far the most used data management tool, and EnergyStar was the most acquired ecolabel. The diversity of tracking, management and reporting tools being used by industry was unexpected. Use of sophisticated, internally-developed and third party energy (and holistic sustainability) management systems appears to be on the rise. Property managers are well advised to implement a system, because managing increasingly large

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