Once the market begins to grasp that renewable energy, any form of clean energy, means free energy and therefore no energy bills, and therefore permanently lower O&M (Operating & Maintenance) costs compared to a fossil fuel infrastructure, property values will forever be affected by that information. Property values will become directly related to energy prices for the one and only reason that now there is an alternative--there is a benchmark. It is only a matter of time until net-zero is that benchmark, because it is so simple and easy.
As economists would tell you, the action always happens on the margins, and in this case what's happening on the margin is that net-zero construction flourished all through the recent real-estate downturn. That is important information for property valuation. Currently, we are at the dawn of a more public awareness of that net-zero homes and buildings, as the financial industry is grappling with the related underwriting issues, and beginning to formulate green financing methods for renewable energy retrofits, which they somehow stubbornly continue to misunderstand as energy efficiency retrofits.
The sceptics will argue that the incremental cost of renewable energy is sometimes greater than the incremental value added, but that is a short-sighted argument. This may have seemed true at times during the recent low energy prices... Just wait until energy prices start rising again! the point being that whoever was able to find renewable solutions will see the value of their property go up in tandem with the energy prices. The mission is simple: find such renewable energy solutions as make sense today, and be prepared to add-on in the future. For existing buildings, net-zero is a direction, and what matters is getting closer to it.
The secondary issue affecting property values will become resiliency: to what extent is your property able to continue functioning if the grid comes down. This implies that net-zero is not the be all and end all, must have objective, after all net-zero is easier to do in new construction than in old construction. Even approximating net-zero can only be achieved with renewable energy options, however - no amount of 'energy efficiency' will get you there. Independence from the grid is more important than achieving net-zero status, even if it is only partial. Just ask the people who were without utility service for weeks and months after hurricane Sandy. They would have given their hen's teeth for hot water, if nothing else. Valuing resiliency is trickier, and will depend in part on how many power outages we had in the last year.
Case one: property values for Net-zero or not-zero (but close)
- Green Looks are not enough
If you can start from scratch, with new construction, net-zero is now a broadly feasible thing, and it is in high demand. Given that this was the only area where construction flourished during the downturn, it is clear that the market values the notion of net-zero, and developers would not be building it if it wasn't financially worthwhile. So all the theoretical arguments that the costs exceed the benefits are out the window. Like with everything else, some designs will be better than others, and no doubt there are solutions that are uneconomical in the short-term. Thus it is up to property owners to figure out the winning formula for their properties that will get them partial independence from the grid. The central strategy is renewable energy in whatever form.
We might notice that in the data center industry it has been the rule for a long time now that the most reliable designs are to use the grid only for a backup, not as a primary source of power. This is another fringe phenomenon that holds a lot of information value. With respect to property values, any property that is practically independent from subscription energy sources and therefore the grid, will go up in value with every energy price hike and with every major power outage - all else being equal. These will be the premium properties. The benchmark will be the energy usage for comparable homes. And remember again, you can only get there with forms of renewable energy--energy production, not energy savings (although they help).
CASE TWO: ENERGY EFFICIENCY WAS ALL WE COULD DO
There is almost no case where you can't do at least some renewable energy, and but in the worst case you make your home as efficient as possible, and provide a generator to get you through the storms. Broadly speaking, these will be the mediocre homes, and for a long time they will be the majority, in part because people invested foolishly in energy efficiency even if they could have done renewable energy. Energy efficiency alone is a lousy strategy because of diminishing returns. Usually, 30% "energy savings" is very good from an energy efficiency standpoint, but with renewable energy 70-90% reductions in energy are usually within reach.
The underwriting industry for the most part is focused on energy efficiency as a priority and a requirement for certain financing, mostly referred to as green mortgages, etc. This is a trap for the financial industry as a whole and for building owners as well. There seems to be a general energy efficiency mania going on, which will have us miss the boat in terms of what could be done with renewable energy. Pity the poor property owners who get trapped in all these misguided incentives. Investments in energy efficiency will be wiped out if same/similar buildings implement successful renewable energy strategies.
Financially, the funniest part of the market will be those buildings that went along with the energy efficiency mania, but will come to trade at a discount, because investment-wise the efficiency strategy is a dead-end, and the resale value of these buildings will suffer as a result, if they had evident potential for renewable energy infrastructure, but followed the pied piper of energy efficiency.
case three: property values without potential - scrap it or fix it up?
The next class down is the lowest, and here increasingly tradeoffs between energy retrofits and demolition will take place. If the building is in bad shape, and doesn't have the potential for a serious renewable energy overhaul, the value will come under increasing pressure, again, simply because net-zero will emerge from the fringe and become increasingly main-stream. Entire classes of buildings will see property values decline because of it. Sometimes whole streets.
Location, location, location, and four more times
Assessment of property values will never be the same again, and NYC will never be the same when these lessons sink in. Manhattan will tend to be a permanent energy sink, and a future energy slum, although there are interesting options such as triple glazing with capabilities for shedding and harvesting heat as needed, which are a renewable energy option. The recent 90by50 report from the Urban Green Council put a lot of emphasis on this option, but for Manhattan, this is just about the only viable renewable energy option. All other options are overwhelmed by the scale of buildings. Most will never even get close to net-zero.
The outer boroughs by and large are in far superior position to exploit renewable energy quickly. Of course, the opportunity is rapidly being squandered with the current gas conversion tsunami, with the NYC Clean Heat program as cheerleader for the lemmings going off the cliff. Be that as it may, eventually property owners will get it, and there will be a tremendous shift in the NYC real estate landscape as a result. Besides the insights offered above, about the three broad classifications of buildings along the lines of their energy independence, any property must be evaluated on the basis of its suitability for all types of renewable energy: geothermal, wind, and solar, and in some cases hydro-electric power. Along with it the options for passive solar etc. need to be considered. And how close a property gets to net-zero status will become the benchmark for success.
Conclusion
Valuation of properties will never be the same as the impact of renewable energy is being felt. Besides the old location, location, and location, there will be 3 or 4 more: suitability for solar-, geothermal-, wind- and hydro-power. Net-zero buildings are becoming the gold standard in renewable energy implementation, and property values will reflect how close a building comes.
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