The case for renewable energy in industrial real estate is building rapidly, but the sky is not the limit – it’s more accurate to say the roof is.
Solar energy is currently the most effective renewable energy source for most real estate assets, given current technology, and industrial is particularly suited – large roof areas means more space for more photovoltaic cells.
There can be no doubt that demand for renewables is increasing, from both occupiers and owner-occupiers alike. Owner-occupiers have long been able to see the value of investing in renewable energy sources, even when the up-front investment costs were higher. When you own the building you operate from, payback periods can afford to be longer. A good case in point was the investment made by office supplier COS, which in May 2017 completed the installation of 1500 solar panels to the roofs of its warehouses in Sydney, Melbourne and Brisbane. It has been reported the installation is expected to produce 80 percent of the power required at each site.
JLL’s Head of Industrial in Australia, Michael Fenton, says it’s easy to see why occupiers are beginning to value renewable energy sources.
“A lot of tenants are increasingly demanding these features, mostly to be seen as good corporate citizens, but also because there is a demonstrated pay-back in terms of ongoing occupancy costs over a long period time,” he says.
But the case for renewables is also stacking up for investors, too, and not just in the industrial sector. It was reported recently that one of Australia’s leading retail property groups, Vicinity Centres, was looking to solar panels as a way to mitigate costs of energy and labour.
Further benefits of investing in renewables can also be seen in the improvement of Green Star and NABERS credentials of an asset.
“Owners who incorporate these measures now are essentially future-proofing their building from a re-leasing point of view, as more and more tenants will be requiring these measures,” Fenton says. “As a result, a higher rent can be charged for these buildings.”
The majority of leases to Government tenants already require assets to have sustainability measures on board, and corporate occupiers are beginning to follow suit.
And, this all comes at a time of escalating electricity prices – furthering the attraction of renewables.
“There are examples of companies being able to generate enough power to actually sell back to the grid, such as Amazon in the U.S.,” Fenton says. “Solar panels now have a much greater life span, and the technology has advanced so that they now generate power even in low light – making them a good investment.”
Matthew Clifford, JLL’s Head of Energy & Sustainability, agrees.
“At the moment, we’re in a ‘perfect storm’ for renewable energy, in a good way – electricity prices are rising, there are more regulations around greenhouse gas emissions, technology costs for panels and inverters are coming down, and the quality of technology is going up,” Clifford says.
“We’re already at a point where, under certain contract models, solar can be delivered more cheaply than grid-sourced power, and those scenarios will only expand over time.”
“Compared to the prospect of paying ever-increasing power bills month after month, solar and other renewables allow building owners to move themselves to a scenario where their utility bill could literally drop to zero. Considering that energy can be a big input cost in many industrial sectors, especially manufacturing, that has significant implications for the industrial sector’s profitability.”
Although the impetus of cost as a driving factor is steadily declining, one of the few remaining significant hurdles to applying solar and renewables to industrial property is structural – who pays to install the technology, the owner or the tenant?
But even here, solutions are beginning to present themselves.
“With upfront costs still representing the biggest roadblock, there can often be a stand-off between owner and occupier over who pays the initial investment and who is responsible for ongoing costs,” Fenton says. “However, once there is a proven payback period, it mainly comes down to both accepting their corporate social responsibility.”
Clifford agrees, saying that these ‘split incentives’ remain a significant hurdle. However, new solutions are presenting themselves that involve a willing tenant committing to an upfront investment.
“For example, if a manufacturing client invests the time in installing their equipment in a site, they don’t want to move that again in five to seven years,” Clifford says. “They’re more likely to sign longer leases, so in that scenario they may be more willing to invest the capital to deploy solar panels.”
“Also, power purchase agreements (PPAs) – where a developer funds the upfront investment and then sells solar power to the tenants – can break the deadlock, and allow more clients to move to 100 percent renewable energy more quickly. The key is to get the PPA model right, so it benefits and protects all parties.”
While hurdles remain, it seems that the only way is up for solar power with the opportunity for investors of industrial to lead the way.
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Head of Industrial - Australia, JLL