The private real estate industry is warming up to solar energy. Some of the industry’s largest managers and investors have been deploying significant amounts of capital into installing solar photovoltaic (PV) systems on their real estate properties, thanks to decreasing costs, net-zero initiatives and opportunities to generate additional revenue.
In August, New York-based CBRE Investment Management announced a sustainability initiative to scale the development of solar projects within its direct logistics portfolio, which encompasses more than 600 assets, 200 million square feet and $30.2 billion in assets under management across 17 countries worldwide.
Meanwhile, Vancouver-headquartered investor QuadReal Property Group made its first direct investment in the space by installing rooftop solar PVs in their warehouses this year and is in the process of constructing three rooftop systems on three warehouses in New Jersey.
A significant decrease in costs over the past decade has helped to catalyze solar energy adoption among commercial real estate owners. Solar system sizes are typically described in kilowatts, while costs are measured in dollars per watt capacity. The cost for a 200-kilowatt solar PV rooftop system for a commercial building has fallen from $5.57 per watt in 2010 to $1.72 per watt in 2020, according to a NREL US Solar Photovoltaic System and Energy Storage Cost Benchmark in Q1 2020.
Adoption of solar energy in commercial real estate also stands to accelerate as property owners seek to protect themselves against future energy price shocks amid the global energy crisis.
“Even if solar is the same cost or even slightly higher than current energy bills, it can serve as a hedge against long-term rising energy costs and price volatility,” ULI Greenprint stated in its Renewable Energy Strategies for Real Estate report published this year.
These factors are acting as tailwinds for the decarbonization efforts of a growing cadre of real estate players. QuadReal, for example, has committed to reduce the carbon footprint of its Canadian operations by 80 percent in 2050.
Demand for solar energy is not only coming from property owners. Jamie Gray-Donald, senior vice-president for sustainability and environmental, health and safety at QuadReal, tells PERE that more tenants are asking about the carbon intensity of their properties.
According to a Fortune survey in May 2022, 58 percent of Fortune 500 CEOs said they are aiming to achieve net-zero greenhouse gas emissions by 2050 or sooner, a 36 percentage point increase from last year.
While some of the movement toward net zero has been voluntary, Gray-Donald sees government regulations as a further push for real estate companies to invest in solar energy globally. For example, New York City’s Local Law 97 sets strict building emissions standards, requiring buildings to invest in energy-efficient retrofits or else rely on renewable energy. Other cities such as Denver, Copenhagen and Munich – and France, on a national level – have also passed legislation that requires green or solar rooftops.
As the industry strives toward net-zero emissions, solar energy investment has become particularly relevant amid growing interest in data centers and other digital infrastructure. Data centers are huge consumers of electricity, accounting for an estimated 1 percent of global usage, according to the journal Science.
Nick Zhou, vice-president at Singapore-headquartered GLP, tells PERE the firm’s renewable energy and data center businesses are highly complementary. In China, part of the government’s plan to reduce carbon impact around data centers is to keep the power usage effectiveness ratio to below 1.3 by 2025.
“Expanding upstream into power generation provides a channel for us to supply clean energy to these end users which require a lot of electricity to run continuously and without interruption, which enables greener energy efficiency,” Zhou says.
Additional income stream
While sustainability remains at the center of renewable energy adoption, another incentive is the additional revenue stream from assets that are carbon-positive – meaning they produce more energy than they consume.
In July, Hong Kong’s ESR Group became the first real asset manager to partner with Enerbank, one of the major green certificate operators in Japan, to participate in the country’s Green Energy Certificate system. Through it, the firm’s self-generated solar power from its logistics facilities is now recognized as a renewable power energy source that is fed into Japan’s power grid and can be accounted and certified through the Green Energy Certificates.
ESR was one of the early movers in solar energy and started installing solar rooftop on its warehouses in 2011. Today, it has achieved a rooftop solar power capacity of approximately 54 megawatts and is on track to produce in excess of 100MW by 2026.
Stuart Gibson, co-founder and co-CEO of ESR, tells PERE the Japanese government’s incentive to boost renewable energy following the Fukushima nuclear disaster in 2011 was the initial trigger for the firm to tap into solar. Before the earthquake, nuclear power was intended to provide half of Japan’s energy needs by 2030. To fill the resulting shortfall, the government introduced a feed-in tariff to purchase renewable energy generated by independent suppliers over 10 to 20 years.
“We are one of the biggest rooftop owners in Japan. So of course, we participated in this program because there was a critical need for energy post-crisis, and it was the right thing to do. The government deregulated the power sector and extended government subsidies to encourage the production of green energy by third party providers,” Gibson says.
Other managers generating additional revenue through solar include GLP, which can produce approximately 430,000 megawatt hours through its 415MW of solar PV installations globally and sells the clean energy it generates back to utility companies and customers; and Link Logistics, a US-based logistics manager that has increased its average annual rent by $1 per square foot through rooftop solar operating leases at distribution centers.
In some cases, firms have opted to launch dedicated renewable energy businesses. One such firm is APAC-focused alternative investment group PAG, which established PAG Renewables in July after committing approximately $1.6 billion to renewable energy investments – including rooftop solar installations – across Australia, Hong Kong and Japan over the past two years, according to James Buford, the platform’s CEO.
Operational renewable power facilities provide a “very stable income stream” for investors seeking assets with low-risk, reliable cash returns. “The interest from institutional investors and heavy energy consuming corporates with renewables mandates gives us confidence in the ability to ultimately exit those projects when we invest at an earlier stage of development or projects that are in construction,” says Buford.
Investment opportunities in solar power vary widely across different regions, however. In the US, such opportunities can differ by state, depending on the local climate, jurisdiction and price of electricity.
Rahul Ghai, managing director, co-head private real estate Europe at Partners Group, tells PERE that there is strong interest to invest in solar panels in states like California where there is abundant sunlight and favorable government policy. Some states, however, lack one or both of these factors.
The ability to develop carbon-positive assets also varies by region. Ghai thinks it is easier for property owners in Asia to achieve carbon positivity because properties in the region are typically newer and more energy efficient. Government support is also crucial: Singapore, for example, aims to quadruple solar energy deployment by 2025 under its Green Plan 2030.
With solar energy investment, property owners globally are moving toward achieving carbon neutrality or even carbon positivity. But given the many variables that go into an investment, they are not moving in lockstep.