Interest in building energy efficiency has been growing recently as real estate owners, investors, utilities, and regulators advance their understanding of the simple things that can be done in buildings to save money and lower emissions (see here for a post on this topic by my colleague Ben Birnbaum). Knowledge of the broader US non-residential building market, both how it’s sized and how customers transact, is essential to understanding the addressable market opportunity for new technology and services solutions becoming available in this space.
Several questions were top of mind as we approached researching the US non-residential building market. How are customers of different types or in different places viewing this opportunity? What is the total addressable square footage by building activity type, region, or building size? Which building activity types have grown the most recently, and which will grow the most over the coming years? Which regions and which building activity types see the largest expenditures on electricity? In which market subsegments could building energy efficiency projects and solutions, if implemented, have the most impact? There’s an endless number of questions given the large scope of the opportunity, but to answer any of them, we needed to start with a comprehensive dataset that captures both the energy characteristics of buildings overlaid with general real estate trends.
That dataset doesn’t exactly exist, so we built it, combining data from the Energy Information Administration (EIA), Reonomy, the Census Bureau, and other open sources for analysis. Through this, we have established a baseline for what we believe the market looks like today and have compared that to data from roughly ten years ago to understand how it has evolved. Let’s dig into our takeaways.
#1: The US non-residential building market today is comprised of ~5.5M non-vacant buildings, accounting for a total of ~90B square feet. As divided by Census region, the South accounts for the highest amount of square footage with ~37B.
While this breakdown in square footage by region largely tracks population distribution, it is important to understand its implications when considering the energy efficiency market. We believe that each region presents unique market opportunities for energy efficiency.
Overall, our analysis revealed that:
The South provides a sizable opportunity both in terms of overall square footage as well as current electricity consumption. Non-residential buildings in the South consume ~21% more electricity per square foot than the other regions do on average (16.3 kWh/ square foot/ year vs. 13.5 kWh/ square foot).
Operators in the Northeast and West face high electricity costs. Despite having the highest electricity usage per square foot, the South does not spend the most per square foot on electricity. Primarily given higher per kWh costs, both the Northeastern and Western regions relatively spend more. Respectively, these regions spend $1.55/ square foot and $1.53/ square foot, compared to the South’s $1.49/ square foot and the Midwest’s low of $1.19/ square foot.
Different project approaches may be necessary in the Northeast and Midwest, where the non-residential building stock tends to be older. In these regions, ~43% and ~29% of the existing square footage was built prior to 1960. For the South and West, only ~16% and ~17%, respectively, of the current building stock was constructed before 1960.
Implications for energy efficiency: Building operators in the South could benefit most from energy monitoring and grid-integrated energy optimization solutions. For the Northeast and Midwest, where the building stock is older, there is a larger market opportunity for retrofits-as-a-service solutions.
#2: Recent growth in square footage has been driven by buildings greater than 100K square feet in size. Commercial buildings are getting larger. While the average commercial building in the US is ~16.4K square feet, our model indicates that buildings over 100K square feet in size have experienced a total growth in square footage of ~15% from the 2012 EIA CBECS data.
This growth seems to reflect a continuation of trends for Health care, Lodging, and Mercantile buildings seen in the analysis of the 2012 EIA data.Our model estimates that 59% of Health care, 48% of Lodging, and 37% of Mercantile square footage in the US are from buildings larger than 100K in square feet.
Additionally, as will be discussed in point #3, there are other building activity types that we expect have outperformed overall market growth. These types also tend to have similar size profiles as the segments listed above.
Implications for energy efficiency: The economics for energy efficiency technology implementation should be even more compelling for buildings greater than 100K square feet in size. Larger buildings on average have higher total operating expenses, and with energy efficiency technology implementation, operators should see greater total improvements to baseline NOI (and potentially a quicker return on investment).
#3: We believe the following building activity types have outpaced the general market growth since 2012: Education, Office, and Warehouse & storage. Compared to the 2012 EIA data, we estimate that these sectors respectively have seen total square footage growth of 10%, 17%, and 11%.
For some of you, the growth in these segments may not be too surprising:
In Education, discussions have focused on the “amenities arms race” that have potentially been pushing colleges and universities to spend on new facilities (vs. ongoing maintenance)
For the Office segment, it has been hard to miss the announcements from big tech. New corporate campuses have opened; and press releases have detailed intentions to pursue additional space (e.g., completion of Apple Park, announcement of Amazon’s HQ 2, expansion of Googleplex, etc.)
As most consumers can understand, e-commerce has driven the demand for Warehouse & storage space. In the past 4 years alone, Amazon has opened up more than 20 distribution centers. And it’s not just the number of buildings, but the sheer size of these centers as well. Of the distribution centers opened by Amazon in that timeframe, the largest is a 1M square foot facility in Aurora, IL.4 It’s worth observing that logistics centers are prime use case candidates for vehicle electrification – a source of a massive potential increase in their electricity consumption
Additionally, it should be noted that each of these sectors particularly could face longer-term consequences from COVID-19 market shifts. As we continue to track the market, core questions that we’ve been considering include the following:
What will recovery in enrollment numbers for higher education look like?
We expect that the sharp decline of ~16% nationwide in enrollment of first-time students reflects the decision of many students to defer higher education for a year. Assuming primarily in-person learning seems possible in the fall of 2021, we believe that next year’s enrollment numbers will effectively counter-balance what has occurred in 2020. Lingering economic effects could also prompt some to pursue higher education. Some university systems, however, may still take a closer look at consolidating campuses and facilities because of this year’s budgetary shock.
How many professionals may elect to continue remote work indefinitely?
Companies may delay office lease signings now, but we do not expect a long-term, substantial reduction in corporate office space footprints. As recent surveys seem to indicate, remote work will play a larger role moving forward. However, the office will continue to serve a critical function as a space for teams to collaborate more effectively.
Have consumer habits and preferences permanently shifted toward e-commerce?
For certain retail segments and among certain demographics, elevated levels of e-commerce seem to be here to stay. Major players in the space clearly believe in the longevity of this shift. In the first half of 2020, Amazon executed on over 26.9M square feet of new industrial/ distribution space to occupy, more space than what Amazon transacted in all of 2018 or 2019.
Implications for energy efficiency: The Education and Office segments may be more receptive to the economic value proposition of energy efficiency project implementation, as these segments face near-term operational uncertainty due to COVID-19.
#4: We estimate annual electricity spend by US non-residential buildings to currently total ~$130B, with concentration in certain building activities. Together, the top three building activity sectors – Office, Mercantile, and Education – account for about 50% of that expenditure. Given the growth of square footage, Office and Education have also seen some of the largest increases in electricity spend compared to 2012 (17% and 11% total growth in spend, respectively).
Note that Other includes the following segments: Food sales, Food service, Public assembly, Public order & safety, Religious worship, and additional smaller sub-segments.
Implications for energy efficiency: Several high-expenditure segments present the opportunity to target energy efficiency customers with sizable building portfolios (e.g., Office, Mercantile, Education, Lodging). Arguably, the market opportunity in these segments could help energy efficiency technology and service providers scale more efficiently.
Overall, this analysis only provides a current snapshot of the market. However, we’ve combined these various datasets so that we have the most precise and dynamic view on non-residential building development when we evaluate the various building energy efficiency market opportunities.
We use this model to evaluate the impact of new technologies and solutions on how building systems operate and understand the underlying economic effects of efficiency-related improvements on NOI for building owners.
Have a view on where the market is headed? Want to talk building energy efficiency? I’d like to hear from you! Send me a note at gk@keyframecapital.com.
Notes and sources:
Reflects change from 2012 EIA data adjusted to account for vacant buildings
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