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Split Incentive Series: Challenges Implementing Energy Efficiency in Commercial Real Estate (Part I)

Written by: Daniel Handal

The commercial real estate (CRE) market is a complex industry with multiple, and often fragmented, stakeholders, spread out between owners, managers, and tenants. As a result of this fragmentation, incorporating energy efficiency into multi-tenant commercial spaces is often considered too difficult.  This is commonly called the “split incentive” problem. Waypoint is penning this split-incentive blog series to provide some background on the components needed to enable adoption of energy efficiency in the CRE market.

All the Stakeholders

Let’s begin by looking at stakeholders in the CRE market: building owners/developers, asset managers, property managers, tenants, and design/construction teams. The fragmented nature of the various stakeholders involved in the CRE market makes gaining approval for capital investments in energy efficiency inherently difficult. The figure below provides an overview of the different stakeholders.

CRE Barriers to Energy Efficiency

Not only are the multiple stakeholders to consider, but there are a multitude of barriers to adopting energy efficiency throughout the CRE market as well. These can generally be broken out into three categories which are detailed below.

  1. Market Structure Barriers – Barriers resulting from differing motivations and incentives across a range of CRE stakeholders.

  2. Financial Barriers – Barriers which prevent the investment in energy efficiency due to actual or perceived costs, or externalities associated with assessing or implementing energy efficiency projects.

  3. Information and Physical Building Barriers – Barriers that result from a lack of transparency and information about energy use, costs, benefits, savings, and existing nature of the buildings and improvements needed.

The next few blogs in this split-incentive series will focus on tackling each of the barriers listed above. Tune in for the next post on market structure solutions for the CRE market.


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