Solar Energy Opportunities in US Industrial Real Estate

Decarbonizing the built environment plays an increasingly key role in climate change mitigation strategies. The process often includes solar photovoltaic (PV) systems, which are becoming more affordable than ever before.

The U.S. has set a nationwide goal to reach 100% carbon-emission-free electricity by 2035. To reach such an ambitious goal, the U.S. would require significant transformation across multiple pathways, including decarbonizing energy. Solar has an important role to play here¹.  A flat rooftop (common among industrial buildings) lends itself easily to solar panels, helping industrial property owners and tenants to reach decarbonization goals.

¹https://www.whitehouse.gov/wp-content/uploads/2021/10/US-Long-Term-Strategy.pdf

Solar energy is one of the cleanest and most widely available renewable energy sources, which the U.S. has in abundance. As of mid-2022, the U.S. had approximately 130 GW of total installed solar PV capacity, roughly 10% of which can be attributed to commercial and industrial (C&I) solar. This puts the U.S. second on a global list of countries with the most PV installed, somewhat ahead of the major European countries (Germany, Italy and Spain), though China more than doubles the U.S. installations.

The U.S. C&I solar industry has grown by an average of 7.0% annually over the past decade. The surge has been partly driven because of declining costs for PV panels, supportive government policies like the Investment Tax Credit (ITC), and the rising demand for clean energy from both public and private sectors. Much of the commercial growth comes from industrial buildings, such as warehouses and distribution centers, that have a flat rooftop.

Figure 1: Commercial Solar Installations Since 2011 and Forecast

Source: SEIA, CBRE Econometric Advisors.
Note: MWdc is Megawatt of power with direct current.

Solar rooftops benefit both the industrial building owner and the local community. A solar rooftop can reduce greenhouse gas (GHG) emissions and therefore limit a building’s contribution to climate change. However, to achieve such an objective and to ensure a long-lasting impact, a relatively significant long-term upfront investment is required.

• Financial Benefits: Solar systems can reduce a building’s reliance on grid-supplied electricity by as much as 80% and in many cases offset the electric bill by up to 95%, therefore lowering the tenant’s cost of occupancy. Lower energy costs, and access to clean energy, can encourage tenants to sign longer lease agreements and make the building more attractive to potential tenants. The longer the lease terms, the higher the net present value (NPV) and cash flows. Such savings are particularly crucial for triple net lease tenants. In addition, a variety of federal, state and local incentives, rebates and tax credits can benefit landlords and tenants.
• Environmental Benefits: Rooftop PV generates clean energy which offsets grid-supplied electricity, the majority of which is produced by fossil fuel-burning power plants. The implementation of rooftop solar PV will result in reduced carbon emissions due to a cleaner energy supply.
• Marketing Benefits: More companies have set net-zero targets in recent years, putting pressure on other companies to adopt similar approaches. Solar PV can help to achieve these objectives and, thereby, avoid regulatory risk and promote a sustainable environment.
• Social Benefits: Community solar is becoming popular in the U.S. and can add access to solar energy sources for multiple local community members such as small businesses, residential homeowners, renters and low and moderate income (LMI) customers. Under a community solar program, members receive credits from the electricity that is generated by the system without the need for any ownership. The newly-enacted federal Inflation Reduction Act (IRA) has significant tax incentives if the power is sold to LMI households.
• Other Benefits: Solar panels prolong the lifespan of roofs by providing protection against natural elements such as rain, snow, debris and direct ultraviolet (UV) light. Moreover, if a building owner is seeking to obtain Energy Star or LEED certification, a solar rooftop counts toward several of the credit categories.

Electricity prices held steady from 2012 to 2020 when the COVID-19 pandemic hit. At first, electricity prices for commercial and industrial sectors declined slightly, as most of the population was isolated in their homes due to pandemic-related lockdowns. But as inflation accelerated rapidly in early 2021, energy prices rose. During that time, natural gas prices reached their highest levels in decades.

Natural gas fuels approximately 38% of U.S. electricity generation in 2022, up from 37% in 2021, according to the U.S. Energy Information Administration (EIA). To recoup higher costs, utility companies passed on the costs to consumers, causing the electricity costs to rise by 20.8% and 22.2% between 2012 and 2022 for commercial and industrial sectors, respectively. Over the same time, the cost to install solar PV across the U.S. has dropped by almost 62%, creating an opportunity for solar investment against increasing electricity prices.

For 2023, EIA expects electricity prices to rise by 4.4% and 2.8% to 12.53 and 15.32 cents per kilowatt hour, respectively, for commercial and residential sectors. Inflation and international demand for U.S. natural gas are two drivers behind the increases, making conventional energy more expensive to produce.

Figure 2: Average Price of Electricity by Sector vs. U.S. Solar PV Pricing

Source: SEIA/Wood Mackenzie, EIA, CBRE Econometric Advisors.

Rooftop solar can generate significant value for investors and tenants. Property owners and tenants can develop solar projects on their own or choose to work with third parties. There are pros and cons to consider with each execution strategy. Specifically, executing a solar project can be complex and involve complicated negotiations with utilities and supply chain partners. A partnership may help speed up the implementation process and facilitate better control of the system lifecycle. Moreover, the capital investment required may be better invested in the property owner’s or tenant’s core business. A partner can provide more certainty in execution and assume responsibility for on-going maintenance.

To ensure installation costs are low enough to provide all stakeholders with optimal financial benefits, a roof should be at least 100,000 sq. ft. and located near highly populated areas. The latter enables the excess energy generated by a solar PV system to be sold to a public utility power grid. For example, in the Southwestern U.S., the region with the most solar generation potential due to solar irradiance, a typical 800-kilowatt (kW) system can produce up to 1.6 GW hours of electricity per year and the excess electricity can be sold at some of the highest electricity rates in the country. The same system in some parts of the Pacific Northwest, a region with the least solar generation potential, can produce up to 0.9 GW hours of electricity per year and excess capacity can be sold back to the grid at decidedly lower rates.

After analyzing 68 U.S. industrial markets, CBRE EA has identified the top 15 markets for potential solar growth opportunities:

Note: Numbers indicate the potential number of properties Markets ranked by total square footage.

The top 15 markets represent approximately 58% of the 2.1 billion sq. ft. of warehouse space (100,000 sq. ft. or greater) built since 2010. Assuming solar PVs are installed on the rooftops of these sites, and considering that on average, 1.2 GW hours annually can be produced from a 100,000-sq.-ft. rooftop, each of these markets has a potential to produce between 350 and 1,700 GW of energy. Combined, all 3,139 buildings, totaling more than 1.2 billion sq. ft., have potential to produce approximately 11.7 terawatts (TW) of electricity, which is enough energy to replace 0.3% of the country's 2021 total energy usage, which totaled about 3,930 TW (source: Statista). All markets are located near population centers and are major regional distribution hubs. Furthermore, five markets have the largest industrial development pipeline in the U.S., including:

Combined, these markets have more than 232 million sq. ft. (MSF) of industrial space under construction, most of which is designed to accommodate solar PV installation. Aging warehouse inventory and increased demand for highly functional facilities that can process a high volume of goods and/or can support the integration of automated technology and robotics are driving construction activity. Given the need to reduce the carbon footprint of the industrial sector, it is likely that industrial owners will join forces with solar partners to build projects that can do just that.

Public policy—particularly as it relates to climate initiatives—will impact capital allocation across real estate. It will also play an important role in catalyzing building upgrades. Until recently, much of the policy focus has been on regulation, which often used the prospect of a penalty to motivate owners and investors into taking greater action to reduce environmental impact.

As of October 2022, 32 local jurisdictions and two states had enacted Building Performance Standards for existing buildings. These standards require commercial and multifamily buildings to meet certain energy performance targets. Tax benefits from the IRA could reduce costs for real estate owners to meet energy usage criteria, potentially increasing the scope of viable investments, given reduced costs. As such, the IRA is creating new investment possibilities for investors by lowering the cost of retrofits to help bring assets into compliance with new regulations. The installation of solar is one of the most straightforward ways to upgrade buildings and reduce environmental impacts. Notably, this type of upgrade will qualify for subsidies contained in the IRA.

For context, the IRA is designed to help the U.S. reduce carbon emissions by 40% from 2005 levels by 2030. As mentioned, the law includes tax credits for environmentally friendly retrofits and projects. The total estimated investment in alternative energy sources and climate change is $369 billion, accounting for more than 80% of the total spending in the bill.

Commercial buildings that meet prevailing wage and apprenticeship requirements, as well as energy efficiency standards (such as more efficient interior lighting systems, heating or hot water systems) will be eligible for tax deductions of up to $5 per sq. ft. beginning in 2023. New housing developments that meet energy-efficient criteria will also be eligible for tax credits worth as much as $5,000 per dwelling unit. Many of the tax credits are designed to benefit buildings built to meet energy efficiency standards.

Because certain sections of the bill specifically require the primary use of a building to be residential, multifamily will see numerous benefits.

Multifamily is not the only commercial real estate sector that will benefit. For example, the law provides tax credits of up to 30% of the eligible cost for buildings that install and develop clean technology. This tax credit applies to costs of upgrading building systems to be more climate friendly (including the cost of installing solar). Incentives are also available for facilities that produce electric and hydrogen-fueled vehicles, solar panels and wind energy components. All of these will be especially important for industrial and logistics properties.

In summary, investors will find generous tax incentives to modernize and utilize efficient and environmentally friendly systems in their buildings. Such incentives will also help keep many assets viable as investments, particularly in local jurisdictions or states where Building Performance Standards have been adopted. Altogether, the IRA is a significant new law that will influence commercial real estate investment dynamics for some time.

Altus Power, based in Stamford, Connecticut, is a premier commercial-scale clean electrification company serving commercial, industrial, public sector and community solar customers with end-to-end solutions. Altus Power originates, develops, owns and operates locally-sited solar generation, energy storage and charging infrastructure across the nation. Visit www.altuspower.com to learn more.

CBRE Econometric Advisors wishes to thank Altus Power for their contributions to this Viewpoint.