How to Leverage Solar Against a High Interest Rate Climate

The fight against inflation, led by Federal Reserve Chairman Jerome Powell has put many business activities on hold, as the market reacted to high interest rates. In industries like real estate, it appears that the art of transacting in a high-interest-rate environment has been lost. With the prospect of enduring high rates, investors and owners must pivot their strategies towards meeting societal needs and repositioning existing assets until CRE bid ask spreads tighten. Here, we detail how to leverage solar in a high interest rate climate in order to increase net operating income NOI with no capital expenditure.

Necessary Pivot

As Jim Costello from MSCI pointed out in a conversation with Bisnow, the new strategy will require a reliance on detailed property knowledge, efficient asset management, and income improvement. In essence, the era of high interest rates necessitates a focus on enhancing the NOI of existing assets, rather than acquiring or developing new ones.

This strategic pivot is not just about survival; it’s about seizing new opportunities. It’s about recognizing that even in a high-interest-rate environment, there are ways to generate value and drive growth. One such opportunity lies in the realm of environmental sustainability. Walter Boettcher, the Head of Research Economics at Colliers, suggests repositioning assets by tapping into the need to make them more environmentally sustainable. This is where New Columbia Solar (NCS) brings value to our clients by offering multiple avenues to leverage solar technology to increase a building’s NOI without any capital expenditure from the owner

How Solar Increases NOI

Solar is able to increase NOI by capitalizing on unused roof space in a few ways:

1. Rooftop Community Solar Lease: NCS leases unused roof space from the building owner to host a community solar system that sells power to local energy consumers. NCS takes care of engineering and construction, bearing all the costs associated with project development. This lease provides the building owner with a defined revenue stream for the next 20+ years.
2. Solar Power Purchase Agreement (PPA): NCS engineers, finances, and constructs the solar system, then sells the energy to the building at a rate below retail, allowing the building to benefit from renewable energy savings without any associated risk. This not only increases NOI through energy savings but also allows the owners to market themselves as environmentally conscious.
3. Direct Ownership: While this option does require upfront expenditure from the building owner, it opens up multiple revenue streams. Solar as alternative investment to CRE, often has a significantly more attractive cash-on-cash profile for investors seeking yield. In addition to greater energy savings than under a PPA, building owners receive payment for the energy they send to the grid, earn from the Solar Renewable Energy Certificates (SRECs), and can benefit from the Federal investment tax credit of 30% or more.

Downstream Benefits

An easy way to raise an asset’s income without a costly capital expenditure in a high interest rate climate is to leverage solar. This is all the more critical as high interest rates not only dampen sales and acquisitions, but they also cause headaches for property owners finding themselves in need of refinancing for debt on existing properties. As loans come due and property owners are forced to refinance into higher interest debt, they will need higher NOI to make up for higher debt service costs. The increased NOI associated with the solar system helps fill that gap. It also raises NOI with no cost and little risk, meaning it can also help the performance of the asset, helping to secure better loan terms. Solar leases can also help subsidize the purchase of interest rate caps.

The current economic climate dominated by high interest rates is reshaping the CRE market which had grown used to the post 2009 economy characterized by near zero rates. Investors and building owners must shift their focus from new developments to enhancing and repositioning existing assets. Leveraging solar technology, as offered by NCS, presents a viable and sustainable solution to increase a building’s NOI, thereby making a significant contribution to this strategic shift. NCS’s solar solutions offer a strategic response to the challenges posed by high interest rates. By providing a stable revenue stream, cost savings, asset value enhancement, and multiple revenue streams, NCS helps building owners navigate the high-interest-rate environment and emerge stronger on the other side. This not only ensures the financial viability of the assets but also contributes to the broader goal of environmental sustainability.