Go for the minimum or the best? The Impact of Dutch Energy Efficiency Policy on the Office Market

Over the years, EU governments have issued various policies to stimulate energy efficiency in commercial real estate. The Dutch government is no exception, introducing several measures to improve the energy performance of office buildings. However, a considerable number of Dutch offices still fall short in terms of energy efficiency. This has led to the implementation of more stringent policies, such as the label-C policy (link: https://business.gov.nl/amendment/ban-office-buildings-are-not-energy-efficient/), which mandates that office buildings must meet certain energy efficiency standards.

Is it effective? We showed in one of our previous blogs that low-rating properties still stay in the market. However, it is too early to say the policy is not “effective”. As more data is collected and analyzed, a better understanding of the policy's impact will emerge.

For a forcing policy, a natural question would be: are people truly going for the best possible energy performance, or simply complying with the policy with minimum effort, for example, installing some solar panels and making my office barely above C level?

To answer this question, we looked into energy label “updates”, which occur when people make modifications to their building and register a new energy label. For example, installing (or removing) a heat pump or changing insulation.

We use a transition matrix to represent updates in energy performance certificates: the left-side

axis is the starting energy label, and the top axis is the energy label at the end of a period. Each grid in the matrix represents the percentage of the total stock (by square meter) of a certain transition. From January 2008 to October of 2018 (policy announcement), we observe 2608 offices (10,146,039 m2) and 2664 commercial buildings of other types (5,727,375 m2) that have at least upgraded their energy performance certificates once, in comparison with 7736 offices (22,587,546 m2) and 5260 commercial buildings of other types (9,591,736 m2) after the policy announcement in October 2018 until December 2022.

The matrix for office buildings shows that, for all offices that updated EPC (10,996,150 m2) from 2008 to October 2018, 12.77% of upgrades led to an increase from rating D to rating C, meanwhile 16.97% improved from rating C to rating A or better. After the policy announcement in 2018 until 2022, we observe that a large fraction (75%) of updates, 4382 out of 7736 offices (17,061,130 m2 out of 22,587,546 m2), led to label A or better (see the right-most column of each transition matrix), including approximately 32.39% from level D and below. This compares to just 17.46% upgraded to A or higher ratings from level D and below for other commercial property types.

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Although it is only an “intuitive” comparison, it shows most people are not merely going for the minimum. This is a reasonable choice. Property owners need to pursue higher standards to catch up with the increasing “minimum standard” required by both policies and market expectation.

Despite the seemingly good impact of the label-C policy on the energy label upgrades, several questions about its effectiveness remain. For instance, does a higher energy label rating correspond to reduced energy usage? The current energy label rating criteria place less emphasis on evaluating long-term energy-saving performance based on actual energy usage.

Additionally, the policy's scope must be considered, as it currently applies only to offices larger than 100 square meters. What about smaller office units? Furthermore, with the rise of hybrid work after the COVID pandemic, the energy performance of home offices and their overall impact must also be taken into account.

As we continue to monitor the energy efficiency policy on office buildings, it is crucial to ensure that the regulations in place effectively promote sustainable practices and adapt to the ever-changing landscape of the commercial real estate market.