Solar energy is on track to become the cheapest form of power in the coming years -- and that's even after factoring in the added costs of battery storage. Because of that, investment in solar energy is on pace to accelerate. By the end of the decade, energy market forecasters expect the industry to install twice as much new solar energy capacity each year compared to the current annual rate.
One of the many beneficiaries of the solar energy building boom is those who own properties with good solar energy potential. Here's a closer look at how real estate investors can cash in on the rise in solar energy investment.
Going green to save some green
Real estate investors can install panels on existing properties to generate energy and offset the building's current power consumption. This investment can reduce a property's operating costs and carbon footprint, making it a more attractive option for tenants focused on achieving their ESG (environmental, social, and governance) targets (environmental, social, and governance) targets.
Many large real estate investment trusts (REITs) have started making these investments in recent years. For example, leading office REIT Boston Properties (NYSE: BXP) announced last November that it would build a 5.2-megawatt (MW) solar power system at its Carnegie Center in New Jersey.
The company will have four large solar panel-covered parking canopy systems installed at the four-building complex. The 13,000-panel system will generate enough electricity to offset at least 75% of the 554,000-square-foot office complex's power needs. It will also provide year-round covered parking for about 1,400 cars while removing the greenhouse gas emissions equivalent of more than 1,000 passenger vehicles per year.
Self-storage REIT Extra Space Storage (NYSE: EXR) started investing in solar energy a decade ago. It currently powers more than 400 of its roughly 1,900 locations with solar energy. It generated 26.4 gigawatt-hours of renewable energy in 2019, enough to power 2,500 homes for one year. These investments have paid dividends for the company over the years. Extra Space has delivered peer-leading NOI growth over the last few years, due in part to the impact of solar in keeping its expenses down.
Turning unused space into a solar-powered income stream
Another way to capture solar energy's benefits is to use a property to develop a community solar program that sells power to the grid or another end user. Industrial REIT STAG Industrial (NYSE: STAG) is one of the early leaders in transforming its real estate into mini-power plants. The company is working with a partner to develop three community solar projects in Maryland to supply low-cost renewable energy to local homes and businesses. The three systems -- which include the largest rooftop community solar project in the country -- will have the combined capacity to produce 11.6 MW of electricity, enough to power 1,500 homes. Overall, STAG's buildings host more than 25.5 MW of solar energy systems.
Commercial buildings with large flat rooftops (e.g., warehouses, industrial facilities, and shopping centers) are ideal for solar power projects. Likewise, vacant land and parking lots can be good sites for community solar projects and larger utility-scale solar farms.
Solar project developers lease rooftops and vacant land to build community solar systems and solar farms. For example, they often pay between $250 to $2,000 per acre each year for vacant land, depending on its attractiveness for solar, proximity to the grid, size, and state. Leasing a building's roof, parking lot, or vacant land to a solar project developer allows the owner to generate an additional income stream from the property.
A bright future for solar in real estate
Solar energy is just starting to hit its stride, thanks to a dramatic decline in costs over the years. That's making it increasingly economical to add solar panels to buildings. This trend gives real estate investors unique opportunities to lower their operating costs or generate an additional income stream from their properties. Given those benefits, real estate investors should explore the possibility of adding solar to their properties.