Five real estate executives weigh in on what it will take to unlock $1.4 trillion in net energy savings through commercial building efficiency.
RMI’s Reinventing Fire analysis shows how to tap into $1.9 trillion in saved energy costs in U.S. buildings through 2050, from an incremental investment of $0.5 trillion (both in present-valued 2009 $). En route, we plan to make one billion square feet of commercial space at least 35 percent more efficient and grow the buildings-efficiency market from less than $10 billion to more than $25 billion per year by 2025.
But what will it take to get there from here? We asked five top real estate executives two questions:
1. In your opinion, what needs to happen for energy efficiency to become mainstream in U.S. commercial buildings?
2. And how can we get to deeper levels of energy efficiency in markets where commercial buildings have already grabbed the low-hanging efficiency fruit?
This is what they said.
Clay Nesler, Vice President, Global Energy and Sustainability, Johnson Controls
There are two important factors to address: timing and financing.
As RMI has written about in the past, it’s very hard to get commercial building owners to invest in efficiency improvements out of cycle. These interventions need to be done during critical times in a building’s life cycle, such as when it’s being acquired, undergoing renovations, or being refinanced.
An opportunity for investor-owned buildings is to identify energy-efficiency opportunities during the purchase due diligence period. Many portfolio asset managers take a year or more after acquisition to perform an energy audit and develop a business case for energy-efficiency improvements. At this point, with only a few years left in the portfolio, only improvements with very short payback periods are considered. There are a number of new virtual audit tools that use advanced analytics to identify energy-efficiency improvement opportunities and produce a preliminary business case, even before the building is acquired.
The other critical factor for commercial energy-efficiency projects is financing models. Commercial buildings are usually owned by limited liability corporations (LLCs) that have difficulty securing credit. Many have lease structures that do not properly align the financial investments and returns between the building owners and tenants. We are big fans of financing structures like property assessed clean energy (PACE) financing that tie the funding to the property instead of the building owner, allowing loans to be transferred to new owners. PACE also allows costs and savings to be passed on to tenants in an equitable way, even with traditional leases.
Another key driver is the trend towards energy-efficient tenant spaces. We are working with the Natural Resources Defense Council (NRDC) on a project to demonstrate the attractive business case and energy savings opportunities for high-performance tenant spaces, especially when built out in high-performance buildings.
Angela Cain, CEO, CoreNet Global
Building owners and tenants need to see and experience the financial rewards of energy efficiency. Once a building owner sees that converting to energy-efficient lighting reduces utility bills, and that demand-side power management also yields significant savings, the movement will become mainstream. I think this is already happening.
According to the Association of Energy Services Professionals, the large-scale commercial and industrial building sector is poised for the greatest amount of growth in energy efficiency, compared to small buildings and residential. The Building Technologies Office of the EPA has several programs under way and is working well with the commercial sector in enhancing efficiency. And utilities all over the world have incentive-based programs for businesses as well as homeowners. At CoreNet Global, we are encouraging all of our members to institute energy-efficiency programs.
The guide to energy-efficient retrofits that CoreNet Global is developing with RMI is a great example of how to get to even deeper levels of efficiency. I think for building owners to go beyond the “low-hanging efficiency fruit,” they must employ the technologies and make the investments into converting older buildings. This too will become mainstream, but it will take time. Today, even though it’s mandated by federal law, we wouldn’t think twice about making sure that either an old or new building is ADA compliant. The same mindset will establish itself with respect to energy efficiency.
The key again is to make it a revenue issue. We’ve made great progress as an industry with sustainable building design, of which we are extremely proud. But energy efficiency, more than being a best practice for the sake of the environment and the power grid, really does generate measurable financial gains. Once companies see this, the movement will become mainstream.
David DeVos, VP, Global Director of Sustainability, Prudential
The big driver is to understand the financial advantages of energy efficiency, which can only happen with benchmarking. In order to put together a pro forma or financial analysis of energy efficiency, we need to know where we are today and where we need to go tomorrow. We just finished benchmarking 780 of our buildings in 17 countries. That process is critical to evaluating the financial opportunity of energy-efficiency measures.
It’s also important to try to stay ahead of the regulatory concerns and risks. Reporting requirements are growing rapidly, making it easier to collect data and benchmark. For example, we received energy data from 60 industrial properties, compared to zero beforehand, after the passing of California’s Mandatory Energy Benchmarking and Disclosure Bill (AB 1103). The challenge is the variety of regulations that are out there. Each state is different. A national standard or protocol would be extremely helpful for portfolio owners.
The real issue is to make it easy for the average building operator to understand energy efficiency’s financial benefits. Certain things, like a lighting retrofit, are straightforward, but when you get into deeper retrofits the calculations are much tougher. The real estate industry doesn’t often factor in the “softer” benefits of efficiency — whether productivity, health, or tenant satisfaction. They drive building value but are extremely difficult to calculate. We know that by investing in energy efficiency we will have other financial gains, but the hard part is quantifying them.
The bottom line for us is our fiduciary responsibility. If we’re investing on behalf of people’s retirement money, we have to show that the bottom line will be better. So our first target is to improve the financial performance of buildings. But I’m confident that if we improve the energy efficiency of buildings, we are not only gaining environmental benefits, but improving the financial bottom line as well.
Anthony Malkin, Chairman, CEO, and President, Empire State Realty Trust
The biggest driver to scale efficiency is to work with tenants. Unlike whole-building retrofits, people are building out tenant space all the time. And in a typical urban office building, the tenants use 60 percent or more of the building’s energy. This brings us to the hurdle of the split incentive. Landlords wonder why they should spend money on things in which the tenant will profit. We have addressed this in our high-performance tenant demonstration project. We work with the same process that we use for whole office buildings, and we make that applicable to individual office spaces. This way we can demonstrate to tenants that they can get the same investment and return by designing their spaces to be efficient.
However, in order for tenants’ spaces to be efficient, they need a central building energy management system. Buildings without a central energy management system will be at a disadvantage when it comes to making the determination for the tenants to invest. This is a big incentive for building owners to invest in central building energy management systems. It puts the actual incentives for efficiency investment in individual offices in the tenant’s hands, and the investment incentives for the whole building in the landlord’s hands.
The most important way to drive energy efficiency is to show the numbers work. When you can point to proven replicable models with economically justified energy savings, others will follow. When you can document investment and return, and get the word out that investment in efficiency yields returns, more people will buy into it. So the key driver is setting up a replicable program, executing, documenting, monitoring, verifying, and educating people when they go to spend money, on a better way to spend money based on economic returns.
Rame Hemstreet, Director of Energy, Kaiser Pemanente
Here in California energy efficiency is mainstream in commercial buildings. Not only is it required by the building code, but also most large real estate owners, ourselves included, recognize we improve our bottom line by paying for energy efficiency.
One of the most important things to do in existing buildings is retrocommissioning, and then constant commissioning from that point on, which is becoming cost effective due to the IT revolution. We integrate all our building management systems and create a constant commissioning program. If anything goes out of parameters it’s immediately recognized and reacted to, rather than having to wait for a utility bill. Once you have that capability, you discover all sorts of things about your buildings you didn’t know before. That’s the easy part. The hard part is establishing the capability and protocols of how to react to different situations.
In new construction we are pursuing a number of measures to make our hospitals 20–50 percent more efficient than the norm. For instance, we are utilizing active chilled beams and trigeneration (combined cooling, heat, and power, or CCHP) in our newest hospital, currently under construction, and we require LEED Gold certification for all new facilities. We are also exploring the potential for natural ventilation to improve both energy efficiency and indoor air quality.
There are two ways to get more portfolio owners to perform constant commissioning of their buildings. One is through the regulatory process. In California the code moves us in that direction: we will get to net-zero energy for commercial buildings by 2030. The other way is to present case studies that prove there is a return on investment. Investing in constant commissioning and energy-efficiency measures has an excellent return.
Written by Laurie Guevara-Stone, writer/editor at RMI. Follow Laurie on Twitter. All photos courtesy of the subjects.