Wednesday, June 15, 2011
Sustainable Cities, Building by Building
By Lauralee Martin, CFO and COO, Jones Lang LaSalle
Millions of people around the world know that the Empire State Building dramatically reduced its energy usage, thanks to a whole-building retrofit project that will pay for itself in about three years through energy cost savings alone. But much of the vast media coverage of the project missed the larger point: Every large building in every city can feasibly do the same thing, and if they did, the reduction in greenhouse gas emissions would be historic.
As the world’s cities grapple with ways to reduce emissions without damaging their economic competitiveness, city officials need to work with commercial property owners on cost-effective ways to maximize their energy efficiency. And the Empire State Building provides the model for that.
A quick recap: Owner Anthony Malkin convened a team of the Clinton Climate Initiative, Jones Lang LaSalle, Johnson Controls and the Rocky Mountain Institute to examine cost-effective ways to reduce energy at the Empire State Building, In 2009, the team announced a plan to cut energy by 38 percent at a total cost of about $20 million. The bulk of the retrofit work was completed over the next 20 months, reduced energy costs by $4.4 million per year and will enable the building to avoid 150,000 tons of greenhouse gas emissions over the next 15 years. For more details click here.
The retrofit team developed a model for analyzing various energy strategies, and ended up with eight projects that collectively offered the optimal balance of upfront cost and environmental benefit/energy savings. At Malkin’s direction, the team shared the details of the analytical model so that other building owners could replicate the process. Some building owners have used the model, or their own process, for making similar energy gains. But the vast majority have not.
There are several reasons why few large buildings have pursued energy retrofits. One issue is that the cost is largely absorbed by the owner while energy cost savings due to lease structures goes largely to the tenants who have no financial incentive to conserve energy as a result. This is known in the business as a split incentive, and it can be resolved if the landlord and tenant agree on certain terms during lease negotiations; however, in a highly competitive office market, many landlords are reluctant to make non-financial demands of tenants.
At the Empire State Building, Malkin resolved the split incentive in part by submetering all tenant spaces as leases roll over, and giving tenants access to data on their energy usage so they could see how their usage and conservation affects their costs. In addition, the building’s lease agreements include a set of performance criteria for energy and sustainability in tenant fit-outs. The retrofit team supports tenants in identifying and implementing energy measures that demonstrate a reasonable payback period for the tenant. One tenant, Skanska USA, reported a 46 percent reduction in energy usage per square foot after locating to the Empire State Building, equating to $368,380.00 in cost savings to the tenant over the 15-year term of the lease.
Another issue that prevents buildings from achieving energy efficiency is the challenge of obtaining funding for retrofits. Malkin could afford to pay the implementation costs himself, but few owners have that capability, and no single financing vehicle currently exists to address the majority of situations. In the absence of a market-based solution, cities interested in reducing their carbon footprint might consider ways to incentivize owners or help owners gain funding for retrofits. Since buildings are the main source of carbon emissions in cities--responsible for 75 percent of all emissions in some cities—there is no way to effectively address carbon emissions in urban areas without focusing on large buildings.
Some U.S. cities, and many in other countries, have enacted laws aimed at improving energy efficiency in commercial buildings. These laws are too varied to detail here, but they tend to fall into three categories: transparency, incentives, and mandates.
Transparency laws require owners to measure and report on energy and carbon using some third-party standard, such as ENERGY STAR in the U.S. Jones Lang LaSalle supports these laws because they cost owners little or nothing, and they allow tenants and property investors to make informed choices on buildings based on their energy performance.
Incentives for energy efficiency and renewable power can take many forms, from outright grants to tax credits to low-interest loans. There is a balancing act here—if a city offers too little, owners won’t bite, but a deal that is too good for owners may be too costly for municipal budgets. In addition, owners are leery of deals that may be here today but gone tomorrow.
Laws mandating performance can also be difficult to get right. If a city’s requirements of owners are too stringent, some investors and tenants might avoid that city, and owners may be unable to comply. But how far is too far?
In some U.S. cities, buildings soon will be required to undergo energy audits, and owners will have to make any improvements identified by auditors as having an energy payback of less than five years. It will be interesting to see how these laws play out, given that many owners today can’t afford improvements with more than a three-year payback.
Ultimately, there is a tremendous opportunity for cities and business communities to work together in creating a low-carbon economy that saves on energy costs, reduces environmental risks and potentially creates a healthier community. Yes, there are challenges, but there are also solutions that work for everyone.
The Empire State Building team showed that an energy retrofit can make economic sense. We just need to replicate that success at 100,000 more buildings in cities around the world. The economic benefits of getting it right are huge. The societal risks in failing to take action are too great to ignore.
Lauralee Martin is CFO and COO of Jones Lang LaSalle, a global real estate services and asset management firm.