Originally published in the May/June 2015 issue of BOMA Magazine.
In the early 2000s, pension funds CalPERS and CalSTRS found themselves, along with California’s other state agencies, committed to reducing energy consumption in their commercial buildings by 20 percent before 2015. As two of the nation’s largest institutional investors in real estate, the impact on their investments would soon be felt far and wide. Environmental sustainability was about to become a big issue in commercial real estate. At the center of the industry’s response was a key question: How can the goals of “green” from the ecological perspective be aligned with the constant pressure of the other “green”— the cash flow that makes the commercial real estate industry go ’round? Much has changed since that time. Technological improvements in lighting, water conservation and building automation systems (BAS) have made almost all buildings more efficient. Programs, such as ENERGY STAR® and LEED®, nascent at the time, are now universally known, if not ubiquitously adopted, with many similar measurement and ratings systems cropping up alongside them. And, an entire new generation of office workers—not to mention real estate professionals—has grown up with “green.”
Broader Awareness, Sharper Focus
The most noticeable difference in commercial real estate today is the sheer number of people in various industry segments who are talking about sustainability. The topic has pulled interest from investors, occupiers and everyone in between, and the tide of education and sophistication keeps rising. “More and more tenants are asking for information about sustainability, and more and more of them know which questions to ask,” says Nicholas Stolatis, senior director of Global Sustainability and Enterprise Initiatives for TIAA-CREF Global Real Estate. “Investors now have ratings systems, like the Global Real Estate Sustainability Benchmark (GRESB), to help them identify partners in sustainability.”
Sustainability for Third-Party Operators
Being a third-party manager means looking at an asset from the client’s perspective. Sometimes this entails doing things a bit differently. Eric Duchon, director of Sustainability Strategies for Cushman & Wakefield, offers some helpful insights for those managing on behalf of investor-owners:
- First of all, while it’s true that technology is always changing, it’s equally true that today’s technology will benefit a property for years to come. If it makes sense to upgrade something now, then don’t be shy about recommending it to your client.
- Always be aware of any planned capital expenditures on the horizon in the next two to three years, and do the analysis that shows how sustainable options pay off as part of those projects.
- Remember that a fully leased Class A office building is different than a rehab. There may always be opportunities to showcase your retrofitting expertise, but there could still be the chance to do things little by little over time.
- Avoid recommending projects that don’t fit the client’s timeline. Even if the payback is good over five years, it won’t be valuable if the client plans to sell in one or two.
Steve Harrison, managing director of Facilities and Sustainability at Parmenter Realty Partners, observes that sustainability has moved far beyond reaction and regulation. “Government entities continue to lead the way in championing the adoption of sustainable best practices,” comments Harrison, noting, in particular, the market influence of a heavyweight like the U.S. General Services Administration (GSA). “But now we also are seeing just as much interest from private investors and occupiers.”
A subtler evolution, if no less important, has been the refinement of what exactly “sustainability” means within the commercial real estate context. Even as the industry’s response to sustainability has broadened, it has coalesced around activities that reside squarely in property management’s wheelhouse. “Commercial real estate has always been about value,” says Harrison. “The value-add of sustainability generally means three things: energy and water conservation, waste reduction and air quality improvement.” Stolatis sounds a similar note when he says that sustainability is, at its core, “simply reducing consumption of energy and water and reducing waste.”
Both Parmenter and TIAA-CREF are long-time sustainability veterans. In April 2015, Parmenter earned its second consecutive Partner of the Year award from ENERGY STAR, while TIAA-CREF earned its eighth. Both also are owners, though they use different operating structures (thirdparty managers for TIAA-CREF; employees for Parmenter). That each demonstrates a clear commitment to sustainability and an equally clear understanding of what that means sends a resounding message to their property managers: If you are not running green, you are not running lean.
Measuring
In 2011, Eileen Nacev joined The JBG Companies as vice president and director of Sustainability. Since that time, she has encouraged JBG to adopt the philosophy that sustainable practices are best practices, and best practices should become standard operating processes. “‘Sustainability’ is an integral part of first-class asset and property management,” she says. For JBG—one of the GSA’s largest landlords—the foundation of a sustainable operating platform is accurate, real-time utility consumption data. “When you manage thousands of accounts, that information is harder to collect cohesively than you might think! But once you have reliable data, then you can make sound decisions on sustainability projects.”
Developing and using accurate intensity metrics for energy and water are so central to JBG’s green strategy that the firm’s managers all do sustainability reports, tracking consumption in addition to costs.
Parmenter takes this approach a step further. “We benchmark water, gas and electrical consumption using EPA’s ENERGY STAR’s Portfolio Manager® tool,” explains Harrison. “Then, we rank our [three dozen”> buildings, top to bottom, every month. We want to motivate them to perform better.” At TIAA-CREF, benchmarking in Portfolio Manager is mandatory, even when achieving certification (available to properties performing in the top 25 percent of similar buildings) is not feasible. “Nobody knows everything,” Stolatis relates. “We rely on our operators for information, and we also share what we know with them. But we do count on them to input benchmark data accurately, diligently and in a timely manner.” Behind what Stolatis calls a “co-commitment” from owners and operators, the company benchmarked its entire portfolio of 30 million square feet of Class A office space in 2014, not to mention 15,200 multifamily units and four million square feet of its retail space.
BOMA International takes a similarly high view of benchmarking. All properties applying for the BOMA 360 Performance Program® designation—which evaluates both energy management and sustainability practices, in addition to four other areas of building operation and management—must benchmark energy performance through Portfolio Manager.
Managing
But benchmarking energy and water consumption is only the first step. Improved performance does not happen by itself, but through implementing sustainability strategies. According to JBG’s Nacev, day-by-day measurement empowers dayby-day management. “With modern BAS systems and controls, there are a lot of incremental things you can do with automation that have essentially no implementation cost and, thus, have immediate payback for the building,” she says. Even adding something like occupancy sensors to turn lights off in empty rooms is a relatively low-cost solution. “There are so many little operational and system tweaks you can make before having to consider major capital upgrades.”
TIAA-CREF’s Stolatis agrees. “Our position is that, if you’re starting your sustainability program with capital projects, you’re in the wrong ballpark,” he says. “Without benchmarking, you have no idea how to deploy capital properly.” As an example, Stolatis points to a building in the TIAA-CREF portfolio with an aging HVAC system that, nevertheless, performs very well. An uninformed strategy might have suggested replacing the system with one that was newer and “more efficient.” But through benchmarking, TIAA-CREF knew that the building consistently achieves an ENERGY STAR rating of 95. Furthermore, every drop of coolant is accounted for through meticulous recordkeeping. “In this case, benchmarking and superior operations saved us from unnecessary capital investment.”
Capital expenditure is sometimes unavoidable, of course, as evidenced when a major piece of equipment reaches the end of its useful life. “In these cases,” Stolatis says, “there is no question of ‘payback’—you have to replace it. The question is, what do you replace it with?” A good property management team (in partnership with asset management, when applicable) already will have taken the time to evaluate more sustainable alternatives. “If a management team has not done its homework, you could end up simply replacing the equipment with what was there before. That is a real missed opportunity for a sustainability upgrade,” says Stolatis.
Proactive management teams are prepared when such surprises come, and they also are ready to recommend sustainable solutions in other situations, like planned upgrades. Parmenter, for example, recently worked in a lighting retrofit, including daylight maximization and switch-off sensors, as part of a previously scheduled parking facility renovation. Savvy managers also keep abreast of incentive programs available from vendors, local governments and utility companies, and they stay ready with suggestions for stand-alone sustainability projects with payback periods that meet the asset’s strategy and the owner’s hold period.
The More Things Change
Benchmarking and education are two crucial aspects of successfully sustainable operations, but there is another element that, if absent, can derail everything: the willingness to implement. It is up to property management to develop a strong case for implementation so that building ownership is confident enough to pull the trigger. Studious pro forma analysis (informed, again, by benchmarking) and a strong track record with sustainable technologies certainly help. Ironically, the very pace of technological advancement can make owners gun-shy. “Some aspects of sustainable technology change very quickly,” explains Parmenter’s Harrison. “If we install something new today, there is the risk that something better comes out tomorrow.” Nobody wants envy of a better technology to be the greenest part of a sustainability project.
This fear of missing out may sound reasonable, but it also can be paralyzing, preventing buildings from enjoying real savings. Stolatis cites the example of property managers who installed compact fluorescent lamp (CFL) lighting—only for light-emitting diode (LED) bulbs to become more cost-effective shortly thereafter. “They should not regret their decision!” he insists. “They replaced less-efficient lights, and they continue to get the payback. As long as you have been through the variables, the value does not change.” In this scenario, the only grounds for the “if only” lament would be rejection or ignorance of an existing superior alternative. “We have to be good stewards,” says Harrison. “But we also have to act. The good news when you have a portfolio is that, if something better comes out, you can put that in the next building.”
Sustainable Savings
Still another advantage of benchmarking utility consumption is the ability to measure the results of sustainability projects almost immediately. JBG, which has a portfolio that includes 10 million square feet of office space, along with industrial, multifamily and hotel properties, is targeting a 20 percent reduction in utility costs by the end of 2021. So far, the results have been encouraging. “Eightyfive percent of our commercial square footage is now certified or targeting certification with either ENERGY STAR, LEED or both, up from 49 percent in 2011,” says Nacev. Financially, that translates to millions in annual savings. “With an annual utility spend of about $50 million, a 20 percent reduction means roughly $6 million in savings.”
For TIAA-CREF, the results are similarly easy to track. “Portfolio Manager gives us the metrics that let us calculate the avoidance of 120 million kilowatt-hours in 2014,” Stolatis notes. Applying market-based pricing, that translates to $14 million in cost savings. “All of that is either direct bottom-line impact or it flows to tenants in the form of reduced expense escalations, which is a competitive advantage.”
Tenant Engagement
The competitive advantage of a sustainable building is, in part, dependent on the very tenants who stand to benefit from it. “The next frontier for sustainability is tenant engagement,” says Nacev. “Seventy percent of a building’s load comes from its tenants, and they also play a leading role in waste generation.” At the end of the day, commercial buildings only operate as efficiently as the tenants inside of them do. With that in mind, JBG has offered its tenants Earth Day gifts and has held lobby events to celebrate sustainability successes, all in an attempt to raise awareness and engagement. Nacev believes it is on property management to help tenants modify their behavior. “We need to teach and train them, not only on how to build out their space, but how to use it efficiently every day.”
The flip side of tenant engagement is tenant retention. A building can hardly be considered “sustainable” if it is vacant. “If the tenants aren’t happy, you’ve missed the whole point of sustainability!” Parmenter’s Harrison exclaims. “Occupancy and retention are important sustainability metrics.” This assertion is backed by several studies, including one published recently by DTZ, that show higher tenant satisfaction and retention in buildings with a strong commitment to “green” practices. There is now empirical evidence that sustainability is resonating in the ultimate commercial real estate marketplace.
Sustainable Value
In the past decade, the commercial real estate industry’s biggest question about sustainability has been thoroughly answered: There are, indeed, broad areas of alignment between environmental and financial stewardship, and industry practitioners are speaking the same language when they use the terminology of sustainability. For all the government regulations, certification programs and technological advancements in the sustainability arena, the property management teams on the ground have driven much of the value of that alignment. When supported by measurement tools, platform expertise and educational programs that empower efficiency, property management is the real estate industry’s “green ops team.”
