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Rising cost of energy mobilizes industry

Faced with surging utility costs, a power shortage and an uncertain outlook, real estate owners, operators and tenants are working harder than ever to manage energy judiciously.

Long taken for granted by tenants as a basic service provided by owners, energy has been transformed from a budget line item to a top management and environmental concern. This past year, the issue reached crisis proportions in California, as brownouts threatened the economic vitality of the region.

“Energy, regardless of the current crisis, represents 20% to 25% of the cost of operating a typical building, so it's always been a serious focus,” said Rob Bagguley, president of property and facilities management for Chicago-based Transwestern Commercial Services. “We're not dealing with low energy supply just in California, but across the country. We're looking at conserving energy expenses and curbing use nationwide.”

Spurring this effort is a U.S. Department of Energy study that shows as much as 50% of the energy consumed by businesses is wasted through the use of inefficient, obsolete technology. At the same time, a simple amenity such as lighting, which most users take for granted, can account for up to 40% of all electrical expenses for a commercial property.

“Experts predict rising energy rates over the next three to five years,” said Joseph Howley, manager of environmental marketing for Cleveland-based GE Lighting. “Once electricity rates increase, they tend to stay there. We really don't see electricity rates going down that much.”

For building owners and tenants, energy isn't just the crisis du jour. Experts say energy problems will continue indefinitely. While the strong U.S. economy may be taking a breather now, history shows that it will heat up again. When businesses gear up for the good times, energy use spikes and prices soar. “We're going to have continual energy demand because of the American quality of life and economic development,” Bagguley said. “It's going to take awhile for utility companies to ramp up new generating plants.”

A future energy partnership

According to Bagguley, the cost of energy is a grave concern to both tenants and landlords. He suggests that the two unite to reduce energy consumption as a benefit to all. “Tenants should be concerned about energy conservation, and work in concert with building owners, because they pay increases in expenses or their net share of the costs,” Bagguley advised.

Many investment and management firms already are focusing on energy efficiency to differentiate themselves in the marketplace. Stuart Brodsky, commercial real estate program manager for the U.S. Environmental Protection Agency's Energy Star program, said owners and managers of more than 2.5 billion sq. ft. of office space participate in Energy Star, the registered name for a free Internet benchmarking tool that provides a national rating system for energy performance of properties.

Buildings receive a score from 1 to 100. A rating of 75 or higher indicates a structure is in the top 25% of energy-efficient buildings nationwide and qualifies the property for the Energy Star label.

Brodsky said the label is a way for owners to show tenants, or investment partners, their commitment to controlling energy costs and to link better management practices with a higher asset value. In addition to benchmarking, Energy Star's QuikScope software tool is being used to forecast the financial returns of energy-efficient improvements in multi-tenant properties, where both owner and tenant share in savings and costs of upgrades, Brodsky said.

Brodsky added that Houston-based Hines, Dallas-based Harwood Management Services and Los Angeles-based Arden Realty Trust have received national recognition for their commitment and success in making properties energy efficient. Many of their properties have received the Energy Star label. “These companies were early leaders, and much of the industry is now aggressively benchmarking their properties and looking at the financial value of energy efficiency,” Brodsky said.

Other firms participating in the Energy Star program range from private developers and REITs to pension funds and fund managers such as New York-based Lend Lease Real Estate Investments, Brodsky said. “These companies recognize that the energy performance of an office building can have a significant impact on net operating income, marketability in leasing and sales, funds from operations (FFO) and ultimately asset value,” Brodsky added. “Energy Star tools help owners articulate that value.”

Controlling costs

When the largest controllable line item in the operating budget for facilities is the cost of energy, owners and operators want to react, noted Bob Moyer, senior vice president of Trammell Crow Global Services in Stamford, Conn. Energy consumption depends on use, he said.

An office facility's energy costs are typically 20% to 25% of all operating costs, while a health care facility's energy costs can reach 35%. At a manufacturing or industrial facility, energy costs could even be as high as 50%. “It depends on the nature of the business, but whatever the use of the building, the fact is that energy costs have not gone down,” Moyer said.

Most property managers and building owners want to minimize the amount of energy consumed by customers by shifting the hours they use kilowatts to the periods when rates are the least expensive, Moyer continued. He noted that energy is a commodity that responds to demand. For example, the cost of electricity on an August afternoon is much higher than the cost of electricity at 2 a.m. on that same August day.

“The way to reduce costs is to first look at your operation and maintenance procedures and make changes to those that result in reduced consumption,” Moyer said. That might include changing the time the air-conditioning system turns on, or shutting off equipment during peak times.

The goal also is to improve the efficiency of equipment. Of course, an air-conditioning unit from the 1970s is less efficient than a newer model, so upgrading the infrastructure may produce savings, Moyer said. “There is also the possibility of influencing end users and making them aware of practices that waste energy, such as leaving computers turned on overnight or not shutting off lights,” Moyer said. “Many say people ought to be responsible and should not have to be reminded, but it doesn't work that way.”

Knowledge is power

Nearly every real estate owner is concerned about rising energy costs and wants to control them, said R. Scott Helm, president of American Powernet, an independent energy management company based in Wyomissing, Pa. “There are two primary ways to control energy costs,” explained Helm. “One is to reduce the number of units you use, and the second is to reduce the cost per unit. It's typically easier to address the supply side first because it doesn't involve any capital costs. You want to reduce your cost per unit as much as you can, or structure your unit cost to reflect what the true wholesale market costs are at that time.”

Obtaining information about power usage in a building is the first key, Helm believes. “As more states deregulate and more utilities provide pricing that reflects true wholesale costs, it's important that companies become more familiar with their load profiles and their relationship to hourly wholesale prices,” he said.

According to Helm, installing a meter to track hourly data could provide suppliers with important information on energy usage. Demand-side strategies, such as installing lighting retrofits and load shedding (temporarily dropping electric demand during peak usage or high-cost periods), or supply-side strategies, such as shopping for power or investing in on-site generators, could be used to manage facilities at maximum efficiency and minimum cost, Helm said.

Alternative measures

There also are other ways operators can boost the bottom line. A utility invoice audit is one of the most important steps a building owner can take to reduce utility costs, said John Maliff, vice president of business development at Boston-based Unicco Service Co., a provider of integrated facility services. “We audit bills from utilities that are frequently incorrect because the billing company simply did not use the appropriate tariff (rates),” Maliff said.

Maliff added that he recently conducted an audit for a logistics company that enabled the firm to relamp an entire warehouse with a credit received from the utility company, which had been inaccurately computing the company's bill.

According to Maliff, companies such as Unicco also can install monitoring devices that inform owners on a real-time basis how electricity is being consumed, whether it is through air-conditioning, lighting or refrigeration, and also when peak demand occurs during the course of a given operating period. In addition, Maliff added, owners should make sure their equipment is properly maintained.

“Dirty filters can raise the amperage draw considerably on compressors, and that can increase energy consumption,” Maliff said. Compressors that are not lubricated properly increase consumption because of the friction between rolling elements. More energy is required to generate the same amount of cubic feet of air than in a properly lubricated compressor.

A real-life example

Companies have different ways to cope with rising energy costs. Some hotel chains add an energy surcharge to guests' bills, said Robert Winchester, president and COO of Waterford Hotel Group, Waterford, Conn. “But you can make a case for surcharges on everything. We're of the view that you should build such costs into your rate and still be able to make a profit,” he said.

Early on, Waterford, which operates 26 hotels in 10 states, created an energy management plan, or an “audit check list,” for general managers and the heads of engineering departments. Winchester said the checklist enables managers to get into the habit of using common sense when it comes to energy conservation. Making sure automatic timers are calibrated properly is but one example.

“Our goal is to keep our hand on every button all the time. We do that by bringing energy conservation to the forefront of what the hotel staff does every day. It produces results,” Winchester said.

Owners, managers and investors should press for energy conservation as much as possible because it saves money, said Howley of GE Lighting.

“There is a lot of new technology available today with lighting systems that can produce a good financial payback for building owners or operators,” explained Howley. “When electric rates were lower, it may not have made sense to do a building upgrade. But the newer lighting systems can save even more money, and electric rates tend to be higher this year.”

Still, building owners and operators shouldn't try to reduce lighting costs without expert guidance.

“The best advice is to get the experts in early,” said Chris Forti, market development manager at GE Lighting. “A supermarket that has lots of foot traffic may take out every other light in hopes of saving energy. But is that wise?” Forti asked. “Sometimes people resort to panic-conservation measures. That may have a negative effect on productivity and sales, and could result in increased worker errors, and that ends up costing the company more money.”

Considering hybrid gas/electric systems

In hopes of reining in energy costs, some building owners and operators are considering hybrid gas/electric cooling, heat and power for commercial buildings. Such systems can provide operators of commercial buildings increased control over energy costs, said Tony Occhionero, executive director for the American Gas Cooling Center in Washington, D.C. The systems reduce summer peak electrical usage, provide an alternative energy supply and operator flexibility.

“Owners of large buildings might want to put in electric and gas air-conditioning, say half and half at a 40-60 ratio,” he said. “It's an opportunity to control energy costs and operate the building more efficiently.”

In addition, Occhionero said, some owners might consider installing microturbines to generate a portion of electricity in-house. “The goal is to reduce that peak demand charge, which can range from 50% to 500% higher than the usage rate [at non-peak times],” Occhionero said. Microturbines, or other small generators, make use of waste heat in heating or cooling systems.

“We're not suggesting customers get into the energy business and do it all at the site. We're saying use the best of both worlds — manage costs by diversifying,” Occhionero said. He noted that the Federal Regulatory Energy Commission (FERC) building in Washington, D.C., installed an HVAC system that generates energy using half gas, half electricity.

Now that the summer is over and California appears to be enjoying a temporary reprieve from the energy crunch, the concern among experts is that owners, operators and tenants might let their guard down.

“A number of companies are saying, ‘Crisis, what energy crisis?’ now that we have made it though summer fairly unscathed,” said Gary Graham, vice president of energy advisory services at Jones Lang LaSalle in Chicago. “But the real issue they haven't addressed is that the underlying national pinnings that caused the crisis are still there, and it may take three to five years to get it resolved for most marketplaces.”

In many markets, demand exceeds supply or is coming close to it, Graham continued. How quickly the economy recovers will affect the future balance of supply and demand. The conventional wisdom is that the current softness in the economy has weakened demand for energy.

Ultimately, the nation's energy infrastructure needs to be expanded and upgraded. Additional gas-fired energy plants will tax the gas distribution network, said Graham.

A grim outlook

So what about the future? Veteran developer Dan Packard, founder and certified property manager of Denver-based PowerSpring, an Internet-based energy information application, is pessimistic. He believes property managers are too passive in seeking solutions for energy costs.

Packard cites California's energy crisis as an example. “The West Coast energy issue has been beaten to death,” said Packard. “The expression there by property managers today is that Gov. Gray Davis has stepped in and solved the problem.” Many Americans incorrectly believe the energy crisis is over because the issue currently isn't heavily covered by the media, Packard added.

Analysts say property managers across the country have not begun to implement energy solutions for their portfolios to stop the decline in FFO and net operating income attributable to energy costs. “At the present pace, it will be many years before they recognize the needs of their tenants,” Packard said.

“Over this period, the best of tenants [those willing to pay the highest rents] will have moved on to other space that offers extensive menus of value-added services, including many energy options,” concluded Packard. “The property manager who is slow to react will be out of a job.”

Some enlightening energy management tips

Energy costs don't always have to rise. Experts say they actually can decrease, if an efficient energy system is put in place. Here are some suggestions from Rob Bagguley, president of property and facilities management at Chicago-based Transwestern Commercial Services, and others to energize the thinking of a real estate owner, operator or manager:

  • Chill out. Install energy management systems that better control equipment, add efficiency and save power. Air conditioners, for instance, gobble up huge amounts of electricity.

    Most traditional commercial cooling systems, called chillers, operate during the day when rates are highest. Some property managers have sought to cut costs and conserve energy by running chiller systems during off-peak hours.

  • Think differently. Does cleaning have to be done in the dead of night with different crews on different floors? Bagguley urges building owners to coordinate cleaning staffs. “It's a simple concept,” he explained. “Assemble crews on one floor, complete that floor and then have them move on to another. You'll finish a floor in a shorter time frame.”

  • Go back to the basics. For example, if outdoor lighting is automated, use a digital clock that has more accurate timing and reflects changes in daylight-saving time to control the lighting. Turn lights on only when needed and off when they are not in use. Consider motion monitors that trigger the on switch when a person is in the office.

  • Check out a building's equipment. Retrofit air conditioners with energy-efficient machines. Determine when power peaks. If owners or property managers can lower that peak demand, they will significantly affect their rate structure. Stagger times for equipment start-up and shutdown. Instead of using energy in a bell-shaped curve, where energy use starts out flat and then climbs rapidly before falling again, monitor energy usage.

  • Consider alternate sources of power. Rather than obtaining 100% of power from a grid, consider using an on-site generator to control peak costs that could provide 25% to 50% of the energy needed at the site. Not only will such a system reduce costs, but it also could help in an emergency. Owners and operators also could opt for a hybrid system that combines electricity and gas.

  • Take advantage of programs offered by utilities and energy manufacturers. In California and other states, energy companies offer rebate programs to entice owners to replace fluorescent light bulbs with lower-wattage bulbs, thereby creating significant savings.

    Lighting manufacturers typically offer financing, and the payback can be realized in less than two years. At the same time, tenants see the benefits of their conservation efforts.

  • Get everyone involved with the program. The age of tenants is changing. Generation X is more concerned about energy conservation. Seek to make everyone more conservation-conscious not only from an economic viewpoint, but also from an environmental one. Work with tenants. Everybody loves a great view, but educate tenants to use mini-blinds to reflect heat. Ask tenants to be cognizant of energy usage.
    Mike Sheridan

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