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Tenants Go for the Green

After years of fits and starts, office building owners are finally getting the green message. Just ask Al Skodowski, vice president and director of engineering for Chicago-based Transwestern, which manages a 150 million sq. ft. office portfolio.

Six months ago, Skodowski recalls sitting in endless meetings with asset management groups, facing the same tired question: “What's LEED?” But in recent days Skodowski has observed a turning of the tide. With each passing day, the real estate community is increasingly embracing the Leadership in Energy and Environmental Design (LEED) program and other related green initiatives.

“I've since been back to three of those five groups and they are now saying, ‘OK, we're hearing it from potential tenants, from potential tenant rep brokers, from our owners' rep brokers. What do we need to do, and how do we figure this out?’” says Skodowski.

Until recently, owners had little incentive to invest in greening their existing properties. After all, most leases stipulate the pass-through of all operating costs directly to tenants. Besides, the notion of turning brown edifices into clean, green machines is anything but a new idea.

The U.S. Environmental Protection Agency launched the Energy Star program back in 1992, and the states of California and New York enacted mandatory energy conservation policies in 2000.

According to property managers, tenants are finally driving owners to walk the green talk. Why now? Chalk it up to the one-two punch of increased awareness and rising energy usage, particularly electricity.

Given the U.S. Department of Energy's forecast for electricity use in commercial buildings to increase by 50% by 2030, more tenants are now demanding highly energy-efficient facilities.

For building owners, energy savings are easily quantifiable and go directly to the operating income of the building. That data also gives owners another point of differentiation when the “for sale” sign goes on the front door.

According to a study released this past summer by Bethesda, Md.-based CoStar Group, multitenant Class-A office buildings that carried an Energy Star rating in CoStar's database achieved higher occupancy rates (89.2%) than those without the designation (87.5%).

The report, which covers building performance over the past three years, found that Energy Star buildings posted higher occupancy rates beginning with the fourth quarter of 2004. A similar trend was found for both rental rates and sale prices.

Point of differentiation

Increasingly, owners of existing buildings are turning to a LEED designation tailored to existing properties to distinguish themselves to tenants. The rating is known as LEED-EB, and comes from the U.S. Green Building Council based in Washington, D.C.

“A year ago this green wave swept over the new construction industry, so architects, engineers and developers are very aware of green building standards,” says Pete Atkin, an associate with GreenOrder, a New York-based consultant specializing in green strategies.

“This year owners, managers and brokers are realizing the same thing is happening in the existing building market. They need to get on board, otherwise they won't be competitive,” adds Atkin.

Certainly from a cost savings and environmental standpoint, the stock of existing buildings far outnumbers the volume of buildings under construction. According to the EPA, commercial buildings account for 40% of global greenhouse gas emissions; in cities such as New York and Los Angeles the figure approaches 70%. The high environmental impact led the Building Owners and Managers Association (BOMA) to issue a challenge to the industry in July to improve energy efficiency across the board some 30% by 2012.

Crisis du jour?

Still, many observers are experiencing a certain sense of déjà vu. Given asbestos, indoor air quality, Y2K, the 2000-2001 energy crisis and security issues after 9/11, maybe management pros can be forgiven for thinking the “greening” concept is just the next crisis du jour that will depart from the commercial real estate landscape just as suddenly as it arrived.

“All of these things were going to change the business forever. Well, none of them did,” says David Pogue, senior managing director of asset services in the Western region for CB Richard Ellis, referring to Y2K and other crises. “Many people still think if they can just avoid this [greening issue] for a year, there will be a new crisis. But this time it's different,” he says.

Thanks to government involvement, today's green initiatives are putting pressure on the building industry. Local, state and federal entities around the country have launched conservation initiatives. In early October, San Jose Mayor Chuck Reed formally proclaimed that the city would become the greenest in America by reducing its energy use some 50% by the year 2020. Politically speaking, that's an ambitious statement.

But achieving that goal will require building owners to jump on board, and now owners are feeling the heat of having a bull's-eye painted on their windows. “We are a target and there are some big guns aimed at us,” says Pogue of CB Richard Ellis. “If we don't voluntarily move on this, there is going to be something involuntary that we're not going to like very much.”

Former President Bill Clinton recognized the need for retrofitting existing buildings with the launch of the Energy Efficiency Building Retrofit Program in May 2007. The program is uniting energy services companies Honeywell, Johnson Controls, Siemens and Trane to conduct energy audits and perform building retrofits.

The program also includes the commitment by financial firms ABN AMRO, Citigroup, Deutsche Bank, JPMorgan Chase and UBS to arrange $1 billion each to finance cities and private building owners to undertake retrofits, doubling the global market for energy retrofit buildings.

And with larger multinational companies such as Citigroup and Coca-Cola announcing energy savings initiatives earlier this year, most industry observers admit that it is only a matter of time before smaller tenants make similar demands for efficiencies.

LEED-EB no panacea

The gold medal standard in the race to energy efficiency is the LEED-EB certification, which means an existing building has achieved a rating from the U.S. Green Building Council based on six categories. These range from cleaning issues to systems upgrades and maintenance to meet green building performance standards.

The first LEED-EB certification was created in 2004, so the program is relatively new in relation to the green building council's new construction program, launched in 2000. According to the council, only 480 structures are on the existing buildings waiting list, while some 5,000 new buildings await LEED certification.

For now, most managers recognize that the standard for existing buildings is too stringent and not the only answer for owners wishing to achieve energy efficiency. In fact, fewer than 100 existing buildings across the country have attained the coveted LEED-EB seal.

Many of the larger portfolio management firms, including CB Richard Ellis, are going their own way, working closely with the green building council, but creating their own twist on the LEED-EB program. In early October, Pogue met with the council and made a commitment. “We are taking a portfolio approach where we're going to identify 100 buildings across the United States and try to get somewhat of an expedited fashion LEED-EB accreditation.”

According to Pogue, CB Richard Ellis is tweaking the LEED-EB rating to create the global brokerage's own proprietary list of “101 Tips for a Sustainable Building.” Still under development, the program officially rolls out to buildings and tenants within CBRE's 700 million sq. ft. asset services portfolio in January 2008.

And while management firms do their own thing, the savvy bunch at the green building council is readying a rollout of its own new LEED-EB standard — dubbed LEED for High-Performance Operations — later this year to make it more user friendly and focus the rating system primarily on operations and maintenance.

“The aim is to differentiate the rating system for existing buildings from that of new construction,” says Doug Gatlin, director of the LEED program for existing buildings. “We thought the line had been blurred by having too many new-construction oriented credits in the existing building program.”

Sweating the small stuff

Utilities are the largest operational cost for commercial buildings, accounting for as much as 50% of overall costs on average. Coincidentally, it is the easiest place in the budget to realize savings, according to management experts.

The EPA estimates the average office building in America could easily reduce its energy costs by 30%. Much of the challenge involves educating owners that they don't have to spend millions of dollars to achieve significant energy savings.

“A lot of these buildings are not running as efficiently as they were designed, and we think there is significant savings to be wrung out of virtually every building,” says Pogue of CB Richard Ellis. He points to the current buzz over so-called “retro-commissioning” buildings, which is vernacular for gaining maximum efficiencies out of existing building systems.

“For a whole host of reasons, buildings wind up not running as efficiently as the engineers designed them,” says Pogue. Calibrating systems to meet their original specifications can yield the Holy Grail for owners — less than a year of payback for service costs and a 10% to 15% ongoing savings in energy.

More owners also are realizing savings by eliminating so-called “Saturday hours.” Currently, many buildings operate on a normal schedule for an extra day each weekend. “We've tried to make our owners realize that by taking these simple steps, they could save 25% on their operating expenses,” says Pogue.

There also is growing evidence that building owners who invest money in their building systems benefit greatly. Over the past six years, San Jose-based Adobe Systems invested $1.4 million in 64 individual retrofit and upgrade projects in its three-building headquarters facilities to achieve a 121% return in combined annual energy savings and rebates from local utility Pacific Gas & Electric (PG&E). Adobe reduced its electricity use by 35%, its natural gas use by 41%, its building-water use by 22% and its irrigation water use by 75%.

Adobe's 1 million sq. ft. headquarters in San Jose includes three buildings constructed in 1996, 1998 and 2003. All were state-of-the-art for their time. In fact, retrofitting the newest tower has yielded the same savings as retrofits of its older brethren, says George Denise of Cushman & Wakefield, general manager for Adobe Systems' North American portfolio.

“If we're getting that kind of a savings and return on the investment with the new building, then just think what you can do with an older building that has older chiller plants, older motors on the fan systems and so forth,” says Denise. “As you go to older buildings, you run into increased potential for savings.”

Tenants can also be lured. “You're seeing more tenants looking for green spaces, and a lot of them cannot afford a new building,” says Atkin. “So, you have existing building owners that are in a position to attract tenants based on how green a building is and use it as a differentiator, even if it's not new construction.”

Most experts agree that as with any new trend, the path to energy efficiency across the industry is still a long and winding road. “There is still skepticism out there, and we are definitely in a valley at the edge of the mountain,” says Skodowski of Transwestern.

But there is little sign that the greening movement is going away anytime soon. In fact, many experts are predicting a deluge of information to drive home green benefits to both owners and tenants.

Carnegie Mellon University and other institutions are hard at work researching the issue. But until they produce sweeping empirical evidence, which could be years from now, adoption of green strategies is still a matter of taking one step at a time.

Ben Johnson is a Dallas-based writer.

Green incentives: It's a hodge-podge out there

Someday, “going green” will be easier for building owners once incentives become more standardized across federal, state and city bureaucracies. But today, unlocking the value in economic and tax incentives for green retrofits of existing buildings is best left to the tax experts.

According to Elizabeth Gillon, managing director of tax services with Smart Business Advisory and Consulting LLC in New York, one of the biggest incentives comes from the federal government, specifically the Internal Revenue Service (IRS).

Thanks to the Energy Policy Act of 2005, building owners are eligible to receive a tax deduction ranging from 30 cents to $1.80 per sq. ft. on their federal tax return, if they reduce annual energy consumption by 50%.

As their benchmark, owners must use the standards for heating, cooling, lighting and water heating set back in 2001 by the American Society of Heating, Refrigerating and Air Conditioning Engineers. Even buildings that fall below the 50% threshold may qualify for a deduction of up to 60 cents per sq. ft. of building floor area, if they meet a 16% minimum energy savings target.

Ferreting out all of the available incentives is still a time-consuming process at best. Local utilities, particularly electric companies, offer some of the most lucrative incentives for reducing energy usage.

At the state and local level, incentives vary widely, but a good place to start is online at, where the Database of State Incentives for Renewable Energy offers a comprehensive source of information on state, local, utility, and selected federal incentives.

According to Gillon, uncovering all of the possible incentives and striking the right balance of incentives versus total energy savings rests with the property owner's ability to find a “champion” within the organization who is dedicated to the green cause.

“It really takes a champion to be able to move something like this forward,” Gillon says. “If you don't have a champion like that or have that as a principal business goal, then I think it will be missed.”
— Ben Johnson

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