Why Sustainability is Sustainable for Commercial Real Estate

Great post last week in RealEstateJournals.com engaging how and why sustainable buildings make sense for commercial real estate developers, investors and managers. Here's the initial tease from the post's author, Don Schoenheider, a vice president of Liberty Property Trust (NYSE: LYR), a $6.6 billion REIT:

Fifteen years ago the word “recycling” was something aging hippies did and a “carbon footprint” was what was left if you stepped too close to the fireplace and then walked on a rug. How times change: today both are top of mind for commercial real estate developers, brokers and tenants, and it is crucial to understand the benefits if you want to best serve your company or client.

Schoenheider believes -- and we concur -- commercial real estate development has forever changed on four important levels: building occupancy cost, employee productivity, customer relations and commitment to the future of business.

1. Occupancy cost. Sustainable buildings are first and foremost about efficiency – saving energy, saving water and keeping reusable materials out of landfills. Liberty has consistently demonstrated they can provide tenants with a commitment to a sustainable environment and save them money; at least $.15-$.30 cents – or more – a square foot in occupancy costs. Lower electric bills, lower water bills, lower gas bills … something they can easily (and happily) relate to.
2. Healthier buildings. Sustainable buildings tend to be healthier, meaning less time is lost to illness which translates into greater productivity and lowered employee turn-over.
3. Customer relations. Investors see the cost savings, employees see the health benefits, vendors see the opportunity to work with a progressive company and customers are actively looking for a commitment to the environment.
   
4. Sustainability: The future of business. Who will be the commercial real estate decision makers in just 10 or 15 years? Schoenheider posits. People who have grown up recycling, tracking that carbon footprint (and I don’t mean across the carpet), installing solar panels in their homes and driving hybrid cars. How will they view non-sustainable buildings? Just like disco (and grunge and ponchos and Ugg boots and …): obsolete.

Schoenheider wraps with a reflection of the past decade: We at Liberty remember saying in 2002 that a sustainable building was only expected to cost 10-20% more to develop than a standard building. Today as we approach break-even, the goal is to make them even less expensive to develop than standard buildings.

Companies like Liberty get it. The qualitative virtues of sustainable buildings are somewhat difficult to grasp; they're there, but they are intangible. However, there's no argument with the quantitative benefits. When you invest in making your real estate assets more efficient and sustainable, your NOI increases, asset values are bolstered, occupancy rates rise, and you can command higher lease rates. It's a sustainable path to the bank.

$50 billion reasons energy efficiency works

The growth of energy efficiency has been hamstrung by its relative transparency, its invisible nature. Is it real? Does it work? A recent GreenerBuildings post authored by Evan Smith, Kickstarting the Green Economy with Building Energy Efficiency, lends credence -- $50 billion worth -- to the immediate and perpetual efficacy of energy efficiency.

Quick synopsis:

What isn't getting enough play in our green technology economy is work we can and need to undertake right away: A serious coordinated effort to deploy network-based portfolio-management energy efficiency strategies and measures across our buildings and fleet transportation systems as rapidly as possible.

Here's one specific area for consideration. United States commercial real estate (all buildings except residential housing and goods-producing industries like manufacturing, agriculture and construction) consumes energy at a substantial and growing rate. It will grow at two-thirds the rate of gross domestic product through 2025, according to the Annual Energy Outlook 2005 published by the U.S. Energy Information Agency. In 2003, the commercial building sector, which is made up of 4.9 million commercial buildings covering more than 71.6 billion square feet of floor space, consumed 17,548 trillion BTUs of energy. Estimating a conservative nominal energy cost of $10 per MMBTU, the energy bill for commercial buildings in the U.S. exceeds $175 billion annually.

What is absolutely criminal is that today, somewhere between 20 percent and 40 percent of that energy is wasted, even from buildings built within the last 10 years.

The translation of energy waste to money lost -- seemingly simple, certainly proven -- is a cognitive challenge. Utility rates go up. Buildings age and become increasingly inefficient. Property owners and managers pay their utility bill every month. They can't see the energy they're wasting, and the hole in their pocket expands. It's groundhogs' day, and hole gets deeper with each setting of the sun.

Simply stated:

Start with the $175 billion in annual energy costs for the U.S. commercial real estate. Conservatively, 30 percent is available to conserve. The savings potential therefore approximates $50 billion annually.

What to do? The article frames a common scenario for facility owners and managers, and proffers a sage suggestion amplifying the purpose and utility of Octus's Smart Energy Platform:

In most facilities, maintenance staff work on the most egregious failures when they detect them, but the reality is that maintenance only detects and addresses some fraction of failures. The energy performance of most buildings today, even new ones, relying on alert maintenance staff and manual controls, is well below optimal.

New approaches to smart building facilities portfolio management enables digital readouts on zones, nodes and systems within wired buildings that can tell maintenance the energy (and air quality, safety, carbon footprint, etc.) impact of each failure on a real-time basis. These readouts - like giving each building an MRI every 15 minutes - can help maintenance staff to rapidly staunch energy losses and conserve most of the energy loss potential identified. These technologies and approaches are available now.

Five barriers to energy efficiency savings: What we can learn from Google and GE

Google and General Electric know a bit about making money and creating shareholder value. It's no surprise, then, that they're sages when it comes to energy efficiency. A panel discussion at a recent Fortune Brainstorm Green session -- which included Google’s Green Energy Czar Bill Weihl and Gretchen Hancock, project manager for corporate environmental programs at GE -- germinated a list of five key roadblocks to energy efficiency. First, a panel primer from the Environmental Defense Fund's Innovation Exchange:

Here’s a business conundrum for you: energy efficiency saves serious money, cuts carbon pollution, requires low tech solutions, and is a known quotient, having been around since the 1970s. So why are so many companies still not taking the necessary steps to identify and eliminate these inefficiencies?

“What we learned in Econ 101 doesn’t hold true when it comes to energy efficiency – the notion of perfect markets, where information flows freely and people are maximizing their value,” notes Environmental Defense Fund’s Gwen Ruta. “Instead, it’s as if companies across the globe are walking around with a hole in their pocket with coins dribbling out nonstop.”

How is it that smart companies who are vigilant about monitoring the bottom line, stock price, customer satisfaction and much more let this wasteful “dribbling” occur? This question launched a robust discussion at a Fortune Brainstorm Green session last week titled “A Trillion Dollar Opportunity: The Hunt for Energy Efficiency.”

We posit often about how companies and property owners leave money on the table; dribbling coins (nonstop) from their pockets is a new one. What are the main barriers to energy efficiency and how can companies try to overcome them? According to Innovation Exchange's recap:

Barrier #1: Information overload and lack of focus. There’s a ton of information out there about energy efficiency – and what companies should do to reap the savings – but it’s diffuse and challenging to wade through. Companies need help focusing in on the right tools and content and prioritizing where and how to begin. GE conducts through regular energy “treasure hunts” inside a given company where selected employees come together for a jam-packed three-day working session to identify energy efficiency savings at a chosen manufacturing site. The results are impressive – each treasure hunt typically identifies opportunities to reduce energy spent by 20% – and proves that when people have the information, data and focused time to spend on this challenge, huge savings can be found.

Barrier #2: Structural limitations. This is a big one. Companies of all sizes suffer from a siloed approach to business, where business units and operational departments are managed by separate budgets, performance timelines, product cycles and more. Finding energy efficiency savings requires employees throughout the company to share information and make trade offs in order to achieve strong results. For example, there may be an increase in cost to the R&D budget around energy efficiency efforts, but balanced by a result in savings that will show up in the facilities management budget. Most likely, these two divisions communicate rarely and have little in common – including different bosses who may not communicate well among themselves, either. Why would one take on a cost for the other to reap the savings? Google takes a “total cost approach” that is geared to precisely avoid this problem. And GE’s treasure hunts bring cross-functional teams together over the three-day activity which by definition helps break down silos. According to Gretchen Hancock, the more people from different departments are involved, the better the results of these treasure hunts are.

Barrier #3: The solutions are small and diffuse, not few and mighty. There is no single “gee whiz” step that companies can take to ensure they are reaping all the benefits of energy efficiency for their organizations. It takes time for companies to unearth where and how they can save both cash and carbon through energy efficiency. Some employees may be attracted by bigger, more appealing sustainability projects or cost savings efforts that are being considered or launched by their company. To avoid this problem, the hunt for energy efficiency savings should be institutionalized throughout companies as a continuous process, not one-off events. Energy efficiency savings should be one of the metrics that business units are evaluated on, and therefore, regularly measured and reported on.

Barrier #4: Cultural resistance within companies. As Gretchen Hancock noted, some companies hear the phrase energy efficiency and think, “Didn’t we tackle this problem in the 1970s?” In companies where innovation and excellence is the expectation and the norm, executives may believe that the “low hanging fruit” of energy efficiency is either too low-tech to consider or has been dealt with decades ago. But the fact is that energy efficiencies exist where even super bright executives might not expect to find them. Aging equipment can cause inefficiencies, new technology enables new savings and employees need to be trained and retrained on efficiency issues and practices.

Barrier #5: Those super-short ROI expectations. We all know how Wall Street expects speedy ROI for corporations across the board. As a result, public companies have a strong disincentive to invest in processes, products or technologies where recouping the costs may take anywhere from 1 to 5 years. This short-term thinking leads to short-term strategies, and serious money being left on the table.