Deep retrofits with energy savings topping 30 to 50 percent result only through the combination of energy efficiency strategies affecting multiple systems.
America loves a comeback. There is something about it that taps into our national psyche. Individuals, businesses, and institutions achieve greatness, lose it, and then regain it. It is an undeniable part of our shared mythology. Our most admired figures—real and fictional—often exemplify the concept of the comeback. Whether it is Steve Jobs, Rocky Balboa, or the 2011 St. Louis Cardinals, we are fascinated by stories of renewal and defying the odds.
The same is true of buildings. It helps explain why real estate is such a fascinating business. The cyclical nature of booms and busts offers a dramatic backdrop for comeback stories. The concept of the comeback is intrinsically tied to how we build value—having the vision to see what others don’t, sensing an economic opportunity, and revitalizing land, communities, and buildings.
Increasingly, sustainability is playing a role in these stories. Through reduced operating costs, improved performance, increased market appeal, and public relations and marketing, the broader story of a building’s renewal comes into greater relief when that renewal is enhanced by sustainability and energy efficiency initiatives. A prime example is the recent effort of Malkin Properties to reposition the Empire State Building. By combining traditional real estate strategies with an aggressive and public campaign to reduce energy use, the story transcends that of a standard real estate project. Would the comeback story of the Empire State Building resonate as deeply without the energy efficiency focus?
Deep Retrofits: Catalysts for Comebacks?
The question of how to revitalize real estate assets in today’s market is a timely one. Capital markets are still reluctant to endorse anything but Class A properties, and it can be challenging to secure debt. The lingering economic doldrums are preventing all but a few new development projects from breaking ground. Appropriately perhaps, the real estate market is turning inward, looking at the existing building stock and seeking new methods to enhance asset value. Deep energy efficiency retrofits constitute a unique opportunity in this environment.
Loosely defined, a deep retrofit is a project that achieves aggressive energy savings. Whether targeting energy savings of 40, 50, or 60 percent or more, a number of organizations are pursuing such projects. Recent initiatives launched by the Northwest Energy Efficiency Alliance (NEEA) BetterBricks program, the Rocky Mountain Institute (RMI), the U.S. Department of Energy (DOE), and the National Trust for Historic Preservation (NTHP) Preservation Green Lab are coalescing around the idea of "going deep" to meet public policy, environmental, and business needs.
Focusing on energy efficiency to reduce costs and enhance asset values should be an industry standard by now, though, unfortunately, it is not. Major institutional investors are readily achieving savings of 5 to 20 percent across entire portfolios of buildings through upgraded energy efficiency, often at little capital expense. A deep retrofit has a number of implications for real estate investors, and a number of reasons exist to consider one.
Putting the Multiplier Effect to Work
Deep retrofits with energy savings topping 30 to 50 percent result only from energy efficiency strategies that affect multiple systems in the building. More often these savings are accomplished through careful consideration of the interrelation among these systems and the conditions in which they operate. It is not enough to just examine the light fixtures; one must also consider the windows and natural light. Solar heat gain in relation to the heating, ventilation, and air conditioning system requirements needs to be examined, as does the size of a chiller in relation to the building’s insulation and envelope integrity. The strategies accumulate, achieving a multiplier effect. Like an interest rate plugged into a pro forma—cascading through the model and compounding through the years—deep energy retrofits require a systemic and iterative view.
Psychologically, deep retrofits are simply more inspiring than a piecemeal approach. They do not occur by accident; they imply the involvement of a capable team with a plan and the technical abilities to pull it off. They grab our attention in a unique way. In the competition to secure and retain tenants, with buildings certified under the Leadership in Energy and Environmental Design (LEED) program becoming the norm in some markets, deep retrofits offer a gut-level indicator that this building is different.
Whether reflected through Energy Star ratings, the occasional solar panel, or low-flow fixtures, sustainability initiatives too often are applied piecemeal. But deep retrofits do not work in this manner. To capitalize on the potential value of a deep retrofit, the sustainability strategy must be integrated seamlessly with the overall marketing and investment strategy. Deep retrofits should not be a side project but a crucial ingredient to a building’s comeback.
The Nature of the Comeback
Deep retrofits pose different questions. Part energy efficiency project, part real estate project, deep retrofits can be daunting in their cohesive nature. When are the best times to begin a deep retrofit? Do such projects require a different financial approach? What market conditions best enable their success? It is a set of questions that requires careful thought, and initiatives led by BetterBricks, RMI, DOE, the NTHP Preservation Green Lab, and others are underway to provide guidance to the real estate community.
In A Search for Deep Energy Savings, a 2011 study for the NEEA of more than 50 buildings that achieved energy savings topping 30 percent, the New Buildings Institute found that "in most projects, the cost of the efficiency portion was not distinguishable due to the renovation nature of the work." In other words, the real estate and sustainability strategies were integrated as part of a cohesive turnaround project. Deep retrofits are best viewed as value-creation strategies rather than cost-reduction strategies, and as such should not be justified solely by simple payback. The cost savings are real, but they are only one piece of the investment puzzle. Energy efficiency can provide the initial boost and provide leverage to achieve greater performance levels, both financial and environmental.
Comebacks are essentially about rediscovering hidden strengths—about finding catalysts to achieve greater things. Perhaps deep retrofits can act as catalysts for real estate investment, offering new paths to asset revitalization. A handful of buildings have shown the way. The character of our buildings speaks to the character of our culture, and many of our buildings are overdue for reinvestment. Deep retrofits will come with challenges, but the comeback stories we remember are those involving the greatest challenges. Anyone can renovate a lobby, but how many can turbocharge a building comeback with a deep retrofit?
This year, many resources and tools will debut to help real estate investors make their own deep energy efficiency retrofits. So stay tuned, assess the potential in your buildings, and make a commitment to a comeback.
See, Diving Deep to read about other deep retrofit projects that were able to capitalize on unique financial and marketing opportunities.
Watch Anthony E. Malkin in a video in which he offers advice for owners and developers of any size buildings as well as to policy makers. Malking is president of New York City–based real estate firm Wien & Malkin, with a portfolio of 8 million square feet (744,000 sq m) in the Big Apple that includes the Empire State Building.
Empire State Building energy retrofit website
to learn more about the multitude of changes made, those decided against and to avail yourself of the free, open source tools created to help other developers and owners assess energy retrofit steps under consideration on their own projects.