Nearly four years in the making, new legislation aimed at encouraging energy efficiency in leased commercial spaces was signed into law by President Barack Obama on April 30.
The law authorizes the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy (DOE) to jointly create a voluntary Tenant Star program aimed at providing national recognition to tenants who design, construct, and operate highly energy-efficient leased spaces in commercial buildings. The Tenant Star program is inspired by the long-running Energy Star program for whole buildings. That program provides a variety of tools for promoting energy efficiency, for measuring and benchmarking energy consumption, and for certifying those properties that achieve certain levels of energy efficiency.
Tenant Star will be the first government-endorsed label in the United States to recognize leased spaces within commercial buildings for sustainable design and operation. Energy Star has been commendable at capturing energy performance in existing buildings.
The new law will take the next step by getting tenants more deeply involved, it should advance the capture of whole building performance data and hopefully better align tenant and landlord interests, says Helen Gurfel, executive director of ULI Greenprint.
Tenants account for a significant amount of energy consumed in a building when related to three key areas: their electric plug load from equipment and operations; the lighting; and the heating, ventilating, and air conditioning (HVAC). In fact, tenants’ spaces often account for 50 percent or more of a building’s total energy use, according to research conducted by the National Resources Defense Council’s Center for Market Innovation in New York City, specifically for its High Performance Tenant Demonstration Project.
“Making on-going environmental performance improvements starts with accessing data and information, setting a baseline, tracking data, and analyzing performance,” says Gurfel. “It is a widely accepted concept, that you cannot manage what you do not measure.”
The basic philosophy that you cannot manage what you do not measure is a key part of ULI Greenprint’s core mission, who works with an alliance a real state owners and investors to improve the environmental performance of the property sector. Measuring energy consumption also is at the crux of what Energy Star started. Now that concept is going even further with Tenant Star, where landlords and tenants can work together to better track their energy usage information and, ideally, to make improvements, says Gurfel. Engaging tenants is definitely another step in the right direction to promote energy efficiency and sustainability, she adds.
Introducing a tenant-specific program to help promote energy efficiency has won wide support from landlords. “This is going to be another tool that we can use to get tenants to be more aware of their energy consumption and, we hope, to take steps to be as efficient in that consumption as possible,” says Nicholas E. Stolatis, senior director of global sustainability and enterprise initiatives at TIAA-CREF Global Real Estate in New York City. Landlords such as TIAA-CREF plan to use Tenant Star to educate and promote energy efficiency among tenants.
Tenants are not generally inclined to do things that don’t have an enormous financial benefit. “So anything that we can do to incentivize tenants to care more about their energy usage is great,” agrees Jonathan Flaherty, director of sustainability at Tishman Speyer in New York. It is even better when that message comes from someone other than the landlord, especially a neutral third party such as the EPA. “Energy Star has been enormously successful on all fronts. So to take that brand name and drive it to the tenant level is a no brainer, because there is only an upside,” says Flaherty.
Now that President Obama has officially signed the bill into law, the next step is for the DOE to establish a framework for the Tenant Star program that will then be implemented by the EPA. “This will be a voluntary accreditation, just like Energy Star, but it will give tenants something tangible towards which to aspire,” says Anthony E. Malkin, chairman and CEO of Empire State Realty Trust and chair of the Real Estate Roundtable’s Sustainability Policy Advisory Committee. Malkin and the Real Estate Roundtable played a key role in proposing and rallying support for the legislation.
In fact, it was a buildingwide retrofit a few years ago at the Empire State Building that served as the catalyst behind the legislation. What Malkin learned as part of his firm’s retrofit of that property is that about 60 percent of all the energy usage within the Empire State Building is consumed within a tenant’s own four walls. Energy Star measures the whole building’s energy consumption, but if a landlord is going to reduce energy consumption throughout a building, a majority of the work needs to occur within tenant spaces. “That was a meaningful factor for us in determining that we needed to address the tenants’ consumption of energy,” says Malkin.
Because most tenants pay their own utility bills, even if landlords do the work to improve energy efficiency, it is the tenant that directly benefits from an effort with lower utility bills. What Empire State Realty Trust found is that energy efficiency can be implemented into a tenant buildout just as it is done with a whole building retrofit. “Tenants do buildouts all the time. So if you have that opportunity as the tenant builds out, you can effect major change,” says Malkin.
Empire State Realty Trust also found that energy-efficient buildouts within tenant spaces produce significant financial benefits with short-term paybacks and extremely high rates of return. In the case of the Empire State Building retrofit, tenants were saving 30 percent to 50 percent on their energy consumed and were generating internal rates of return for a 10- to 15-year lease of 25 percent to 27 percent, notes Malkin.
After completing energy upgrades to its base building and all of its tenant spaces, the Empire State Building is expected to save at least $4.4 million a year, which represents at least a 38 percent reduction of energy use for building tenants, according to a statement from the company.
The cost savings and the return on investment is an easy sell for most tenants. A second component that Malkin wanted to address was how to obtain some type of certification or recognition for tenants who follow an energy-efficient process. Similar to Energy Star, the certification would provide quantifiable measures, and it would create a nationally branded program that would help to educate tenants. As it turns out, establishing such a program also would require an act of Congress.
The Tenant Star law was passed with overwhelming bipartisan support in both the U.S. House of Representatives and the U.S. Senate. Although similar to Energy Star in principle, Tenant Star will need to be organized differently to fit how it applies to building occupants rather than to building owners. For example, Energy Star relies on benchmark data from the Commercial Buildings Energy Consumption Survey.
Tenant Star will likely be designed as a process that will focus on incorporating the basic principles of maximizing energy efficiency into the design of tenant spaces before construction, rather than applying them to already built out spaces. Ultimately, those opportunities will not only improve energy efficiency but also improve the work environment with things such as better or more appropriate lighting and better temperature controls, adds Malkin.
One potential hurdle that may exist is whether or not the EPA gets the funding necessary to successfully implement Tenant Star, notes Flaherty. The EPA faces the same ups and downs with the federal budget as do other government agencies. “So the only question as to whether it’s going to be successful or not is can the EPA get the cash and have the personnel to be able to build this system successfully,” he says.
It will likely take a number of months for the DOE to establish the rules and for the EPA, in turn, to build Tenant Star into its systems and programs so that it can be used by occupiers of space. “The important thing is that it has been signed into law, and it is something that is going to happen,” says Malkin.