Tenant Power: Learning from the Empire State Building’s Retrofit

In the late 2000s, Anthony E. Malkin, chairman and chief executive of Empire State Realty Trust, joined forces with a coalition of businesses and environmental organizations to launch an ambitious $20 million retrofit of the Empire State Building with the aim of reducing the iconic New York City office tower’s energy consumption and greenhouse gas emissions by more than one-third.

The massive effort ranged from an overhaul of the building’s chiller plant and installation of state-of-the-art systems controls and metering to refurbishing all 6,514 windows. The window work was performed in a 5,000-square-foot (465 sq m) shop that renovators set up inside the venerable structure in order to eliminate carbon emissions that would have been generated by shipping the windows elsewhere to be taken apart and rebuilt.

The retrofit sliced millions of dollars off the building’s energy costs and transformed the 85-year-old structure into what many observers hail as a green landmark.

Introducing: ULI Tenant Energy Optimization Program

But Malkin—whose company owns 14 office properties and 10.1 million square feet (938,000 sq m) of rentable space in Manhattan and Westchester County, New York, and Fairfield County, Connecticut—was not satisfied, and not just because he dislikes the term green, which he sees as nonspecific feel-good lingo. “What we’ve done at the Empire State Building is about sustainability and energy efficiency,” he says.

Malkin realized that the retrofit would only go so far toward cutting energy consumption because tenants account for as much as 65 percent of a building’s energy use. He also knew that if he was going to get tenants to conserve energy, he had to show them that it was not just the socially responsible thing to do, but also that there was a compelling business case for investing time and money in the effort.

For those reasons, Malkin and a team of sustainability experts, with support from organizations including the Natural Resources Defense Council and the Rockefeller Foundation, have spent the past several years developing a guided, multistep process—from site selection to design and benchmarking—that enables tenants in the Empire State Building and other properties to fit out their spaces for optimal energy efficiency. The process also guides the tenants to monitor and fine-tune their energy use going forward.

By carefully documenting the process and subsequent energy savings, Malkin and his team were able to demonstrate how efficiency benefits tenants’ bottom lines. “Look at a tenant who is getting a 20 to 30 percent internal rate of return from energy saving, based upon investment in their space,” Malkin says. “When you compare that with other investments that you make in your business, you have to say, ‘Wow, this is one of the best investments I could possibly make,’ as opposed to, ‘Why would I do that? It’s so expensive.’”

It is a message that Malkin thinks will resonate throughout the real estate sector. By educating other building owners and service providers—architects, engineers, real estate brokers, and the like—he hopes to drive a major culture change.

The Process

It was not easy for Malkin to convince prospective tenants to let the process guide them in designing their space. He recalls a meeting he had with an executive from one firm who brought along her engineering team.

“She looked at the engineers and said, ‘Well, what do you think about this?’” Malkin recalls. “And they said, ‘Well, that’s going to be really expensive.’ And we said, ‘If you’re doing a 17-18-year lease here, you don’t have to do anything on which you don’t get a five-year payback or better.’ And she said to the engineers, ‘Well, what do you think about that?’ And their response was, ‘Well, aagh . . . if they can prove that, you know, fine.’”

The data-driven process designed by Malkin’s experts was, indeed, able to do that for tenants. The projection for LinkedIn, which leases multiple floors of the Empire State Building, is that energy-efficient design will result in cost savings of $153,000 over ten years—a 23 percent rate of return on the investment—with a projected payback of 6.4 years. (Those results are being achieved through measures such as recovering heat generated by the office’s roomful of computer servers for use in warming the office space.)

“All this led to this point of coming up with this data to demonstrate that you could follow a design and construction practice—a series of steps, starting with site selection and moving forward to design, and benchmark those against code,” Malkin explains. “And you could demonstrate meaningful savings.”

“We’ve worked to develop a model that guides the project forward and the client through quantified projected energy savings and quantified incremental costs to achieve a higher energy performance,” explains Dana Schneider, a managing director and leader of the energy and sustainability services division at the professional services firm JLL, who played an important role in the program. “It then shows them this is paid for.”

The ten-step process aims to improve energy efficiency by optimizing a range of elements of facilities operation—from air conditioning, food service areas, and data centers to lighting. “We’re dealing with silver buckshot, not silver bullets,” is how Malkin puts it. “There are subtle moves and measures within all these areas. The breakthrough is putting it all together through a series of decisions which are small in themselves but which together make a big improvement.”

The process includes a post-occupancy phase, in which tenants can monitor the performance of their space and adjust their systems to increase their energy savings.

Lighting, in particular, seems to be low-hanging fruit for seekers of energy efficiency. “Lighting designers typically over-illuminate spaces,” Malkin notes. “It’s a huge waste of energy.” Reducing the brightness—along with employing solutions such as motion detection and auto-dimming to make sure spaces are lit only when occupied—can achieve significant savings, he says.

Flexibility and Scalability

One key theme of the program is flexibility. As Malkin’s experts worked with the tenant design and construction teams on planning a space, they presented a range of options and calculated not just the energy savings, but also the rate of return and the payback period.

“It’s easy for a tenant to make a decision based upon what we call packages of good, better, and best,” says Wendy Fok, an architect and sustainability expert who served as project director. After the team goes through the process, during the early design phase they will choose a package that makes sense for them, including economic metrics and design metrics.”

Convincing tenants to devote the time and effort to go through extensive upfront energy analysis was a challenge, even though Malkin—with help from outside foundations—subsidized the cost for most of the ten program participants during the pilot phase. That saved tenants the cost of hiring their own outside vendors to provide such analytics, which might have run $10,000 to $30,000 per space. “But once we show them the results on the back end, it’s a no-brainer,” Schneider says.

The process does require some investment from a property owner, as well. The more efficient a building is overall—the windows, the insulation, the central plant, and so on—the more potential there is for a tenant to build on that efficiency in designing a space.

In addition, “if a landlord doesn’t offer a building energy-management system and submetering, this won’t work,” Malkin says flatly. Submetering, which enables tenants to see how much energy they are consuming and paying for, provides them with a powerful incentive to conserve, Schneider says.

The process relies heavily on wireless devices, such as a control system developed by Lutron, to avoid the costs of employing electricians to install conventional wired meters.

Energy Savings as Revenue

The key to the success of the tenant energy–optimization process is that it is not a “tack-on” to a completed space, Malkin says. Instead, sustainability is integrated into the project at every stage, starting with site selection. “That is what differentiates us from anything else,” he says. “This is not a retrofit. This is integration.”

Malkin and the team did not confine their efforts to the Empire State Building. The process has been used by tenants in a variety of other locations, demonstrating that it would work in buildings of various sizes and designs—not just in the Empire State Building, but also in modern glass structures. “This works in both,” Malkin insists. “It’s not just, ‘Oh, you have an old inefficient building.’ You can still improve over baseline.”

The process, as it has evolved, “is based upon real-world scenarios,” Fok says. “We’re all looking for the scalability.”

Malkin has worked to leverage the program’s success and spread the notion of improving energy efficiency from the tenant angle. He joined in a successful effort last year to convince the U.S. Congress to approve a new Tenant Star certification, similar to the U.S. Environmental Protection Agency (EPA) Energy Star program. Currently being developed by EPA, the Tenant Star program will recognize tenants’ voluntary achievements in sustainability.

“It was passed with a big majority in the House and unanimously in the Senate on the second try,” notes Malkin, who used data from his tenants’ case studies to help persuade legislators.

“I told them, I’m not looking for a tax abatement or credit, or for federal funding,” Malkin says. “All I’m asking for is a voluntary label because people want a badge that says they’ve done the right thing. And by creating that, we can convince a whole lot of people to spend their money more intelligently.”

“The Tenant Star program will be well aligned with this program,” says Helen Gurfel, executive director of ULI’s Greenprint Center for Building Performance. “The two together will have a great impact.”

In addition, Malkin has agreed to make the tools and documentation for the process available to others as the ULI Tenant Energy Optimization Program, which was unveiled to ULI members at the Fall Meeting in Dallas.

To get the best results with integration, Malkin and his team say it is critical for tenants to hire sustainability-savvy engineers and architects who have the skills and mind-set necessary to break out incremental energy costs and savings.

“Having the right people on board who are educated in this makes all the difference,” Malkin says. Already, he has seen some design firms develop an expertise with one tenant, then apply what they learned to projects for other clients in their portfolio. “It’s a major differentiator for these service providers.”

And as more people in the real estate industry become educated about the potential benefits of tenant energy optimization, Malkin envisions a not-too-distant future in which landlords of commercial buildings will have to offer such programs to prospective tenants in order to remain competitive in the leasing market. “The tenants are going to be informed by the desire to have this savings in energy consumption and the economic savings that come along with that,” he says.

That change will come in part from thinking about energy efficiency not as a duty, but as the equivalent of an industrial product. “You can’t outsource this overseas,” he says. “It’s got to be done locally, domestically. It reduces energy consumption from the biggest source of consumption in office buildings, namely the tenants. And on top of that, it produces a terrific economic return.”

Patrick J. Kiger is a Washington, D.C.–area journalist, blogger, and author.