Back in the heady days before the economy crashed, a time when there was such a thing as discretionary spending, commercial property owners thought long and hard about retrofitting their property for efficiency and environmental reasons. But today, with the economy in the doldrums, survival has become the overriding goal and deep-diving retrofits have slipped down—or off—the list of priorities.
“Today, whenever there are renovations, owners look very carefully at the bottom line,” explains Jim Batchelor, president of Arrowstreet, a Somerville, Massachusetts–based architecture firm and a member of ULI’s Responsible Property Council. “Retrofitting to increase sale value or for ‘greenish’ reasons does not seem to be [a] primary motivation.”
Nevertheless, most analysts believe that while the retrofit market is currently dormant, its awakening is inevitable, requiring only a nudge from an improved economy and a strategically placed incentive to bring it back to life. Statistics support the analysis. More than 80 percent of the 79 billion square feet (7.3 billion sq m) of commercial building space in the United States is over ten years old and virtually all of it could benefit from technologies introduced in recent years. Pike Research, a global clean technology markets consulting firm, in a 2010 study estimated that “if all commercial space built as of 2010 were included in a ten-year retrofit program, the savings in energy expenses would have the potential to reach more than $41.1 billion each year.”
Retrofitting of any magnitude reduces greenhouse gases, contributes to the national goal of decreasing dependence on foreign sources of energy, and adds the cachet of a “green” brand, a panache that, real estate brokers say, increases property value. The most spectacular example of retrofitting potential is the Empire State Building (ESB), the iconic New York City office tower built in 1931. In 2009, the structure was scheduled for its periodic renovations and its owners, Malkin Associates, decided to transform the routine rehab into a retrofitting showcase.
They launched a comprehensive retrofitting initiative that after completion in 2013 will reduce the skyscraper’s energy use each year by 38 percent, saving $4.4 million annually. The retrofit component added only $20 million to the $500 million scheduled makeover aimed at improving tenant quality.
The owners estimate that the additional retrofitting costs will be recovered through operational efficiencies in approximately three years. “The goal with the Empire State Building,” said Anthony Malkin, principal at Malkin Holdings, in a report on the retrofitting project, “has been to define intelligent choices which will either save money, spend the same money more efficiently, or spend additional sums for which there is a reasonable payback through savings.” Malkin emphasized that retrofitting is not an environmentalist’s whim, but a business decision that will give the ESB a competitive advantage that quickly repays the investment.
Payback Time
The problem is this: payback time matters to some owners more than others. For government buildings and owner-occupied properties, retrofitting even in the current economic environment makes sense. Most government buildings are old and greatly benefit from energy efficiency upgrades. In addition, they have a mandate and allocated funds from Congress to get it done. Similarly, owner-occupied properties can afford to recover upfront costs over time, and in some states innovative financing programs are in place to make it easier.
The 2007 energy bill, the Energy Independence and Security Act, permanently extended authority for agencies to use energy service companies (ESCOs). It also stated that federal agencies must reduce energy intensity 30 percent below 2003 levels by 2015. ESCOs have been successful because they solve the problem of how to finance a retrofit. They assess the retrofitting cost and the annual operational savings and then arrange to pay for the initial expenditure over time through the savings realized.
The model has proved effective in situations of long-term ownership, but for investors who do not intend to hold property long term, retrofitting is more problematic.
“There are two types of retrofitting projects,” explains David Begelfer, CEO of NAIOP Massachusetts. “The first is a redevelopment of a property where major changes take place. That’s the easy one. The second is a building currently rented and trying to make improvements with tenants still in place. There are major costs without an immediate payback. In fact, the savings go to the tenants and not the owner.”
There is even some question whether in today’s economy an energy efficiency certification from the Leadership in Energy and Environmental Design (LEED) program or another rating organization adds value. “LEED-certified buildings seem to have better leasing performance,” says Russell Ingrum of CB Richard Ellis and chairman of ULI’s Office Development Council, “but I don’t see any evidence that buyers will pay more for LEED certification.”
On the other hand, Roger Platt, of the U.S. Green Building Council (USGBC) and chairman of ULI’s Responsible Property Investment Council, notes that over the past five years, retrofitting LEED certificates have far outstripped new-building certificates. “USGBC and other organizations are pushing Congress for a bill to provide incentives to retrofit commercial buildings,” he explains. “In general, existing buildings with private owners have no incentives to retrofit. We are building a coalition to support [the introduction of incentives].”
In the meantime, indications are that retrofitting is limited to times of regularly scheduled maintenance and is focused primarily on the low-hanging fruit, such as windows, HVAC, and lighting.
“I do think there are fewer new buildings and fewer renovations going on because of the economy,” says Arrowstreet’s Batchelor. “It’s fair to say that some of the publicly expressed hopes [for retrofitting] have been a disappointment.” He adds that some momentum comes from changes in building codes, which specify more energy-efficient equipment and methods.
But there is general agreement among industry analysts that a major spike in the retrofitting trend will have to wait for improvement in the overall economy.
