When real estate firm Cushman & Wakefield leased an approximately 6,000-square-foot (557 sq m) space on the 45th floor of the newly built One World Trade Center in New York City, it agreed to try out an ambitious new planning and design process to reduce its energy use.
The ten-step ULI Tenant Energy Optimization Program aims to help tenants improve efficiency by optimizing a range of elements of facilities operation—from air conditioning, food service areas, and data centers to lighting. It was originally developed for use in another iconic New York City office tower, the Empire State Building, but Empire State Realty Trust chairman and chief executive officer Anthony E. Malkin, who spearheaded development of the process, was eager to spread it beyond the properties that his company controls.
With the help of a team of energy experts, Cushman & Wakefield fine-tuned its interior design to burn less electricity. It put in place photo sensors that measure the sunlight streaming through windows and adjusted the amount of illumination that the office’s LED lighting has to provide. It eliminated an energy-hungry dedicated humidifier and reduced the amount of air conditioning in an area that houses telecommunications cables after determining it did not need as much protection. And it chose motors for its air-conditioning and heating system that were rated even higher for efficiency than building codes required.
Return on Investment
Implementing those measures led to some impressive savings: Cushman & Wakefield was able to reduce its projected energy consumption by nearly 48 percent and save more than $87,000 in utility costs over a ten-year period, according to a project case study. The company expects to earn back its nearly $19,290 expenditure on the energy optimization measures in just 1.7 years, with an internal rate of return (IRR) on its investment of 78.6 percent—roughly three times the 25 to 30 percent IRR benchmark that Malkin says the optimization process aims to achieve.
Cushman & Wakefield was so pleased with the results, in fact, that it now plans to use the Tenant Energy Optimization process on another, bigger project—a four-story, 83,000-square-foot (7,700 sq m) space it recently leased in an office tower in downtown Chicago to serve as its new global headquarters. In addition, the company plans to add the process to the basic training that it provides to its property managers around the world.
“The beauty of the process is that it can be done on any level and any size,” explained Todd Schwartz, Americas president of account management and operations in Cushman & Wakefield’s Global Occupier Services Group.
That sort of scaling up and wider adoption is exactly what Malkin is aiming to accomplish. In a session at ULI’s Fall Meeting in Dallas in October, Malkin announced that he is providing all the documentation for the Tenant Energy Optimization process to ULI, which in turn is making it available to anyone in the real estate industry who wants to use it. (Information and materials for the process are available at tenantenergy.uli.org.)
As Malkin sees it, cutting the consumption of energy—which often is provided by burning fossil fuels—is a vital part of fighting climate change, and it is not enough for building owners to design more efficient new buildings and retrofit old ones. The role of tenants in those buildings needs to be addressed, as well. Tenants, whose spaces typically account for 65 percent of the energy a commercial office building uses, are a critical part of the equation. And the best way to get them to use less energy, he argues, is to show them it is not just a matter of being a good corporate citizen, but that there is a compelling business case to do so.
To that end, he and the team that developed the process have compiled case studies from pilot users that not only detail the specific optimization measures involved, but also lay out the energy savings, the projected payback periods, and returns on investment.
“The lessons learned will change the way real estate occupancy by office tenants is done,” Malkin said.
Malkin, Schwartz, and other proponents who participated in panels at ULI’s Fall Meeting think the Tenant Energy Optimization process soon will become the standard in the real estate industry and that its application will be expanded beyond office buildings to encompass other sorts of developments as well. That transition could occur rapidly if major companies that occupy many millions of square feet of floor space lead the way.
They also envision that a growing cadre of architects, designers, and engineers who have learned the process—either from participating in a project or from studying the ULI materials—will start using it as a competitive selling point when they bid to design tenant spaces, and that this will be another driver to acceptance.
In addition, thanks to legislation that Malkin and others lobbied the U.S. Congress to pass, the federal government eventually may offer a Tenant Star certification to recognize companies that employ the principles, and the utility industry may also promote it as well. Finally, yet another boost may come from large institutional investors in real estate, which may push property managers to adopt the Tenant Energy Optimization process as a way to reduce their costs and market risk while demonstrating social responsibility at the same time.
Big Occupiers May Lead
Widespread adoption of Tenant Energy Optimization Program measures could have a gigantic impact in terms of fighting climate change. According to Jason Hartke, program manager for commercial buildings integration at the U.S. Department of Energy, the commercial real estate sector’s more than 5 million buildings—which contain some 87 billion square feet (8.1 billion sq m) of space—contribute one-fifth of U.S. greenhouse gas emissions.
When it comes to reducing energy consumption, “we’ve been fixated on whole buildings,” said Hartke, who formerly was vice president of the U.S. Green Building Council. “Up to this point, we haven’t thought about the tenants. Leased space accounts for 50 percent of real estate. Buildings are the sum of their parts.”
It has been difficult to achieve energy efficiency from leased spaces, partly because tenants did not know how to do it on their own and were wary of how much cost and additional time it might add to the process of fitting out their offices. “I think they just expected landlords to do this for them,” Schwartz said.
Having a documented process that can be applied to office design and construction makes things easier for both building owners and occupiers. “At the end of the day, there will be a great premium [for] landlords who make this easy to do,” he said.
But the Tenant Energy Optimization process may take hold even more quickly if major occupiers themselves lead the way. One such company that could have a major impact is global banking and financial services firm JPMorgan Chase. Ray Quartararo, the company’s head of planning, design, and construction, said it plans to apply the Tenant Energy Optimization process at a $300 million, 1 million-square-foot (93,000 sq m) corporate campus it is building in Plano, Texas, near Dallas.
That may be just the start, said Quartararo, who worked with Malkin on developing the process in his previous job at business services firm JLL. JPMorgan Chase has a global portfolio of 80 million square feet (7.4 million sq m), which includes facilities ranging from small retail banking sites to massive data centers, in addition to its own office buildings.
The Tenant Energy Optimization process has not yet been tried in these other types of spaces and might require some adaptation. But eventually, if JPMorgan Chase can figure out how to apply it across its holdings, the company might achieve massive energy savings—and create an example that other global corporations might quickly emulate.
“Plano is the springboard for us to look at it across the portfolio,” Quartararo said.
For a company that is leasing or building a new, larger space to consolidate its employees, making energy optimization part of the design process is a logical next step for further reducing costs, Quartararo said. “The solution is to bake in energy efficiency at the start of the design and construction process so you don’t have to go back and put it in later,” he explained. “You want to focus upon it from day one.”
As Quartararo sees it, energy optimization has potent brand benefits for JPMorgan Chase because it sends a message that the company is environmentally responsible—a point that is increasingly important to both potential new hires and workers that the firm hopes to retain. “It’s very much aligned with our people agenda,” he explained in a ULI panel discussion. “Sustainability is one of the things that our employees talk about and ask for. It is part of our commitment to social responsibility, and it makes good economic sense, too. There’s an ROI [return on investment] that we can prove out.”
Role of Government
Malkin joined in a successful effort in 2015 to convince the U.S. Congress to approve creation of a new Tenant Star certification, similar to the U.S. Environmental Protection Agency’s Energy Star program. He and other proponents think companies will see earning Tenant Star as an attractive opportunity to establish themselves as environmentally and socially responsible brands, both to employees and customers. “Everybody wants a plaque,” Malkin jokingly explained.
At this point, development of the Tenant Star program is still in the early stages, Hartke said. “We don’t have data yet for the tenant market,” he said. “We need to ramp up submetering in the tenant space to get the bell curve that shows where you rank.” The federal government through mid-November was seeking comment on proposed standards for construction and metering. Once those are set, it also would be necessary for Congress to allocate funds for the program.
But even though the timetable for Tenant Star remains unclear, federal officials may be able to help occupiers and landlords with energy optimization in other ways—for example, by tweaking the government’s modeling tools, currently designed to be applied to whole buildings, to work for tenant spaces inside them. “We’re trying to play a complementary role,” Hartke said.
Utility providers may also help sell the value of energy optimization. Denise Kuehn, director of energy efficiency services with Austin Energy, a public utility operated by Austin, Texas, said the ongoing monitoring of energy use by tenants can enable them to work out pricing options to lower their electricity bills.
Another big impetus may come from large institutional real estate investors once they see the economic benefits of promoting the Tenant Energy Optimization process at their properties. The California Public Employees’ Retirement System (CalPERS), which controls a $27 billion portfolio of properties, will direct its property managers to use the process, which it sees as a way to reduce its financial risks, says Eric Schlenker, a portfolio manager in its real estate unit. “It’s crucial to maintaining good tenants in buildings and not being affected by volatility,” he said.
The energy monitoring that the process puts in place also will generate data that CalPERS can aggregate and analyze for use in making business decisions, Schlenker said. The investment fund, for example, will be able to learn more about the impacts of densifying office space and whether increased head count has a proportional impact on energy consumption. “We think that having valid data across our portfolio is the only way to do this,” Schlenker said.
Having big players driving the trend is crucial because it may take longer for smaller occupiers to find out about it. “The challenge is the tenants who enter the market once every ten years and aren’t as connected to what is happening,” Quartararo said. “They’ve got to depend upon architects and engineers to introduce them.”
Malkin hopes to see design and engineering professionals develop an expertise in the Tenant Energy Optimization process and use it as a selling point to potential clients. He said some firms that gained experience with the program’s pilot projects already are starting to do this.
“Ultimately, we think [Tenant Energy Optimization] will become synonymous with good design,” Quartararo said. “You won’t have to go out of your way to do this.”
Patrick J. Kiger is a Washington, D.C.–area journalist, blogger, and author.