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Commercial real estate owners and managers are feeling increasing urgency to boost the energy efficiency of existing and new buildings. Residents, investors, municipalities, and even the Securities and Exchange Commission are exerting pressure. In the face of severe weather events and changing climate patterns, energy-efficient and sustainable building practices have moved from amenities to necessities.
Certified Energy Performers
Green building certifications that benchmark and document energy and sustainability upgrades have been in use for several decades. Each certification has its own scoring system, depending on building type and age; some certifications focus strictly on energy and green-building materials; others also encompass sustainability and health and wellness measures. Lenders look favorably on green certifications, and some offer green financing options for certified properties.
What’s new is that the SEC is preparing to mandate that public companies disclose information related to climate risks and other environmental, social, and governance criteria. ESG criteria are standards that socially conscious investors use to screen potential investments. This decision will impact REITs and create a tailwind for the organizations providing certifications.
Buildings are responsible for more than 40% of global energy used, and as much as one-third of global greenhouse gas emissions. Source: International Standards Organization
The Green Building Initiative’s Green Globes certification has been in the market since 2004. An alternative to the popular LEED certification from the U.S. Green Building Council, the rating system goes through a collaborative, consensus-based process guided by the American National Standards Institute. Vicki Worden, GBI president and CEO, observes, “From our perspective, the investors are driving a lot of green building certification interest, because of the focus on ESG and ESG integration. We are seeing an increased interest in certification for existing buildings by investors, building owners, and REITs due to the desire to have a way to demonstrate their integration of environmental, social, and governance focus throughout their portfolio. Certification provides that third-party validation of performance improvement efforts on the ground.”
The U.S. Environmental Protection Agency’s Energy Star certification measures energy efficiency using a 100-point scale. Well known as a rating system for appliances, Energy Star has had a commercial building certification in place since 1999. Properties earning 75 verified points are eligible for the designation; the designation must be recertified annually.
Digital Realty, a global company with a portfolio of 31 data centers, tracks and assesses the energy performance of all its data centers. Most meet Energy Star requirements.
“A facility that doesn’t have a rating could be 25%–50% less efficient than one that does. You can see a pretty significant difference,” says Aaron Binkley, director of sustainability at Digital Realty. The company, named Energy Star Partner of the Year in 2020 and 2021, also was the first data center REIT to issue a green bond, one that supports projects with features that are beneficial to the environment. Since 2017, Digital Realty’s standard lease forms have contained green criteria detailing how owners and tenants share the cost of energy-efficiency upgrades, such as switching from fluorescent lights to LEDs, which has a two-year payback.
Binkley notes that customers who signed a lease before 2017 are “proactively coming back at the time of renewal asking, ‘Are there things that we can do to be more green? How can we get more renewables to reduce our carbon footprint in our data center? ’”
Data centers have a Goliath-sized carbon footprint due to electricity draws and water for cooling, which can cause friction with local municipalities, especially where water is a precious resource. Consequently, Digital Realty looks at water consumption across the portfolio and uses systems that don’t require water for cooling in many of its buildings. “Globally, 43% of the water we consume comes from non-potable sources, so we are not relying on the local water supply system. We are using a municipality’s reclaimed water supply or another non-potable supply for our cooling systems.”
Although 50% of Digital Realty’s global portfolio is powered by renewable sources, Binkley observes a sea change in expectations. “Our customers are setting their own global carbon-neutral and carbon-reduction targets in a way they weren’t 12 to 18 months ago.” Conversation have gone from “tell me what you’ve got” to “in every RFP going forward we are going to put these 10 things that are sustainability-related.”
30% of commercial building energy consumption is wasted. Source: Energy Star
Boulder Landscaping and Smarter Buildings
Woodmont Real Estate Services, a boutique third-party property management company based in Northern California, embraced the Institute of Real Estate Management’s Certified Sustainable Property designation for its portfolio of multifamily properties. Obtaining LEED certification is harder for circa 1980s and 1990s buildings, and the CSP’s six-month credentialing process and categories of management, energy, water, purchasing, recycling, and health “fit the bill,” says Jeff Bosshard, cpm, president of multifamily operations.
The IREM certification requires property managers to focus on the health of the residents, and that can be as simple as stocking three healthy options in vending machines. Additional measures Woodmont took: using Energy Star appliances and low-VOC paints; requiring green building materials and cleaning products; using green paper products throughout the leasing offices; setting up recycling at every site; installing recycled carpets and pads, dual-pane windows, and LED lighting; permanently removing water features and fountains; and replacing grass with drought tolerant ground cover and boulders. In addition, Woodmont multifamily operations has implemented smart valves on irrigation systems that monitor the climate, weather, and soil moisture and adjust irrigation at some of its properties.
The company actively markets the CSP credential and prominently displays the CSP designation in all leasing offices. Embedding the CSP credential in marketing materials initiates discussions with prospective tenants, especially in drought-stricken California. “That has become more important, especially with the younger generation,” says Bosshard, who oversees Woodmont’s designation. Woodmont has certified 36 properties and has 13 in progress. The CSP, a relatively new credential, initially required a minimum of 50 units for certification, but IREM has lowered that minimum to 25.
Property managers may already have some of the CSP measures in place, says Bosshard, and with additional focus, properties may qualify for the credential. “There is value in being able to market the credential,” Bosshard says.
“All of the building certifications have brand identity with institutional owners, who are very cognizant of energy efficiencies and corporate stewardship,” says Scott M. Pritchett, cpm, president of commercial operations for Woodmont Real Estate Services.
Currently, Woodmont has one LEED-certified office building, and pending one more lease, a second office property will meet the occupancy standard to file for the CSP certification; several other properties are under review for the CSP. Certification is becoming more important in the office tenant’s checklist, says Pritchett, which he attributes to increased scrutiny of public companies. The question that's on the upper end of many checklists, he says: “Is the building LEED-certified by the Green Building Council?” Pritchett has taken existing buildings through LEED Basic and LEED Silver certification and describes the process as “definitely achievable.”
In a July 2021 survey of NAR commercial members, 69% said promoting energy efficiency in listings was very or somewhat valuable. Luckily, the supply and array of green products—wallboard, carpeting, flooring—is the best it’s ever been for those willing to pay the slight premium, observes Pritchett. In the California Bay Area, solar-paneled covered parking is gaining traction. This feature appeals to suburban office parks that don’t have a parking garage but have a big energy draw. “You provide a nice benefit to tenants, and the owner can reduce the energy footprint of the buildings.” Studies also show that buildings with green features appraise for a premium over traditional properties, so the slight premium up front on materials pays off.
In addition, “buildings are getting smarter,” notes David Eldridge Jr., an associate with Grumman/Butkus Associates and a Green Globes assessor for a decade. Specifically, the pandemic has brought a surge of technologies focused on monitoring building performance and, especially airflow, to reduce costs and provide healthier spaces.
BrainBox AI, for example, is a Montreal-based company that’s developed artificial intelligence technology to boost the energy efficiency of buildings. The company’s autonomous cloud-based Al overlays existing HVAC systems without disrupting tenants. A control box studies a building’s usage for six to eight weeks to learn and establish a profile, then optimizes air flow. A building’s data is visible on a dashboard and can be monitored, says Sam Ramadori, president of BrainBox AI, and air flow can be adjusted zone by zone for downtime, reduced occupancy, and degradation. The company launched in 2019 and has a presence in schools, offices, hotels, and retail spaces in approximately 285 properties in 17 countries. In 2021, BrainBox AI added an online energy savings calculator, based on square footage and building type.
According to a case study provided by BrainBox AI, when the application was installed in Toronto-based GWL Realty Advisors’ 300,000-square-foot commercial office tower and 500,000-square-foot multiresidential building, GWL realized an energy savings on HVAC equipment of 29% and 25%, respectively, after only a few months.
Drive the Conversation
There's no one-size-fits-all solution to reducing a building's carbon footprint, but the options—certifications, building products, technologies, and strategies—are robust, and the demand is real. If you’re not driving the conversations around ESG and energy efficiency, your clients will.