Among my favorite panels this past week at the ULI Fall Meeting was about the retrofit of the Empire State Building (ESB) in New York. The building’s owner, Tony Malkin, was engaging, upfront, and clearly impressed beyond his own expectations regarding his experience retrofitting this historic landmark property. Tony’s company has enjoyed so much success with the programs they are now running at ESB that he is rolling out similar approaches at other commercial properties that he owns.
Prior to retrofit, ESB spent about $11M annually on energy. Post-retrofit, the building is spending $4.4M less per year, achieving an annual savings of about 40 percent. The team of presenters, which included representatives from NYC Economic Development and Jones Lang LaSalle, documented the nine elements that cumulatively led to this 40 percent savings. A point of emphasis across the board was that no one factor was dominant, or in Tony’s words, there is no silver bullet. I managed to write down eight of the nine elements that got them to 40:
Daylighting – 9%
· Plug Load – 6%
· Windows – 5%
· Chiller Plants – 5%
· Air handling units – 5%
· Energy Management & Tenant Engagement – 3%
· Radiant Barriers – 3%
· Demand-controlled ventilation – 2%
· Something I missed – 2%
Among the many tactics deployed with this integrative strategy was a tenant engagement strategy. Although this element was specifically attributed to three percent of the energy savings, Tony pointed out that more than half of the energy savings is achieved in tenant spaces. Behavior change was a topic raised frequently at the panels throughout the week covering energy efficiency and sustainability issues in real estate. Jonathan Rose also raised it in his panel on regulation.
At ESB, building management is doing an excellent job communicating to tenants exactly how they can easily use and monitor their space to the highest efficiency. This is primarily achieved through the system installed by Johnson Controls, which allows each tenant to log-in and monitor their energy usage in real time. This is the same system that building management and the chief engineer uses. And because more and more spaces are becoming sub-metered, Tony and his team are enabling more and more real-time commissioning. Ever since I saw the Adobe Headquarters in action last year, I have been a big believer in the use of technology and quick to instant feedback mechanisms to enable ultra-efficient building management and use.
It’s great to see something like this deployed in such an old, historic, and recognizable manner, which according to Tony, is also quite straightforward. Tony’s approach was to not just produce the kind of savings (not to mention declining vacancies and new types of tenants he is attracting!), but to generate a model that is replicable, and scalable. He told Ray Quartararo from Jones Lang LaSalle at the outset that if all they accomplished was to sharply reduce the energy consumption in the building, this project will have been a failure. It is this kind of leadership that will get more and more building owners and investors up to speed on how much potential, and how value there is to be unlocked in existing commercial buildings; especially in New York City, given the programs that PlaNYC 2030 will contain.
Tony spoke repeatedly about engaging tenants, and about providing them the incentives to reduce their consumption. One that surprised him was how tenants within the building have become competitive about their energy use. A great feature of the online portal where tenants follow their real-time usage and receive summary reports is a report of their energy use relative to other tenants in the building. Even though there is no binding requirement, tenants are paying attention, and if they rank towards the bottom of their tenant peers at ESB, they try to do better. Nobody wants to be told they are doing something poorly, or that they are losing! This gets right back to addressing tenant behavior. This is an issue that will continue to evolve, and owners and managers who can meet and adapt to this evolution will thrive.
There was, however, one issue that I raised with Tony when I approached him following the panel, and to me, this was my biggest takeaway. I asked him if any of the leases written were “Green Leases,” which have evolved over the past few years as a strategy to address the Split Incentive between tenant and landlord regarding who pays for energy efficiency investments versus who reaps their benefits. Green leases can allow both parties to share the savings, but they can also be viewed as a restriction by tenants (not to mention that brokers are generally uneducated on the subject, and these days, any imposition, in their eyes, reduces the chance that a tenant will sign a lease). Tony is adamantly against Green Leases, for the reasons above, and because they require significant detail, and raise issues of liability that are simply not worth the risk, in his eyes. While I’ve heard this general refrain before, his solution, or alteration, to leasing, is quite innovative.
Instead of writing in any requirements to his leases, Tony is introducing “Use it or Lose it” clauses for energy and utilities. The idea is the following: if the standard energy usage for a tenant in the local area is, for example, 6 BTUs per square foot, the landlord will pay for the first 6 BTUs, as agreed upon in the base year allocation, just as most full-service commercial leases are structured. However, over the first 18 months of the lease, whatever the peak load of that tenant turned out to be automatically becomes the new figure off which the base year calculation is made. The landlord benefits because now, with a lower base year written into the lease, legally, and with no change in rent, they can pro forma higher NOI, which amounts to a higher building value. And, when it comes time to renew the lease, the tenant will be able to make the case that because their usage is so low, they should share in that benefit through a rental rate that is adjusted lower. And Tony, who is spending 40 percent less on energy, will be happy to work out a rate that takes this into account. In short, everyone wins, and nobody is restricted. If they really do need those 6 BTUs, then they get to use them. But, it’s turned out that for most tenants, they need only a fraction of their original allocation. The ESB team is creating substantial value just by introducing this “Use it or Lose it” clause. This is absolutely BRILLIANT, and I think this is really the way to go when thinking about how to modify lease language to encourage efficiency.
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