Commercial Real Estate

Plugging the Energy Sink

By By Dennis Law April 27, 2010


This article originally appeared in the May 2010 issue of Seattle magazine.

Hot BuildingsCommercial office building owners and managers in the Puget Sound
region face a conundrum: Although everyone agrees that retrofitting a building
to reduce energy consumption substantially reduces operating costs while also
boosting green credentials, few owners have the money or the credit to make the
necessary investments.

Retrofitting a building, which typically involves upgrading
the heating/ventilation/air conditioning (HVAC) systems, can cost up to $1.5
million. The eventual savings can be substantial, but its not easy to justify
the spending required to get there during times of significant vacancy rates.

Nobody questions the importance of making the investment.
Commercial buildings account for about 40 percent of the nations energy
consumption and roughly a third of its greenhouse gas emissions, according to
MacDonald-Miller Facility Solutions Inc., a Seattle-based mechanical
engineering firm that works with building owners and managers to improve energy
efficiency. The company says that some 96 percent of buildings have one or more
performance issues, with the largest being too much ventilation, which causes
the loss of heat. Another common difficulty is excessive temperature
fluctuation, which makes people in the offices uncomfortable.

Those problems represent an important market opportunity.
Thats because many building owners recognize that by boosting energy
efficiency and perhaps getting LEED (Leadership in Energy & Environmental
Design) certification, they can both raise the value of the building and give
the owner important green credentials.

Besides MacDonald-Miller, several other Seattle firms are
working in the retrofit market, including McKinstry, a national leader in the
sector, and Optimum Energy LLC, a relatively new player. Started in 2005 by
co-founders Nathan Rothman and Jim Hanna, Optimum Energy offers software that
helps make buildings more efficient. They market it to a variety of clients
including airports, casinos, office towers, medical labs, universities,
government buildings, corporate headquarters and data centers.

Gary Gigot, chief marketing officer for Optimum, says the
companys software is targeted at commercial and public sector facilities
equipped with centrifugal chiller plants or variable-air-volume handling
systems. Chiller plants sometimes need to have variable frequency drives (VFDs)
installed on some or all of the motors within the HVAC system (chillers, pumps
and tower fans). Optimum works with building owners and contractors, such as
Johnson Controls, to install VFDs throughout the plant. The price, Gigot says,
ranges from $500,000 to $1.5 million, and includes any equipment that needs to
be installed in the plant (mostly VFDs), the license fee for OptimumHVAC and
all the contractor costs for installation. Customers buy the OptimumHVAC
software license and pay an annual fee for a web-based monitoring/measurement
and verification service.

But Gigot notes OptimumHVAC can help commercial buildings
achieve a 30 to 60 percent reduction in HVAC energy consumption, even on new
buildings built with the latest energy technologies. We typically see a
payback in 18 to 36 months, says Gigot. The shortest payback period is on
buildings that are already equipped with VFDs, but, Gigot adds, even in
buildings that require some additional hardware, there is a relatively short
amount of time needed to recoup the initial outlay.

So why arent more business owners making the necessary
investments? Gigot says many buildings are owned by real estate investment
trusts (REITs), shareholder-owned companies that buy, operate and sell a
portfolio of properties. We see this market interested in our solution, but
adopting it more slowly due to financial constraints in their business models,
he says. He thinks a purchasing surge will occur next year, but until then,
Optimums involvement with other business segments, such as data centers, will
help drive growth.

Dave Nieman, a senior building performance engineer at
MacDonald-Miller, says the arguments for investing in a retrofit are
compelling: For every dollar invested in improving performance, the facilitys
market value goes up $4. More efficient HVAC systems are favored by tenants
because they make the environment far more comfortable and consequently help
reduce employee absenteeism. Operating costs can also fall sharply.
MacDonald-Miller, for example, worked with Wells Fargo Center on a central
plant retrofit and building automation upgrade that produced energy savings of
$234,000 over a 23-month period. For a business that operates on a 5 percent
net profit margin, $50,000 in energy savings is equivalent to generating an
extra million dollars in revenue.

But while many business owners see the benefits of investing
in a retrofit, few are starting one. Everybody is talking energy, but when it
comes down to making something happen, the interest fades, Nieman says. The
current economy deters companies from spending, even when a three-year payback
on a retrofit can be documented.

Jared Silliker, primary partner at Silliker + Partners, a
Seattle firm focused on advancing green building practices and sustainable
business, says he thinks building owners are approaching retrofits from a
variety of starting points. Many, though, are thinking long term in terms of
asset valuethey see cost savings and differentiating their product on
qualityessentially that more efficient and better managed buildings will see
higher occupancy rates, rents and resale prices.
Silliker adds while the recession has tightened credit for owners, others with
cash are willing to invest in energy efficiency. I see building owners
educating themselves and implementing upgrades because it makes good business

Uwe Brandes, vice president of the Initiatives Group for the
Washington, D.C.-based Urban Land Institute, a nonprofit education and research
entity involved in sustainability issues in the real estate, development and
land use fields, says much of the interest in the past two years in reducing
energy costs came from the spike of concern for greenhouse gas problems,
especially in the commercial sector. That difficulty was amplified by the
importance of reducing costs amid the recession. There are many new federal
initiatives on the way, he says, which will transform the marketplace in coming

One major challenge is getting the financing to make
necessary investments. At the federal level, the American Recovery and
Reinvestment Act (ARRA) is promoting energy efficiency; many cities and states
are setting up revolving loan funds with ARRA money to facilitate projects,
Brandes says. There has also been legislation introduced in the U.S. House of
Representatives to increase the deduction for energy efficiency upgrades to
commercial buildings. More and more governments are turning to PACE financing,
or Property Assessed Clean Energy. PACE programs eliminate the upfront cost for
energy improvements by allowing property owners to pay for the improvements
over 15 to 20 years through an increase in their annual property taxes. So far,
about 15 states have passed enabling legislation. Locally, Seattle City Light
has extensive financial incentives to help midsize and large businesses reduce
energy costs, covering retrofit lighting, controls and HVAC equipment, among
others. The incentives are based on kilowatt hours saved.

In addition, Light Green Advisors, a Seattle-based asset
management firm that specializes in environmental sustainability investing, is
working to develop a special purpose fund to provide capital for energy
efficiency retrofits of both commercial and institutional buildings.

Most government incentives cannot be utilized without
private sector investors, says Jonathan Naimon, co-founder and managing
director of Light Green Advisors. Private equity investors have a vital role
to play in financing. He says most real estate owners do not prioritize energy
efficiency investments. This is true especially in a tough economy with lots
of vacant office space, and more to come when leases are finished.

Jack Davis, market manager of office real estate for the
Northwest Energy Efficiency Alliance (NEAA), which is supported by local
electrical utilities, acknowledged that capital is tight now and could affect
plans to update buildings.

But I think it is a building by building issue, he says.
What is the debt load on the building? What are rents doing in that market?
What is the marketing strategy for the property? In some cases, investing now
in improving a buildings performanceor positioning it as a green
buildingis exactly the right strategy, before your competitors do so. My
belief is that coming out of the recession, youll see a lot of winners and a
lot of losers, with little in between. Getting building owners to make the
jump is a matter of convincing them that energy efficiency enhances the
assets value, and that they will be at a competitive disadvantage when the
market recovers if they dont move forward.

The NEAAs BetterBricks program is partnering with the
Building Owners and Managers Association (BOMA) Seattle King County in its
second Kilowatt Crackdown, a competition challenging all Puget Sound area
office buildings to improve energy consumption. The competition focuses on
operational improvements, such as cleaning filters, monitoring air flows and
turning off the lights at night. In 2009, about 53 buildings participated,
representing about 20 million square feet, Davis says.

One firm that made a major commitment to retrofitting is
Unico Properties LLC, a real estate investment and operating company
headquartered in Seattle. It owns and manages 9 million square feet of office,
multifamily, medical office and retail properties.

Unico had been interested in sustainability for many years
and was gearing up for the pursuit of LEED ratings for our existing buildings,
says Dan Novack, Unicos general manager. Currently, seven of Unicos buildings
have been certified LEED-EB (LEED for Existing Buildings); three buildings on
the Metropolitan Tract, an 11-acre downtown parcel owned by the University of
Washington, are among that group: the Skinner Building, built in 1926; Puget
Sound Plaza, built in 1960; and the IBM Building, built in 1964. Unico
partnered with McKinstry to do feasibility studies of the properties and found
that the HVAC equipment in those buildings had outlived its useful life. By
nature of their original design, most systems were not energy efficient and the
average age of the equipment was 35 years old, Novack says.

Of the 50 potential projects identified by McKinstry in
those buildings, Unico focused on those that had equipment nearing
obsolescence, provided a reasonable return and also that would upgrade the
infrastructure, increase tenant comfort, lower operating costs, increase net
operating income and enhance asset value. That whittled the list of projects in
the Metropolitan Tract buildings down to 16, which took five years to complete.

Unico replaced chillers and building controls, and added
lighting controls and window film, among other steps. Clarence Clipper, chief
engineer for Unico, says that across all the buildings, Unico saw annual energy
savings of $355,353 and an annual electrical consumption savings of 5.2 million
kilowatt-hours. Project costs were $8.3 million, but rebates from Seattle City
Light helped offset that by $1.5 million.

Having the financial support of both the university and
[Seattle City Light] sealed the decision to invest the funds we needed now to
build long-term savings and the system integrity that would outlast any first
year economics, Novack says. Unico worked around tenants during the projects,
and scheduled them when Seattle would have only a few days with unusually warm
or cold weather, which minimized discomfort to tenants.

Asked if he thought the projects would make the buildings
more marketable, Novack says, Absolutely. Moving into a Class A building that
isnt the latest generation, but has been maintained extremely well, has been
updated with modern equipment and is in a great location is very appealing to
tenants. He adds, In this economy, tenant retention is equally as important
as bringing in new tenants, so we strive to make sure those who are in our
buildings are satisfied and comfortable. More and more tenants, he says, are
asking about green and sustainability issues.

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