Talkback on Transwestern’s Energy Efficiency Program

I didn’t want this week to end without acknowledging a couple of comments from Green Journey readers on last week’s post about Transwestern’s energy efficiency retrofit program.

Turns out that there were some who had differing opinions than I on whether Transwestern’s efforts were worthy of the industry pacesetter designation that we’re so fond of around here. They backed up their opinions with some fair points worth noting. I like authentic exchange, so I’m printing their comments here.

Alex Brennan, Cannon Equities wrote:

I did want to point out one objection, and that is your equation of low first cost to short payback.

The issue Transwestern (and most other building owners) have right now is that they have to operate within a pre-established budget.  Right now owners are seeing falling revenue as tenants vacate, downsize, or demand rent concessions, which leaves less money for capital improvements.  Because of this lack of liquid capital, they are targeting the low cost points.  Often times these low cost points do not provide ANY tangible increase to NOI, and therefor have the longest payback possible.

Often times the “dogs” that need the most work done (and thus the most upfront capital) will realize savings that far exceed the better run buildings, giving these improvements a shorter payback.  The problem is, the first costs (I know most LEED consultants hate to consider first costs, but it is a real and very valid concern for those of us having to come up with the cash within tightening budgets) are prohibitive in these scenarios.  One of the better options if this is the situation is to go to Pay on Performance type contracts and let the savings pay for the improvements over time (thus eliminating or reducing the first cost concern). I wonder if Transwestern considered this type of contracting before deciding to forgo the dogs?

Paul Maenner, JMW Development wrote:

You are slightly (but not by much) unfair to the guys at Transwestern.  At the end of the day, if sustainability initiatives don’t pencil, most developer/investors aren’t likely to adopt.  Keep in mind, when we attend conferences like this, the crowd is mostly self-selecting, all usually singing from the same hymnal.  We all think/believe that we ‘get it’…

With all of this said, the Transwestern guys are hard-boiled, old-school real estate types who are seeing the value (MAI speak) of sustainability.  That they have come this far is admirable and impressive.  I think you could classify them as Pacesetters in that they have come to their conclusions based on solid, no-nonsense, practical analysis and implementation.

So Now It’s My Turn

Ok, guys, I see your points — and they are fair. My comments about Transwestern were driven by them explicitly telling the ULI audience that they didn’t want to be leaders [at energy efficiency retrofitting], which was frankly disappointing — commercial real estate, particularly value-add investing with its famous short-term horizon, needs lots of leadership around energy efficiency right now. Add to that the impression I got, that they seemed intensely focused on fulfilling the LEED-Silver checklist, but not particularly able to talk about sustainability efforts in any dimensions beyond that.

That said, they are in fact still ahead of the overwhelming majority of commercial real estate landlords when it comes to successfully applying portfolio wide energy efficiency programming, and that we would all be in a better place on energy efficiency if most landlords would just take the good advice they were dishing out at ULI last week.

Alex and Paul are right to bring up the realities of today’s value-added landlord and manager. And I think Green Journey readers like you should keep writing us to present that pragmatic perspective as they see fit.

Thanks to both of you for contributing.

Heard at ULI Developing Green: Transwestern’s Green Retrofit Program

Long time no post, I know.

After many weeks on planes, trains, kayaks, bicycles and of course, automobiles — my long road trip ended at the Urban Land Institute’s Developing Green Conference in Beverly Hills.

There, I presented on financing energy efficiency and heard from some of the leading professionals in green building investing today.

Some of you were following me on Twitter that day and this post expands on those tweets.

Transwestern Talks Green Retrofits

Transwestern Exec’s Allan Skadowski and Scott Tausk talked the way we like at conferences (straight) and often don’t get enough of, no matter how much we pay.  They spoke about Transwestern’s development of its existing building retrofit capabilities including successes and lessons learned.

There was no powerpoint, no slick corporate infomercial, giving their talk the authentic vibe we crave over here on the Green Journey.

Note that I’ve done my very best to make the short snippets below reflect the speakers statements as closely as possible.

• Why are they going green? They made it clear that their goals are to be perceived by peers as proactive – not being a leader in going green. They were also reacting to tenant concerns in market.
  Not wanting to spend too much money – keeping it a low cost program. Transwestern operates a value-add fund. The average hold period is 4-5 years for assets. They have about 65 buildings in their portfolio. Decisions made on the basis of marketing and long-term cost control.
• What do their investors think about greening buildings? Some of their investors don’t care; some investors have it as a factor (but don’t want to pay much for it); a few care heavily about presence of green initiatives on properties.
• Like certification? Thumbs up on LEED EB 2009; LEED online version 3 is much more robust. They are now big fans of volume certification – earn points on your existing buildings as you go instead of waiting for a building to achieve all its points before submittal for LEED certification.
• What was their process to study retrofitting and certification within their portfolio? They chose 25 bldgs to move through certification. They are still currently pursuing 18 buildings. Eight or nine going through the process.
• How much do they pay for certification? “We’re paying $0.17-$0.18/sf to get buildings certified.” Interesting is that they point out that their certification costs have gone down quite a bit as they’ve gained more experience with LEED-EB. Also stated that most of the buildings they certify already are within an easier range of certification — focus on low-hanging fruit. They admitted that they are not taking any “dogs” through the LEED-EB process now; they estimated it’d cost ~$2.00/sf to certify buildings with very low EnergyStar scores like 40.
• Results from their program? They’ve done a scrub on the utility costs of the buildings they’ve certified realizing a 2% savings in utility costs which include substantial utility rate increases. Occupancy on their certified buildings is up 20%.
• Any differences in the cost/value of LEED certification? They had all bldgs evaluated at the start of their program on the basis of the cost to achieve LEED-Silver/Gold /Platinum status.  They found no cost difference between certified and Silver levels. However, Gold cost much more than Silver.
• On the value of retrocommissioning: this is a ‘must’ in their view. They now advise their owners that retrocommissioning results in unlocking serious energy expense savings and that it shouldn’t be left out of any retrofitting initiative.
• How do they know their green retrofit efforts have been successful? Transwestern  has no firm measurement system in place.  However, they say they are seeing lots of positive anecdotal evidence within their operations supporting certification. They indicated that there are definitely leases that have been done due to properties being Certified or Silver. They specifically cited a property in Houston, where a prospective tenant required them to put their promise to get LEED-Silver on a building in the lease agreement (my note: lawyers in the audience were scribbling furiously at this point).
• Has anyone paid them more on the sale of a retrofitted building? Not exactly. “However, the presence of a bidder who expresses interests in the property because its green helped to drive up the price at the end of the day”.
• What increased rents have you experienced? None. Market conditions today are too unstable to look at certification as a premium bringer. Certification value comes more from being focused on operating expenses.
• Green Lease Language in play? No.
• Payback example? They said that they do not focus on paybacks as a decision-making tool (my note: compare this with notes above about only certifying buildings which can be done for very low costs - i.e. short payback). However, they did offer their experience of chiller replacements having a payback in 6-7 years. They also stressed that in areas with high utility rates, like Houston, California and the Northeast, the payback looks great. Other areas with lower utility rates (Midwest) will show longer paybacks for now. As cap-and-trade legislation rolls out in some form, they expect that increased electricity rates will make the payback analysis even better even in currently lower cost utility areas.
• Are you doing any separate analysis and monitoring of the carbon footprint of your portfolio? This was my question. The answer they gave was telling: “We try to get LEED-Silver certification. Whatever that translates to in carbon emissions is what it is.”

Transwestern is, IMHO, at the upper tier of the commercial real estate industry when it comes to greening their existing buildings, when measured on the basis of having gotten a program off the ground and learning how to implement LEED and EnergyStar to their and their properties’ benefit.

They deserve props for their initiative and accomplishing much more than most other real estate platforms in our industry (at this moment in time). Yet, by their own admission, they don’t want to be known as leaders, just “proactive” — so I can’t archive this story under “industry pacesetters“, alongside other groups who both demonstrate competence and broader community stewardship greening their portfolios. Too bad that they equate leadership with “spending too much money”.

What do you think? Am I (un-)fair in my assessment?

The Green Building Finance & Investment Forum: First Movers, 9 Ideas & Some Challenges

So today is a two post day, just to stay on top of the info deluge that is besieging my inbox. I’d posted before about the Green Building Finance & Investment Forum, which took place the latter half of last week.

The focus of the conference was for the green first movers to share experiences from their particular vantage point.

Most Talked About Green Building Ideas

• Be green or be obsolete. You have heard this one here many times before. It was reiterated throughout every panel and presentation. Leanne Tobias used the term “future-proofing” to refer to how green is being seen as a way to mitigate the risk of obsolescence. It became one of the most repeated buzzwords throughout the event.

• Think abundance - apply sustainability to grow the top line. Tom Paladino gave a wonderful case study about how his firm uses sustainability to create specific features that increase the rent premium owners can get on their buildings. This runs contrary to most people’s focus on using green building principles to reduce expenses.

• Sustainable markets – the downtown premium. Jonathan Rose presented his company’s approach to investing, which includes focusing on smart growth locations. They’ve got it down to the point where they have established relative return premiums for various markets.

• LEED branding is gaining economic value. Transwestern’s Greg O’Brien pointed out that investors were seeing a particular value in green building being certified. It is not enough for an investor to just say that they had made specific improvements to the property, but that LEED certification was being seen as a ‘good housekeeping’ seal of approval on the asset.

• Think beyond the net zero building. On the technology and innovation panel, panelists talked about thinking in terms of a net zero community, not just individual buildings. Bill Sisson, of United Technologies and the World Business Council for Sustainable Development and Laura Rodormer, of Swinerton Management Consulting talked about the need for the investment community to enlarge its view of how far we can go with net zero energy.

• Go for the low-hanging fruit. Immediately adopt low cost green strategies. Several panelists said that there were many high ROI green moves that can be immediately implemented at little or no cost (and without an investment committee’s approval). Changing lightbulbs might sound boring, but the energy savings generate a great return.

• Metrics measure what matters. Several investors pointed this out. We will not have positive financial, environmental and social outcomes unless we are measuring portfolio performance on all of these dimensions. Real estate investors now have the challenge to integrate measuring environmental and even some social outcomes within their portfolios alongside financial returns.

• Use government incentives, subsidies and tax breaks to your advantage. Steve Grant, of the Bond Companies, was in the audience.  He stood up in the middle of a presentation and pointed out how his company has gotten quite strategic about how they source and apply incentive dollars. It can be a significant source of financing that is often overlooked by investors.

• The green building tsunami is just beginning. State of California Treasurer Bill Lockyer commented that a year ago the investment officers at CalPERS and CalSTRS (our state pension funds) hardly ever heard about green building investments. Now they get about two proposals a week, requesting their investment in a new green fund.

And then there are still challenges

• Diagnosing with LEED-EB: Lots of investors talked about how implementing LEED for Existing Buildings is a very challenging, highly imperfect endeavor. Not only just to green a building, but they are also applying LEED-EB (now LEED-EBOM) as a screen for potential investments. No solutions were offered, this is an open point for all of us to follow. However, it was interesting to note that several
  consultants in the audience were muttering that the investors difficulties stemmed from trying to force LEED to fit their organization’s existing investment approach (i.e. put LEED criteria into the organization’s existing checklists) and not the other way around. There are lots of efforts underway throughout the industry trying to tackle this problem, so I’m sure we’ll see lots of movement here in the coming months.

• Underwriting, Appraisals & Standards: When it comes to talking about underwriting standards, the industry talk sounds like the City of Babel. Lots of confusion. We still lack formalized underwriting standards that the industry can apply in order to understand green buildings financially, but there are groups, such as the Green Building Finance Consortium, that will be putting out papers about this topic in the coming months. Tim Lowe also presented a detailed analysis of what needed to happen in order for real estate appraisers to adequately value green properties. In short, there is lots of education still needed within the appraisal industry.