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Concern for a Cleaner City Clashes with Costs to NYC's Commercial Landlords

Work Still Needed to Help Finance Sustainable Development
April 12, 2018
From the top floor of New York University’s Kimmel Center, against a backdrop of attention-stealing northwest views such as the glass sheathing currently climbing its way up a tower known as 30 Hudson Yards, New York City Housing Authority Vice President of Sustainability Bomee Jung asks the audience gathered at the Seventh Annual Conference on Sustainable Real Estate one simple question: How many had heard mention of the housing authority in the news over the past week? A good one-third of the room’s hands raise. Then she asks how much of the news heard was good. All the hands drop. Many no doubt have followed recent reports detailing allegations of building mismanagement.

"The reason we have a sustainability program is because the outcomes we are having as a landlord are not awesome," Jung contends. "One of the ways we can get better is to look specifically at our energy outcomes. A big chunk of experience you have as a tenant ties to energy sustainability. The experience of not having thermal comfort in your home ties to how we are managing the buildings’ heat and hot water as a landlord."

The agency is investing into modernizing exhaust ventilation and heating and cooling systems, and installing LED lighting across its portfolio.

Energy efficiency is a specter haunting many owners and operators of the city's commercial real estate buildings. That's mostly because since 2009, New York has been aggressively tightening its energy codes and sustainability initiatives for buildings over 50,000 square feet through its Greener, Greater Buildings Plan.

The local laws passed include such requirements as the measure and reporting of energy and water consumption to the city through the Environmental Protection Agency’s Energy Star platform, and the auditing and retro-commissioning of existing systems every 10 years. Passed at the same time but expanded to buildings more 25,000 square feet, another law requires all common-area lighting be upgraded to meet New York City Energy Conservation Code standards by 2025 and for electrical sub-metering to be installed by the same deadline.

Then in 2016, the De Blasio administration produced a roadmap for its 80x50 plan, which targets an 80 percent reduction in New York City’s greenhouse emissions by 2050 and is mandating energy-efficiency improvements across buildings of all sizes.

To meet the emissions reduction, the plan requires New York City commercial buildings to meet tighter, "ultra-low energy standards," – meaning existing buildings will need significant investment into "deep energy retrofits" including overhaul of heating and cooling systems and better insulation to reduce energy loss. The plan also aims for increased investments into on-site renewable energy throughout the City, including the placement of solar panels on rooftops on City buildings.

Though sustainable initiatives arguably save landlords money over time, the financing of such projects and the training required to bring maintenance workers up-to-date on new tracking technologies proves challenging. The city says it will need to work with the public and private sectors on "appropriate financing mechanisms."

Invesco, for instance, is investing in so-called smart technology to track building energy usage through apps, says Lesley Lisser, director of asset management at the institutional investment firm. But she cautions the technology must be user-friendly so that training building managers and maintenance staff is not so arduous a process.

"You need to explain it to everyone who operates those buildings," she says, adding that partnering with technology firms that can train workers is crucial. Invesco is also looking in sustainability efforts for its York City apartment holdings, says Lisser, but she added the company is financially driven. Thus any sustainability initiatives she puts forward must create cost savings or make financial sense, such as via tax rebates or smaller utility bills. "In office and multifamily you can attain higher rents when you are investing in the incentives," she says.

Speaking about rent premiums from energy efficiency, Nick Stolatis, vice president at asset management firm EPN Real Estate Services, has a different take. "It’s a green premium or a brown discount," he says. An Energy Star or LEED certification may tip the scales in tenants’ decision-making process. "They may not pay you more rent, but they may be willing to pay your rent instead of going across the street and pay less," he explains.

In working to meet energy mandates, older buildings will need the most attention. Because of New York’s tighter building codes, government incentives tied to meeting Energy Star guidelines and the appeal of LEED to international investors, new projects built by the city's largest developers are quite efficient. Just ask Jonathan Flaherty, senior director of Sustainability and Utilities at Tishman Speyer.

Mentioning Tishman’s latest development, a 2.8 million-square-foot office tower named The Spiral, Flaherty says building to city codes means it will be guaranteed LEED Silver. He adds that Tishman is working toward attaining LEED Gold and remains optimistic on that front.

Citing what he calls "aggressive goals" on behalf of 80x50, Flaherty says it won’t be the city’s top developers that will have trouble meeting them.

"The problem will be the 14,000 or so brick-façade punch-window multifamily buildings that are not even close to achieving their goals," he said. "These buildings are perfectly nice, but not efficient." A majority of these properties are owned by individual New York tax payers, he notes, and they will have to pay for these improvements. "We are talking hundreds of thousands per building, for new heat pumps, windows, façades," he adds.

The lowest efficiency building you can build today would still be six or seven times more efficient than one built in the 1970s, notes Timon Malloy, president of the Fred. F. French Investing Co.

Flaherty estimates that meeting the Mayor’s initial goal of reducing emissions 50 percent by 2030 across the city will require "probably $10-15 billion in building efficiency improvements, at minimum."

Tishman Speyer is working with BE-Ex, the Building Energy Efficiency Exchange, an independent nonprofit that works to spread knowledge and best practices to smaller landlords throughout the network.

"We are giving people the confidence to do energy-retrofit projects. It’s an exciting time because we are starting to get economic data, hard number values of how it helps with leasing," says BE-Ex Executive Director Richard Yancy, citing the benchmarking rules in play since 2009. Since energy efficiency is lower on the list of priorities for most New York City developers, Yancy says the group has developed "a list of touchpoints: Everyday measures that can lower operating costs, midrange improvements that pay in 1-2 years and more significant work."

Sustainability is "a significant element" in real estate space and "essential" to operating a building efficiency, adds Stolatis. "Benchmarking is the basic building block. You can’t manage that which you don’t measure." Nor can you improve upon it.

Attaining the financing needed to make deep retrofits on existing buildings is one of the challenges, panelists agreed. A scheme called Property Assessed Clean Energy financing is among the financing options potentially available to private lenders across the country, but the system must first be adopted by state and local governments. It is available in New York.

Through PACE Financing, money provided to developer is paid back as a line item on a property tax bill. "The advantage is property taxes and assessments have a senior lien, so tax assessments get paid first. It’s very attractive to investors. We can provide long-term financing, up to 20 or 30 years," says David Gabrielson, executive director at PACENation, its advocacy group.

Also in business is the New York Green Bank, a state-sponsored financing entity that works with private capital to fund clean energy technologies for buildings. However, panelists said that despite the agency’s good intentions, there’s a hiccup that makes it a less-popular option to some owners. It must adhere to the requirements of the Freedom of Information Act, opening details to the public. Since a large portion of real estate is incorporated not as its own entity but as a pass-through, accepting this funding opens the owner’s personal finances to both the bank and public scrutiny.

Green Bank has not had much deal activity with owners of New York City buildings, because they are not really interested in the encumbrances associated with it, according to panelists. And foreign-based owners are exempt from the funding.

Speed bumps aside, panelists said New York’s stricter building codes place it among a handful of cities nationally and that sustainable-development practices and principles are picking up pace.

"The exciting thing is it is not such a small circle," says Yancy, calling President Trump’s decision to pull out of the Paris climate agreement "somewhat of a boon" for the sustainability industry. "About 1,200 business leaders and 400 mayors signed the 'we are still in' declaration. So how do we talk about energy efficiency as a bottom line? There’s a big benefit to how energy-efficient buildings operate for their tenants. We need to scale up the conversation."
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