Smarter Business > Center for Market Innovation

In major urban areas like New York City, nearly 80 percent of energy is consumed by buildings. Tenant spaces account for more than half of a commercial office building's total energy use, and building owners are starting to pay attention, particularly in light of energy benchmarking and disclosure regulations being adopted in cities across the country.1 If all commercial office real estate owners and tenants in the United States reduced energy consumption by 30 percent, it would translate into more than $6 billion in energy cost savings a year.2 That kind of impact is hard to ignore. Yet energy efficiency opportunities in tenant spaces remain largely untapped, due in part to the split incentive challenge,3 missing economic and performance data, and also to a lack of understanding of the high-performance design, development, and value analysis process.

How a tenant selects, designs, builds, and occupies space has the potential to make a big difference in their energy usage and operating costs. Timing energy efficiency work is critical to improving the cost effectiveness of energy solutions within tenant spaces. A tenant's relocation into a new space likely means that improvement work to the space will already be taking place. Incorporating the installation of energy performance measures into the tenant's existing build-out plan minimizes the incremental cost and future construction disruption to the tenant.

High Performance Tenant Space Optimization Process

The projections from the Center for Market Innovation's (CMI) first set of tenant projects show that an optimized package of energy performance measures, which are interactive, and ordered to reduce loads, install efficient equipment, and manage occupant behavior, can provide 30 to 50 percent energy use savings -- compared to a standard code compliant space -- with a payback period of three to five years. By addressing the high performance opportunities during the early stages of the build-out design process, the project team is able to evaluate potential energy performance measures (EPMs) and present projected energy and financial performance data to tenant's design team in alignment with their standard decision making process and schedule.

"The greatest value added to the client is that they literally save money. There's no question. In addition, they're saving energy for our planet. Who doesn't want to do that? Going forward, I will speak to all my clients about it now that I understand the process. It's going to become easier and easier and I think it will become the new industry standard."

Tamela Johnson
Director of Project Management, Gardiner & Theobald

The energy opportunity exists throughout a tenant's entire lease cycle, and a clear process streamlines the coordination needed to identify the economic case for energy performance optimization. This process provides actionable steps for both tenants and building owners in a collaborative effort to capture the shared financial and competitive advantage benefits during the pre-lease, design and construction, and post occupancy phases of the relationship:

1. Select an Office Space

Energy Aligned Lease Principles:

  • The building owner's base building central systems and common areas (lobbies, hallways, elevators, service areas, etc.) and the tenant's leased premises should operate as energy efficiently as feasible.
  • For installed energy performance measures, the beneficiary of the energy cost savings should be the party who pays for the installed EPM. If the building owner installs EPMs that provide cost savings to the tenant, the resulting energy cost savings should be allocated to pay for the cost of the EPM through a pass through clause to the tenant.
  • Energy use and demand data should be quantifiable and transparent to both building owner and tenant. Sub-metering tenant spaces and total building energy consumption information promotes energy performance benchmarking and ongoing energy management.
  • Consider spaces that are separately sub-metered for their energy usage, with good access to daylight and views, healthy indoor-air quality and up-to-date control systems.
  • Review the building's EnergyStar rating or other energy benchmarking data and past energy related capital improvements or planned upgrades.
  • Review the lease for central building system operating expense pass-through provisions, energy aligned clauses, utility billing structures, and efficiency design criteria.
  • Utilize resources made available by the landlord, including experts dedicated to helping facilitate tenant's energy management goals.
  • Ask if a whole building energy model is available to share with tenants, especially for buildings that have recently been completed or have undergone an energy retrofit.

Buildings with an energy management program and tenant energy platform in place emphasize the landlord's commitment to managing energy performance.

2. Select the Project Team

  • Send a request for qualification (RFQ) for architects, engineers, and contractors with expertise in energy modeling and value analysis. The right technical expertise on your team is needed to calculate baseline energy usage and projected energy savings to make informed investment decisions and to measure actual energy performance after the EPMs are in place.

Project managers versed in energy performance will be able to integrate the energy value analysis into the normal design and construction process and keep the project team focused on communicating the energy and financial implications of energy performance decisions.

3. Set Energy Performance Goals / Develop Menu of Measures

  • Determine appropriate energy usage baseline against which to measure potential high performance designs. The baseline may reflect a code compliant and/ or business as usual design and operational assumptions.
  • Define energy performance targets and have top leadership emphasize it as a priority along with program and aesthetic needs.
  • Work with the building owner to obtain existing conditions information and utility data on the building and leased space.
  • Review potential EPMs from the project team's early design discussions and define a Menu of Measures.

4. Model Projected Energy Performance

  • Perform energy modeling at 50 percent design development.
  • Evaluate individual EPMs against energy baseline.
  • Order EPMs to i) reduce loads, ii) install efficient equipment, and iii) manage behavior.
  • Create several sets of measures ("packages") that account for the interactive effects of various EPMs and finalize the feasible packages.
  • Determine projected energy use savings impact of the EPM packages to both the tenant space and base building.

The energy model is a tool that can be used in design evaluation, Leadership in Energy and Environmental Design (LEED) Energy and Atmosphere (EAC) submittals, incentive and tax deduction filings, and ongoing energy performance measurement and verification. The model allows a quicker, iterative, and more transparent evaluation of energy measures. Modeling costs depend on the space, the final scope of work, and the specific building site.

5. Review Incremental Costs and Available Incentives

  • The project engineer, energy consultant, or construction manager has the ability to determine incremental costs for the modeled energy performance measures. Incremental costs are additional sums, net of cost avoidance amounts, compared to what was already budgeted for the planned system or equipment.
  • Coordinate registration and filing for potential energy incentives and review potential tax deductions to assess amounts that may be available to offset green building and energy design and equipment costs. The project manager or architect can streamline the project budgeting process by include the tenant's accounting representative informed on energy budgeting discussions.

6. Perform Value Analysis

  • Conduct a financial analysis to determine annual and lease term cost impact, taking into account potential incentives and tax deductions. The financial scorecard should include the payback period of each individual measure and an optimal package of EPMs, together with Net Present Value (NPV) and Return on Investment (ROI) calculations for the optimal EOM package.
  • Request a report from the design team (a "Value Analysis Report") that: (i) documents the EPM evaluation process and the outcomes of the energy modeling, costing, and financial analyses; and (ii) recommends "good," "better," and "best" tiers of EPM packages that could be incorporated into tenant's build-out design, taking into account the project's program needs. The project's design, facilities, construction, accounting, and management teams review and discuss the Value Analysis Report.

7. Review Energy Performance Managers Budget and Make Final Decisions

  • Review financial resources available to cover incremental first cost of energy performance measures, including allocation of tenant improvement allowances, potential local, state, and federal energy incentives, possible external financing sources, and tenant's internal capital resources.
  • Decide which tier of energy performance makes sense over the lease term based on financial, energy performance, and sustainability criteria.
  • Direct the design team to incorporate selected EPMs, sub-metering, and commissioning into the construction set.

8. Build Out the Space

  • Select a contractor who is experienced in installing high performance measures.
  • Coordinate operations training for any specialty technologies after installation.
  • Ensure meters are readable in electronic format and connected to an energy management platform.

9. Develop a Post Occupancy Plan

  • Designate an energy manager to monitor and adjust equipment to maintain operating efficiency.
  • Define and execute a protocol (based on IVMVP) to measure and verify the actual energy performance of the new space after occupancy.
  • Collect electronic meter data by space/ floor at a minimum, and end use if possible including:
  • Monthly kilowatt hour (kWh) consumed for every sub-meter
  • One-hour trend data of kWh consumed for every sub-meter available for a two week period in the heating season, cooling season, and shoulder season (6 weeks total over the year)
  • Ten-minute trend of all heating, ventilation, and air conditioning (HVAC) fan speed commands / power over such two week periods
  • Develop an occupant behavior plan to reduce equipment plug loads.

It is nearly impossible to manage energy use without knowing exactly how much, where, and when energy is being used. Sub-metering and energy management systems help tenants watch out for energy waste after moving in, keep equipment running more effectively through informed maintenance, and keep both energy and operations costs down.

10. Communicate Results

  • Expand the value of a high performance build-out beyond the quantifiable economic benefits by promoting the evaluation process and results through corporate sustainability reports, trade publications, videos and social media.
  • Highlight the high performance space while recruiting talent.
  • Write a project case study and document the energy value analysis process to maximize innovation credits if LEED for Commercial Interiors (LEED-CI) certification is being sought.
  • Motivate occupants to reduce energy use daily through incentives and tools using tenant energy dashboards on the organization's intranet and website.

In a recent global study by Johnson Controls' Institute for Building Efficiency, 25 percent of 3,500 facility, real estate, and energy management executives said they were willing to pay a premium for space in a certified green building, and 24 percent planned to build out tenant space to high performance standards. Project stakeholders need to address the energy efficiency market opportunity by gathering the right information and putting it in front of the right people at the right time during the tenant engagement and decision making process.

Energy performance is important to both sides of the real estate equation. By working together, tenants and building owners have the opportunity to save energy costs, create more comfortable interior spaces, and gain a competitive advantage, whether seeking and retaining talented employees or high quality tenants, through promotion and recognition of a high performance tenant space and building. "Greater energy efficiency means higher profits, greater competitiveness, and a better result for the bottom line for everyone involved," emphasizes Anthony Malkin, owner of the Empire State Building.

Evaluating Energy Reduction Opportunities

Though one size does not fit all in tenant spaces, a common menu of measures can be a starting point to evaluate lighting, HVAC, and plug load energy reduction opportunities. The following set of measures has been identified through the Project as those that have strong potential across a wide range of tenant types.

  1. New York City, Washington DC, Philadelphia and San Francisco have adopted benchmarking and public disclosure regulations. Austin and Seattle require benchmarking and disclosure at time of property sales transaction.
  2. Based on commercial office energy expenditures noted in "United States Energy Efficiency Retrofit Report," DB Climate Change Advisors, March 2012.
  3. Split incentives are a result of a lease structure that shares operating and capital costs, and divides energy savings returns between building owner and tenants. This structure significantly reduces the economic benefit of installed energy performance measures to the building owner.
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