Climate change is the greatest issue of our time, threatening civilization as we know it. This underscores the urgency to significantly reduce urban greenhouse gas emissions (GHGs). The commercial real estate industry will be critical in that mission since buildings are responsible for approximately 40 per cent of the emissions. This means net zero targets for new construction and, for existing buildings, GHG reduction targets of about 50 per cent by 2030.
Over the past 20 years, the emissions of existing buildings have been reduced by only 10 to 17 per cent. Progress has slowed as low-cost/no-cost measures are exhausted. The business case to invest further in deep energy retrofits must be bolstered.
At the heart of the problem is the disconnect that exists between lofty corporate sustainability objectives and the day-to-day running of a building. Whereas carbon reduction goals may be positioned as an investment and a future-proofing opportunity, many building managers see carbon reduction initiatives differently: as an unwanted additional burden and cost, which has a low return on investment and a long payback time, and which will produce, at best, a few dollars in energy savings.
While there are numerous government and utility incentives programs for capital expenditure energy projects, they often have limited success. One reason is that the government opportunities often relate to technical solutions that the owners may not feel comfortable or confident in making.
Unless they are repositioning the building, investors/owners tend to look at the vacancy, terms of current leases or potential disposal of the building prior to making a major improvement decision. When a project makes business sense, owners often prefer to invest their own money rather than jump through all the hoops of a government program.
The triple net lease structure, where operating costs including energy are passed on to the tenant, adds to the challenge in rental properties. In what is sometimes referred to as the split-incentive paradox, the building owner has little incentive to reduce energy costs since the tenant is paying the bill. As for tenants, they have limited control over energy especially if they are leasing only a portion of the building. If tenants do make improvements in their leased space, it is the landlord who will reap the full benefit of the improvements over the long term and be able to charge higher rent to the next tenant.
Meanwhile, the growing academic research linking health and comfort to an organization’s human capital has had the unfortunate effect of changing the focus of many organizations from energy and sustainability to wellness and human productivity. Few landlords will sacrifice tenant satisfaction and comfort to save a few kilowatts.
For corporate tenants, the greatest driver is not carbon reduction but rather to maximize employee productivity by providing a healthy and comfortable workplace. Corporations are also adopting new hiring practices such as temporary contracts, part-time work and internships, which are driving new types of workplace leasing arrangements such as office co-sharing to accommodate a growing number of independent contractors who may be geographically dispersed.
At present self-monitoring analysis and reporting technology (SMART) buildings offer the best hope to reduce carbon effectively as well as reduce energy costs and provide good return on investment. This encompasses electronic devices or systems that have their own computing capability that can connect to the internet and be used interactively. As advanced network connectivity enables smart devices to communicate with one another and with other data sources, this gives rise to the internet of things (IoT) and smart systems.
Maximizing human capital
Smart workplace technologies can greatly reduce energy and carbon emissions as well as enhance productivity. Corporations are looking to smart buildings to maximize human capital — the quantity and quality of knowledge, skill and engagement that employers can extract from employees. Smart buildings can support what’s referred to as a “liquid workforce” with many people working offsite.
By 2020, it is estimated that at least 40 per cent of employees will be temporary contract workers. Since it is difficult to predict head count from month to month or even day to day, the workplace needs to be flexible to accommodate a mobile workforce that is in flux, including workers who may be located around the globe. As a result, many companies, large and small, are choosing to co-share office space. This arrangement allows them to set up their operations for short periods of time in a number of locations, where they may occupy a few desks or a closed-wall office.
This requires the buildings to be able to detect and respond to the needs of the occupants within the controlled zones, so they will have access to the building and the space, lighting, heat, air quality, cleaning and security. Smart buildings can also address IT challenges such as setting up and maintaining enterprise applications for temporary employees, securing networks, providing the necessary bandwidth, scalability and associated energy costs. In smart buildings, the various systems such as HVAC, lighting, VOIP and access security are integrated, and are continually monitored, self-calibrating and controlled — in a way that would not be humanly impossible.
Because they can be finely tuned, smart buildings also contribute to occupants’ productivity, making it easy to connect from anywhere, or check in and out of workspaces and conference rooms. Smart systems enable the lighting, HVAC and plug load to adjust automatically and be fine-tuned to meet personal preference. Occupants can book rooms, and benefit from streamlined security and efficient way-finding. For building owners and occupiers, these smart features are clearly a way to attract and retain tenants and enhance the human experience within the workspaces.
Operational savings aligned with ESG
When it comes to energy and carbon, smart building technology offers some of the best returns on investment, with as little as a one or two-year payback. This ROI is realized through energy savings from heating, cooling and lighting, automated security based on tracking of building occupancy and movement. There are also operational efficiencies. For example, smart building sensors and controls can optimize the use of elevators, detect water leaks, enable continuous recalibrating and recommissioning of systems to optimize their efficiency, alert a waste hauler to pick up waste only when a bin is full and so much more.
Although many government energy retrofit subsidy programs have floundered, there are some new programs which are gaining traction. This include generous tax deductions for retrofit projects including smart improvements and long-term financing that is attached to the property rather than an individual and is repaid via the annual property tax bill. Power purchase agreements (PPAs) with renewable energy generators are another option. The energy client strikes a fixed price with a renewable power developer or a utility. The fixed price is typically higher than the current grid price with the expectation of a higher grid price in the future.
This aligns with ESG (environmental social governance) obligations building owners/managers increasingly must fulfill for their corporate tenants and investors to reduce carbon emissions and disclose their carbon footprint through global platforms such as GRESB, the Carbon Disclosure Project and the Investor Confidence Project.
In many jurisdictions, the cost of clean energy (wind, biomass, solar) and nuclear energy is already on par and soon should be a consistently cheaper source of electricity than conventional fossil fuels. Already, companies with heavy power requirements such as Apple, Google and Amazon employ renewables to run their massive data centres.
In light of this, there is advantage in the gross lease arrangement, whereby tenants monitor and reduce their energy use and carbon emissions, and pay only for their actual electrical consumption. Smart technology makes that possible.
In the past, progress to meet carbon reduction targets in commercial real estate has been slow, as consultants have pushed for more energy audits and programs often without understanding the owners’ financial and business rationale. Smart building technology could change that for the environment and generations to come.
Jiri Skopek is Managing Director, Sustainability, with JLL.