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By Loren Snyder
September 2006 -
Energy Efficiency Article Use Policy
These days, energy efficiency is getting a lot of attention from firms that own and manage multi-tenant office space. But it would be wrong to think that all of the firms now starting to talk about energy are just beginning their efficiency efforts.
Consider Trizec. With 37 million square feet in 50 properties in seven major metropolitan areas, it is one of the country's largest publicly traded real estate investment trusts (REIT). The firm began instituting energy conservation measures in the late 1990s. But only in the last year or two has Trizec started touting its accomplishments.
For a publicly traded REIT, energy costs are no small change. In Class A office space, utility costs — electric, gas and steam — account for 25 to 30 percent of a building’s operating costs. In Trizec’s case, energy costs are the second largest line item in the annual operating budget. Every amount building owners can save on their energy bill contributes directly to the building’s net operating income. (See box.)
The gross energy costs for Trizec’s portfolio of buildings is approximately $100 million annually, so for every percentage point of efficiency Trizec gains, the organization saves $1 million. To date, Trizec has improved its energy use about 16 percent, for roughly $16 million in energy savings.
The firm is a good example of how a long-term commitment, coupled with a step-by-step approach, can form a solid foundation for an energy program that expands over time.
The company developed its energy program to investigate, analyze and implement potential energy-conservation projects for each property. An initial goal was to choose projects with accelerated payback periods, generally a window of three years or less. Since 2000, the company has invested approximately $20 million in nearly 450 such projects, with an average payback time of less than 2.2 years.
“Saving energy is the right thing to do,” says Bill Tresham, the chief operating officer at Trizec. “Plus, it saves us a lot of money.”
Now in its seventh year, the plan has captured many of the relatively easy energy reductions. Trizec’s current challenge is to continuously improve upon its previous success.
“All the low-hanging fruit is gone,” Tresham says. “But our commitment is evident, and our people have lots of pride in what we’re doing.”
That commitment to energy savings also garnered attention outside the company.
In 2005, Trizec received the gold “Leader in the Light Award,” presented by the National Association of Real Estate Investment Trusts (NAREIT) in conjunction with the U.S. Environmental Protection Agency. The award recognizes firms that have substantially reduced energy use and costs.
The first thing Trizec did was to figure out how much energy its properties were using, says Tresham, who was largely responsible for instituting the firm’s energy-efficiency program.
“Our commitment was to measure our energy usage,” he says. Using that information, Trizec then relied upon its building engineers and tenants to develop strategies that would reduce energy costs.
Trizec invested in metering equipment and software, then kept a vigil over energy use in the organization’s buildings — reducing energy consumption and lowering building power loads whenever and wherever possible.
In many of its properties, Trizec installed real-time Web- or Ethernet-based revenue-grade meters. The company monitors — via submeters — energy use by tenants. While Trizec uses two rent structures for its tenants, all tenants are required to commit to an established energy threshold. When they go above that limit, they pay for the overage.
“Our software can give us up-to-the-minute load profiles of the systems we use in our buildings,” says Jerry Schumm, senior vice president for operations in Trizec’s eastern region.
Tresham and Schumm do not hide the real reasons behind the company’s success: the behaviors of their building engineers and efforts of tenants.
“This is about investing in the right systems and running them properly,” Schumm says. “But we also need the right behaviors from the people who work in the buildings we manage.”
Trizec goes to great lengths to encourage employees to come forward with energy-saving ideas.
“I think it’s hard for a building engineer to approach upper level management,” Schumm says. “They’re in the best position to know how to improve a situation to increase efficiency, but they might not believe their opinions are always heard. We strive to let them know their ideas have real value.”
Trizec also takes an active part in educating its tenants and vendors, an effort facilitated when energy costs are passed on to tenants. As part of one recent tenant-education program, for example, the company provided tenants with custom-printed packages of self-stick notes that contained energy-saving tips. The company also encourages its night custodial crews to turn on the lights of only those floors being cleaned — not the lights for the entire building.
Tresham says the tactic is working. Recently, one tenant reported that a common area didn't require as much artificial lighting, partly because of the amount of natural daylighting already present.
Trizec also relies upon the assistance of a Toronto-based energy consultant to help analyze and assess the organization’s portfoliowide conservation measures.
Trizec’s efforts have now progressed beyond the simple strategies. “We first selected upgrades with a simple two-year payback,” says Schumm. “That includes lighting retrofits, LED exit signs and much of the metering. We went top to bottom in our buildings, looking for ways to save money. Now we’ve moved on to projects that have longer paybacks — three to four years, for example.”
All told, Trizec has invested roughly $20 to $25 million over the last five years, Schumm says.
“Often people worry about the capital expenditures,” says Tresham. “But even with the expenditures, we’re seeing superb paybacks.” Those paybacks are taking longer than the 2.2-year average Trizec has experienced in the past, but rarely do they exceed five years.
“Recently we acquired a very advanced chiller system,” Schumm says. The three-fuel system has an 8,000-ton capacity and is estimated to save the building $2.5 million annually. The payback is 4.5 years.
A 4-megawatt cogeneration plant is also in the works for one of Trizec’s New York properties. And throughout the Trizec portfolio, the real-time monitoring systems are being upgraded.
“One big push we have is to go to programmable systems that help us minimize energy use during peak hours,” says Schumm.
One such system is currently being used in Dallas properties. Annual energy costs for Trizec’s Dallas properties can top $8 million, so reducing energy costs even a little can significantly impact its energy costs per square foot. The company installed a Web-enabled metering network that provides real-time kilowatt use and load profiles.
“We have nine buildings in Dallas, so having energy load profiles of them puts us in a much better position to negotiate with electricity providers,” says John Dawson, director of engineering in the Dallas market.
Using building-load profiles allows Dawson and others like him to work with utility providers, brokering for better deals. Since 2001, Trizec’s managers have instituted negotiations with local utilities and power suppliers in states where energy has been deregulated. Cumulative savings in the period between 2001 and 2005 exceeded $6.5 million.
But the point Trizec’s executives continually make is that the people who occupy the buildings — the employees and tenants — are the ones who make the most difference.
“The secret is to get people to ask: ‘What can I do?’” Tresham says. “Get everybody involved in the process, from the building engineers and HVAC techs, to the tenants. The lesson here is to invest in management resources.”
Loren Snyder is the former managing editor of Building Operating Management.
Proudly proclaiming energy-conservation practices to the public and shareholders hasn’t always been the best practice for publicly traded real estate investment trusts (REITs), in part because REIT shareholders tend to be conservative investors. But a new class of socially conscious investors is finding green-minded REITs an attractive addition to their investing portfolio. Whether an investor is conservative or not, the impact of energy-efficiency improvements on a REIT’s net operating income (NOI) is something that should make every investor smile.
But NOI is different than traditional “net income” definitions, and an understanding of the difference is vital when evaluating income-producing real estate.
NOI is the income of a property before income taxes but after operating expenses are deducted. So NOI calculations look a little like this:
First, add gross rents paid (calculate “rents possible” less the amount for vacancies) and other income from property. The result is effective gross income.
Next, subtract operating expenses from effective gross income. The result is net operating income.
Operating expenses cover a gamut of costs, including repairs and maintenance, management fees, utility payments, property taxes and supplies.
Costs not included as part of the operating expenses include principal and interest, capital expenditures, depreciation, income taxes, and amortization or loan points.
Calculating NOI is important when determining the capitalization rate and the debt-coverage ratio of income-producing properties. And because energy costs directly affect the NOI, it is important for managers of income-producing properties to mind utility costs.
Facility executives seeking to improve energy efficiency across a portfolio of buildings have to decide where to look for opportunities. That can be trickier than it seems. A building with older systems, for example, might seem a better candidate for improvement than one with newer equipment, but that’s not always the case. A well-run older building can have better energy performance than a new building that isn’t operated efficiently.
One strategy for zeroing in on the biggest opportunities is benchmarking. A place to start is with the benchmarking tool of the ENERGY STAR Label for Buildings program. That free, online tool enables facility executives to compare a building against similar buildings. The tool takes into account factors like building size and location, weather variations, and some operating characteristics. Buildings are rated against similar buildings on a scale of 1 to 100, with a higher score indicating better energy performance. Buildings that score 75 or higher — that is, are in at least the 75th percentile for energy efficiency — can qualify for an ENERGY STAR Label.
Trizec has been using the ENERGY STAR tool to benchmark its buildings. The firm’s goal is to benchmark every property against the ENERGY STAR database every year, says Jerry Schumm of Trizec.
But that’s only one part of a multifaceted energy benchmarking program Trizec uses to help it understand the performance of its buildings. Trizec has developed its own energy database of buildings within its portfolio.
“We benchmark off that database, taking into account things like weather and occupancy,” he says.
The reason for benchmarking from within is because of what Schumm calls each individual building’s “character.”
“You’ve got to understand each individual building,” he says. “They’ve all got their own personalities. For example, if you look at the requirements of One New York Plaza, the energy use looks over the top. But you’ve got to keep in mind that the building runs 24/7, and supplies chilled water to another 1 million square feet of space in an adjacent building that Trizec doesn’t own.