Commercial Tenants: 12 Things You Should Know

Urban Green’s conference brought together an all-star panel of managers discussing how to improve sustainability among commercial tenants. Here are some gems from Dan Egan (Vornado), Jonathan Flaherty (Tishman Speyer), Emily Kildow (Taconic), and Dana Schneider (JLL).

  1. There’s a right way, a wrong way, and the New York way. National and international firms need to be schooled on the NYC way of doing things. Said Flaherty, “Tenants often apply national, if not international, guidelines to their space, so sometimes they need a little background on how NYC works, preferably from their consultant and not from us. An example might be the carting industry[1], but there are many other fun aspects of this particular real estate market.”
  2. Don’t ask brokers to lead the way. According to Schneider, “Brokers are driven by what their clients are asking for and if they are not asked for it they want raise it,” period. And some clients tell her “don’t be a greenie.”

Dana Schneider and Jonathan Flaherty at the Urban Green Council Conference

  1. But while brokers give little hope, appraisers may. Schneider said “While there are a lot of questions about how to isolate the benefits of energy efficiency, it’s clear in general that green-rated buildings are overall better performers economically. And that’s what leasing departments look for.” Egan agreed: “It’s clear every operational expense savings has a clear translation to value. This could inspire wider activity in energy efficiency.” There’s a downside, though; Schneider said “Big companies have separate buckets for capital expense and operating expense, so sometimes paybacks on energy savings don’t matter because operational savings don’t count towards capital expenses.” Flaherty said “Thus we have leases that doesn’t even look at long term operating costs. It makes no sense but that’s how it is.”
  2. This isn’t your grandfather’s lease. Wait, yes it is! No one likes to rewrite an existing lease, so the preference is to amend existing agreements, no matter how ancient. “Some leases are still on parchment,” Flaherty joked. This gives landlords very little clout over tenants to encourage improvements like moving away from legacy systems to more efficient central services. Kildow noted that in Google’s building at 111 Eighth Avenue, “we have no lever to even require old tenants to use our chilled water system.”
  3. Sometimes the left hand (operations) doesn’t know what the right hand (design and construction) is doing. “At occupancy, tenants bring in an entirely new team. The people who show up in the space are people you’ve never seen during design and construction, so there’s not a lot of continuity. Unless there’s a consultant that bridges the gap, everything is chopped up into different pieces and operations staff are unaware of conversations that went before,” said Flaherty. The training gap is difficult to bridge, Kildow said, partially because “LEED Commissioning requires only a short training and doesn’t go into enough details. It’s basically just a walkthrough.”
  4. Green leases are growing, but under the radar. Historically, split incentives (where tenant energy bills benefit from landlord improvements or vice versa) have hindered both parties from equally cheering on efficient retrofits. But Flaherty said “A whole bunch of things about how owners recover capital [from building improvements that lower tenant energy bills] have been well addressed. If we spend money on an energy savings basis we will be able to recoup it on an energy savings basis, and not on a GAAP[2] basis or anything else.” Schneider sees further improvements coming: “Investor-owners are developing green lease templates that solve the split incentive issue. They can pass through costs to tenants that are geared to investments in the asset, something that’s largely been there before. But it’s more institutional than driven by tenant.”
  5. Don’t hold your breath for Tenant Star. Under 2015 federal legislation, Tenant Star is planned to give recognition to tenants just as Energy Star does for whole buildings. But Flaherty said it will take time. “For a whole property, energy tracking is easy. But to create Tenant Star, the EPA needs to collect individual tenant data, which is difficult, because there are so many ways things can end up on either side of the meter. Based building design and a lot of other things, air delivery, water delivery, fan use, and many other things could be either the tenant or the base building.” Flaherty said this will take a lot of time to get right, but in in the end “Owners will love it; it will spark a great conversation. And I’m confident that we will get there, but will take a while.” Kildow said “Tenant Star can foster competition that will spark corporate responsibility departments into action.” And Egan noted that “NYC will be primed to participate when it’s ready; we’ll have submetering in place by 2025. If we don’t already have our own way of rating tenants by then.”
  6. Tenants can benefit from demand response programs. Schneider said “Every large building should participate; you’re saving our grid. We have discussed letting tenants participate and sharing incentive, but it’s not common.” Kildow said to have this work, “tenants need both controls and education. If data centers own their own generators they can participate, so it’s based on financial value add for them. But never tell tenants you’re raising the temperature two degrees in summer. They’ll never notice unless you tell them, but if you do, they will all say they are hot!” Flaherty argued “This does help all tenants because the demand response revenue check goes back into expense pool and lowers everyone’s costs. But it’s dangerous to risk tenant comfort, because the rent is worth a lot more than the demand response checks!”
  7. Submetering can be good, bad, or ugly. Flaherty said “Submetering is half the battle, because tenants know what they are responsible for. But without showing some granularity over time, any savings will get lost in random or seasonal variation. It doesn’t have to be 15-minute interval metering, but it has to be less than a month. Otherwise, there’s no way to know if you’re successful, which means no motivation for the tenant. And at this point, if you’re not submetered in NYC, you should get a new broker. I can guarantee that if you have over 5,000 sf, you’re not getting a good deal.” Large tenants use submeters, small tenants don’t, and some tenants still abhor the whole process. “In tenancies over about 100,000 sf, there is going to be a dedicated facility manager. They will log in and look at their data. In smaller offices with an office manager, the number of logins quickly goes to zero. They’d rather call than log in,” said Flaherty. Egan suspects even worse: an overhaul of submetering software found a tenant had set the password on their energy use portal to “ihatethis”. For many tenants submeters are “just a number they have to pay, not something to manage,” said Kildow.

Dana Schneider and Jonathan Flaherty at the Urban Green Council Conference

  1. Three things matter most in fitout decisions: budget, budget, and budget. Once an office has been chosen, Schneider said sustainability decisions are “ultimately made based on budget. Everything is negotiable, but only if it’s brought up at the right.” Kildow agreed: “Good decisions are made by the design team, but when it goes to the lawyers and those controlling the money, things get crossed out.” Adds Flaherty, “At $85-90 a square foot, every day of construction delay is worth a ridiculous amount of money. Forget adding a couple of days to the schedule after construction to vent VOCs. Projects will do anything possible to meet their schedule due to amount of money at stake.”
  2. Lawyers are standing in the way of better air quality. In China, Tishman Speyer buildings compete in the market on indoor air quality and building health, said Flaherty. But not here. Why not? “In China you can talk about this without immediately being sued by everybody.”[3] Nevertheless, a lot is outside landlord control: “VOCs are probably from tenant furniture, and one outgassing sofa can make all that air quality money wasted.” Kildow is already working on this with Google, including their launch of a new “Portico” tool for material selection that will be freely available to building professionals. On the other hand, she said there’s a downside: “Sometimes there’s insane filtration of indoor air—maybe too much, because it increases energy usage without a clear benefit.” But the panelists agreed that callout rates are higher in buildings with worse air quality so it’s worth looking into. Schneider said “return on investment is tough to calculate because the data on health care and callout rates may be confidential (health care and callout rate, for example). Flaherty said having an “agreed upon framework to measure” these benefits would help.
  3. There’s a time and place for regulation. Schneider noted there are many things that could theoretically be required of tenants to improve sustainability. “But it needs to be positive and simple, not just another law. In the end, it will save them money and make them happier.” Flaherty noted “It’s a little tricky because the city can’t generally directly interact with tenants, other than through building permits. So the city tries to get to tenants through landlords because it’s the easy way to do it. They know who the landlords are, but figuring out the tenants in a building is hard—they don’t have that information.”

[1] With its historical connections to organized crime and consequent heavy regulation, hiring someone to pick up your trash can be an eye-opening experience in NYC.

[2] GAAP are “General Accepted Accounting Principles” – the fundamentals of how bookkeepers, accountants, and finance managers structure their work. Shouldn’t the methods of calculating energy efficiency paybacks be generally accepted?

[3] Presumably on the basis of health or productivity claims that may be difficult to prove in an individual instance.