real estate

Saturday, December 15, 2007

REITs Prepared for High Energy Prices

REITs aren't waiting for an oil crunch to take steps to protect themselves from the near 10-year high of oil prices, especially as Old Man Winter casts his chill upon much of the country. To ensure the continued efficiency of their properties during these cold months—despite higher energy bills—several REITs and REOCs have made energy-efficient changes to many of their properties to protect them from the rising costs of energy.

In a report released last September, Lawrence D. Raiman, an analyst at Donaldson, Lufkin & Jenrette, Inc., pointed out that individual REIT sectors will be impacted differently. "Retail REITs are more exposed to rising energy prices than most others because high costs take hard dollars out of the pockets of consumers, thereby hurting retail sales growth," he says. "Office and apartment REITs will carry average exposure, and given the triple-net lease nature to the industrial sector, industrial REITs will be the least exposed. So look there first if you are looking for a good place to hide."

Investment bank UBS Warburg also released a REIT report last September. The firm concluded that industrial, office, mall and strip REITs will have minimal exposure to rising energy costs, while multifamily and manufactured housing REITs will have more exposure, albeit still modest. But UBS predicted that there is no expected duration of high energy prices, but there could be a prolonged period of high-energy costs.

In late 1999, NAREIT entered into an agreement with the United States Environmental Protection Agency (EPA) to educate its members about the EPA's Energy Star Program, which encourages REITs to use energy efficient technologies to lower operating costs. The goal of the program is to make REITs more competitive, profitable and valuable, which can also improve shareholder value.

"REITs are increasing their focus on energy-efficient properties, including support of the Energy Star Program," said Steve Wechsler, president and CEO of NAREIT. "It's indicative of sound and efficient-energy use practices."

REITs' ability to shift—or pass through—any increase in utility costs directly through to the tenant will work in their favor. "The increase in energy prices will have an impact on all sectors of the economy," adds Wechsler, "but REITs generally structure their leases such that increased costs are borne by tenants, so in many instances the impact will be moderated."

"REITs are very well insulated because the way the leases are structured," says Richard Paoli, senior analyst at UBS.

Stuart Brodsky, national program manager of the EPA's Commercial Real Estate Sector, points out there is an advantage for a REIT to engage in energy-efficiency spending. "We have calculated that a dollar invested in an energy efficiency upgrade can result in a two-to-three dollar increase in a building's assessed value," he says. "At the same time, these upgrades establish a good relationship between tenant and landlord, and position the landlord well when it comes time for lease renewal."

According to the EPA, utility costs make up nearly one-third of a typical office building's operating expenses. A thirty-percent savings in energy costs can translate into a six percent increase in net operating income. "Energy efficiency is a low-risk investment for a REIT with immediate returns because the investment can be shared with tenants," Brodsky adds.

The ENERGY STAR program provides participating REITs training to turn energy savings into financial value. This includes offering a software tool called Portfolio Manager to help a REIT property monitor its energy usage and efficiency.

"It's a web-based scale that measures the energy consumption of an individual building based on weather, size and occupancy density and operating hours," says Brodsky. "The measurement is laid out in a statement of energy performance along with information about the changes in cash flows represented by this increased energy efficiency."

There are 26 REITs participating in the ENERGY STAR program that are implementing energy improvements at their properties.

"Our new office development projects are designed with energy-efficient mechanical and lighting systems with mechanical controls with electrical usage monitoring capability," explains George Smith, Director of Operations at Highwoods Properties in Raleigh, NC. "Highwoods is using Avista Advantage utility payable service for consolidated billing, financial reporting and cost and use analysis on all electrical accounts that allows quick analysis for any building or group of buildings and furnishes load requirement information that will be need in a deregulated environment."

Smith explains that Highwoods is targeting projects with a period of under three years for its existing building energy retrofits. "Each property is being evaluated for operating hours, mechanical controls setup, proper utility rate schedule and equipment operation. We have completed preliminary energy audits to create a short list of vendors that match our objectives. Most leases are structured to allow pass-through of energy costs, but our focus is on furnishing a quality building and controlling the total occupancy cost to the tenant."

Banyan Strategic Realty Trust in Chicago is also involved in energy-efficiency. "Most of our properties have had lighting retrofits," said Chip George, asset manager at Banyan. "We replaced lighting ballasts with energy-efficient bulbs. We also have computer-controlled systems that turn on heat and lights, as well as more insulation and new rooftop units at older properties."

Other REITs have recently signed on with the program, such as Bedford Property Investors, Inc. in Lafayette, CA. "We want to become more sophisticated in our understanding of factors that bear on energy-efficiency," said Bedford executive vice president and COO Jim Moore.

Moore stresses the importance of REIT involvement in energy-efficiency. "As the markets in which we operate become increasingly mature, we are approaching a point where the rate of top-line growth will slow. To accommodate this, we need to look closely at all aspects of property operations and begin to focus more closely on the cost side. Energy costs are a major contributor."

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source: nareit.com

Rising cost of energy mobilizes industry

Faced with surging utility costs, a power shortage and an uncertain outlook, real estate owners, operators and tenants are working harder than ever to manage energy judiciously.

Long taken for granted by tenants as a basic service provided by owners, energy has been transformed from a budget line item to a top management and environmental concern. This past year, the issue reached crisis proportions in California, as brownouts threatened the economic vitality of the region.

“Energy, regardless of the current crisis, represents 20% to 25% of the cost of operating a typical building, so it's always been a serious focus,” said Rob Bagguley, president of property and facilities management for Chicago-based Transwestern Commercial Services. “We're not dealing with low energy supply just in California, but across the country. We're looking at conserving energy expenses and curbing use nationwide.”

Spurring this effort is a U.S. Department of Energy study that shows as much as 50% of the energy consumed by businesses is wasted through the use of inefficient, obsolete technology. At the same time, a simple amenity such as lighting, which most users take for granted, can account for up to 40% of all electrical expenses for a commercial property.

“Experts predict rising energy rates over the next three to five years,” said Joseph Howley, manager of environmental marketing for Cleveland-based GE Lighting. “Once electricity rates increase, they tend to stay there. We really don't see electricity rates going down that much.”

For building owners and tenants, energy isn't just the crisis du jour. Experts say energy problems will continue indefinitely. While the strong U.S. economy may be taking a breather now, history shows that it will heat up again. When businesses gear up for the good times, energy use spikes and prices soar. “We're going to have continual energy demand because of the American quality of life and economic development,” Bagguley said. “It's going to take awhile for utility companies to ramp up new generating plants.”
A future energy partnership

According to Bagguley, the cost of energy is a grave concern to both tenants and landlords. He suggests that the two unite to reduce energy consumption as a benefit to all. “Tenants should be concerned about energy conservation, and work in concert with building owners, because they pay increases in expenses or their net share of the costs,” Bagguley advised.

Many investment and management firms already are focusing on energy efficiency to differentiate themselves in the marketplace. Stuart Brodsky, commercial real estate program manager for the U.S. Environmental Protection Agency's Energy Star program, said owners and managers of more than 2.5 billion sq. ft. of office space participate in Energy Star, the registered name for a free Internet benchmarking tool that provides a national rating system for energy performance of properties.

Buildings receive a score from 1 to 100. A rating of 75 or higher indicates a structure is in the top 25% of energy-efficient buildings nationwide and qualifies the property for the Energy Star label.

Brodsky said the label is a way for owners to show tenants, or investment partners, their commitment to controlling energy costs and to link better management practices with a higher asset value. In addition to benchmarking, Energy Star's QuikScope software tool is being used to forecast the financial returns of energy-efficient improvements in multi-tenant properties, where both owner and tenant share in savings and costs of upgrades, Brodsky said.

Brodsky added that Houston-based Hines, Dallas-based Harwood Management Services and Los Angeles-based Arden Realty Trust have received national recognition for their commitment and success in making properties energy efficient. Many of their properties have received the Energy Star label. “These companies were early leaders, and much of the industry is now aggressively benchmarking their properties and looking at the financial value of energy efficiency,” Brodsky said.

Other firms participating in the Energy Star program range from private developers and REITs to pension funds and fund managers such as New York-based Lend Lease Real Estate Investments, Brodsky said. “These companies recognize that the energy performance of an office building can have a significant impact on net operating income, marketability in leasing and sales, funds from operations (FFO) and ultimately asset value,” Brodsky added. “Energy Star tools help owners articulate that value.”
Controlling costs

When the largest controllable line item in the operating budget for facilities is the cost of energy, owners and operators want to react, noted Bob Moyer, senior vice president of Trammell Crow Global Services in Stamford, Conn. Energy consumption depends on use, he said.

An office facility's energy costs are typically 20% to 25% of all operating costs, while a health care facility's energy costs can reach 35%. At a manufacturing or industrial facility, energy costs could even be as high as 50%. “It depends on the nature of the business, but whatever the use of the building, the fact is that energy costs have not gone down,” Moyer said.

Most property managers and building owners want to minimize the amount of energy consumed by customers by shifting the hours they use kilowatts to the periods when rates are the least expensive, Moyer continued. He noted that energy is a commodity that responds to demand. For example, the cost of electricity on an August afternoon is much higher than the cost of electricity at 2 a.m. on that same August day.

“The way to reduce costs is to first look at your operation and maintenance procedures and make changes to those that result in reduced consumption,” Moyer said. That might include changing the time the air-conditioning system turns on, or shutting off equipment during peak times.

The goal also is to improve the efficiency of equipment. Of course, an air-conditioning unit from the 1970s is less efficient than a newer model, so upgrading the infrastructure may produce savings, Moyer said. “There is also the possibility of influencing end users and making them aware of practices that waste energy, such as leaving computers turned on overnight or not shutting off lights,” Moyer said. “Many say people ought to be responsible and should not have to be reminded, but it doesn't work that way.”
Knowledge is power

Nearly every real estate owner is concerned about rising energy costs and wants to control them, said R. Scott Helm, president of American Powernet, an independent energy management company based in Wyomissing, Pa. “There are two primary ways to control energy costs,” explained Helm. “One is to reduce the number of units you use, and the second is to reduce the cost per unit. It's typically easier to address the supply side first because it doesn't involve any capital costs. You want to reduce your cost per unit as much as you can, or structure your unit cost to reflect what the true wholesale market costs are at that time.”

Obtaining information about power usage in a building is the first key, Helm believes. “As more states deregulate and more utilities provide pricing that reflects true wholesale costs, it's important that companies become more familiar with their load profiles and their relationship to hourly wholesale prices,” he said.

According to Helm, installing a meter to track hourly data could provide suppliers with important information on energy usage. Demand-side strategies, such as installing lighting retrofits and load shedding (temporarily dropping electric demand during peak usage or high-cost periods), or supply-side strategies, such as shopping for power or investing in on-site generators, could be used to manage facilities at maximum efficiency and minimum cost, Helm said.
Alternative measures

There also are other ways operators can boost the bottom line. A utility invoice audit is one of the most important steps a building owner can take to reduce utility costs, said John Maliff, vice president of business development at Boston-based Unicco Service Co., a provider of integrated facility services. “We audit bills from utilities that are frequently incorrect because the billing company simply did not use the appropriate tariff (rates),” Maliff said.

Maliff added that he recently conducted an audit for a logistics company that enabled the firm to relamp an entire warehouse with a credit received from the utility company, which had been inaccurately computing the company's bill.

According to Maliff, companies such as Unicco also can install monitoring devices that inform owners on a real-time basis how electricity is being consumed, whether it is through air-conditioning, lighting or refrigeration, and also when peak demand occurs during the course of a given operating period. In addition, Maliff added, owners should make sure their equipment is properly maintained.

“Dirty filters can raise the amperage draw considerably on compressors, and that can increase energy consumption,” Maliff said. Compressors that are not lubricated properly increase consumption because of the friction between rolling elements. More energy is required to generate the same amount of cubic feet of air than in a properly lubricated compressor.
A real-life example

Companies have different ways to cope with rising energy costs. Some hotel chains add an energy surcharge to guests' bills, said Robert Winchester, president and COO of Waterford Hotel Group, Waterford, Conn. “But you can make a case for surcharges on everything. We're of the view that you should build such costs into your rate and still be able to make a profit,” he said.

Early on, Waterford, which operates 26 hotels in 10 states, created an energy management plan, or an “audit check list,” for general managers and the heads of engineering departments. Winchester said the checklist enables managers to get into the habit of using common sense when it comes to energy conservation. Making sure automatic timers are calibrated properly is but one example.

“Our goal is to keep our hand on every button all the time. We do that by bringing energy conservation to the forefront of what the hotel staff does every day. It produces results,” Winchester said.

Owners, managers and investors should press for energy conservation as much as possible because it saves money, said Howley of GE Lighting.

“There is a lot of new technology available today with lighting systems that can produce a good financial payback for building owners or operators,” explained Howley. “When electric rates were lower, it may not have made sense to do a building upgrade. But the newer lighting systems can save even more money, and electric rates tend to be higher this year.”

Still, building owners and operators shouldn't try to reduce lighting costs without expert guidance.

“The best advice is to get the experts in early,” said Chris Forti, market development manager at GE Lighting. “A supermarket that has lots of foot traffic may take out every other light in hopes of saving energy. But is that wise?” Forti asked. “Sometimes people resort to panic-conservation measures. That may have a negative effect on productivity and sales, and could result in increased worker errors, and that ends up costing the company more money.”
Considering hybrid gas/electric systems

In hopes of reining in energy costs, some building owners and operators are considering hybrid gas/electric cooling, heat and power for commercial buildings. Such systems can provide operators of commercial buildings increased control over energy costs, said Tony Occhionero, executive director for the American Gas Cooling Center in Washington, D.C. The systems reduce summer peak electrical usage, provide an alternative energy supply and operator flexibility.

“Owners of large buildings might want to put in electric and gas air-conditioning, say half and half at a 40-60 ratio,” he said. “It's an opportunity to control energy costs and operate the building more efficiently.”

In addition, Occhionero said, some owners might consider installing microturbines to generate a portion of electricity in-house. “The goal is to reduce that peak demand charge, which can range from 50% to 500% higher than the usage rate [at non-peak times],” Occhionero said. Microturbines, or other small generators, make use of waste heat in heating or cooling systems.

“We're not suggesting customers get into the energy business and do it all at the site. We're saying use the best of both worlds — manage costs by diversifying,” Occhionero said. He noted that the Federal Regulatory Energy Commission (FERC) building in Washington, D.C., installed an HVAC system that generates energy using half gas, half electricity.

Now that the summer is over and California appears to be enjoying a temporary reprieve from the energy crunch, the concern among experts is that owners, operators and tenants might let their guard down.

“A number of companies are saying, ‘Crisis, what energy crisis?’ now that we have made it though summer fairly unscathed,” said Gary Graham, vice president of energy advisory services at Jones Lang LaSalle in Chicago. “But the real issue they haven't addressed is that the underlying national pinnings that caused the crisis are still there, and it may take three to five years to get it resolved for most marketplaces.”

In many markets, demand exceeds supply or is coming close to it, Graham continued. How quickly the economy recovers will affect the future balance of supply and demand. The conventional wisdom is that the current softness in the economy has weakened demand for energy.

Ultimately, the nation's energy infrastructure needs to be expanded and upgraded. Additional gas-fired energy plants will tax the gas distribution network, said Graham.
A grim outlook

So what about the future? Veteran developer Dan Packard, founder and certified property manager of Denver-based PowerSpring, an Internet-based energy information application, is pessimistic. He believes property managers are too passive in seeking solutions for energy costs.

Packard cites California's energy crisis as an example. “The West Coast energy issue has been beaten to death,” said Packard. “The expression there by property managers today is that Gov. Gray Davis has stepped in and solved the problem.” Many Americans incorrectly believe the energy crisis is over because the issue currently isn't heavily covered by the media, Packard added.

Analysts say property managers across the country have not begun to implement energy solutions for their portfolios to stop the decline in FFO and net operating income attributable to energy costs. “At the present pace, it will be many years before they recognize the needs of their tenants,” Packard said.

“Over this period, the best of tenants [those willing to pay the highest rents] will have moved on to other space that offers extensive menus of value-added services, including many energy options,” concluded Packard. “The property manager who is slow to react will be out of a job.”
Some enlightening energy management tips

Energy costs don't always have to rise. Experts say they actually can decrease, if an efficient energy system is put in place. Here are some suggestions from Rob Bagguley, president of property and facilities management at Chicago-based Transwestern Commercial Services, and others to energize the thinking of a real estate owner, operator or manager:

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Chill out. Install energy management systems that better control equipment, add efficiency and save power. Air conditioners, for instance, gobble up huge amounts of electricity.

Most traditional commercial cooling systems, called chillers, operate during the day when rates are highest. Some property managers have sought to cut costs and conserve energy by running chiller systems during off-peak hours.
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Think differently. Does cleaning have to be done in the dead of night with different crews on different floors? Bagguley urges building owners to coordinate cleaning staffs. “It's a simple concept,” he explained. “Assemble crews on one floor, complete that floor and then have them move on to another. You'll finish a floor in a shorter time frame.”
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Go back to the basics. For example, if outdoor lighting is automated, use a digital clock that has more accurate timing and reflects changes in daylight-saving time to control the lighting. Turn lights on only when needed and off when they are not in use. Consider motion monitors that trigger the on switch when a person is in the office.
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Check out a building's equipment. Retrofit air conditioners with energy-efficient machines. Determine when power peaks. If owners or property managers can lower that peak demand, they will significantly affect their rate structure. Stagger times for equipment start-up and shutdown. Instead of using energy in a bell-shaped curve, where energy use starts out flat and then climbs rapidly before falling again, monitor energy usage.
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Consider alternate sources of power. Rather than obtaining 100% of power from a grid, consider using an on-site generator to control peak costs that could provide 25% to 50% of the energy needed at the site. Not only will such a system reduce costs, but it also could help in an emergency. Owners and operators also could opt for a hybrid system that combines electricity and gas.
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Take advantage of programs offered by utilities and energy manufacturers. In California and other states, energy companies offer rebate programs to entice owners to replace fluorescent light bulbs with lower-wattage bulbs, thereby creating significant savings.

Lighting manufacturers typically offer financing, and the payback can be realized in less than two years. At the same time, tenants see the benefits of their conservation efforts.
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Get everyone involved with the program. The age of tenants is changing. Generation X is more concerned about energy conservation. Seek to make everyone more conservation-conscious not only from an economic viewpoint, but also from an environmental one. Work with tenants. Everybody loves a great view, but educate tenants to use mini-blinds to reflect heat. Ask tenants to be cognizant of energy usage.
— Mike Sheridan

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source: industryclick.com

Sustainability Investment News

SocialFunds.com -- Yesterday, representatives from the private sector, academia, and government gathered at a symposium to discuss how companies and the financial markets value sustainability, and how companies are benefiting from their sustainability initiatives. The event was organized by Fairleigh Dickinson University's Corporate Communication Institute and was entitled "Symposium on Sustainability - Profiles in Leadership." It was held at the New York City offices of the investment firm Neuberger Berman.

The invited panel, along with the moderator and audience, grappled with the issue of how sustainability is valued in the market. Symposium participants generally defined sustainability as a company's ability to achieve its business goals and increase long-term shareowner value by integrating economic, environmental and social opportunities into its business strategies.

Speakers said there is evidence that sustainability policies can impact a company's bottom line, and that there are some investors that specifically look at sustainability issues. Nevertheless, most financial analysts still are not viewing sustainability criteria as important, and consequently most companies do not see sustainability as a priority issue.

Ingrid Dyott, a Vice President at Neuberger Berman (ticker: NEU), offered some reasons why analysts may be reluctant to consider a company's sustainability performance as relevant to their assessments.

"Efficient market theory says sustainability is already in the price of the stock," said Ms. Dyott. "And the long-term nature of sustainability conflicts with analysts' concern with the short-term investment horizon."

Many symposium participants agreed that analysts seem to assume that all well-managed companies are already implementing best practices with regard to such issues as the environment, employee relations, and community relations. The also agreed that analysts tend to be interested in these issues only as they affect the next financial quarter.

But at the same time, it was agreed that a company's market value is based on its future prospects. This is especially true for companies such as pharmaceutical manufacturers, who make products that take years to develop. These companies are trying to achieve growth year after year, but they know that selling the long-term message to analysts can be difficult. Similarly, sustainability in terms of social and environmental criteria is also difficult to sell to analysts.

Companies can realize concrete benefits from implementing sustainability policies, as some of the private sector representatives affirmed. Diane Morefield, Senior Vice President of Investor Relations at Equity Office Properties Trust (EOP), explained that her company's thorough analysis of energy use in its buildings enabled the company to realize more savings than expected. For example, a simple innovation of having cleaning crews work in teams on the same floor, instead of being dispersed in the building, cut after-hours energy use from four hours to one and a half hours.

Dr. Andrew King, Assistant Professor of Management and Operations Management at New York University's Stern School of Business, said that the positive results of sustainability initiatives often exceed company expectations. He attributes these better-than-expected results to what he called "innovation benefits." By taking a hard look at their sustainability-related business practices, companies often find innovations that lead to savings or benefits that were previously unknown or not thought possible.

Representatives of DuPont and Novartis both talked about how a commitment to sustainability facilitated the trust of society in the company's business practices. Ann Gualtieri, DuPont's Vice President of Investor Relations, called it DuPont's "freedom to operate," and Novartis's Executive Director of Health, Safety and Environment Jim Thomas called it "freedom to innovate."

Sustainability is a growing concern of various stakeholders in corporate operations, including consumers, nonprofit groups, and the government. Representatives from the U.S. Environmental Protection Agency discussed how their Energy Star program was helping some companies see the value in embracing sustainable practices, resulting in a win for the company and a win for the public good.

Dr. Michael Goodman, Director of the Corporate Communication Institute and moderator of the symposium, said that the involvement of various stakeholders necessitated that companies view sustainability as intertwined with corporate communications. He noted that Credit Suisse, Switzerland's second largest banking organization, has incorporated its sustainability operations within its public relations department.

When asked about how the events of September 11th would change perspectives on sustainability, most panelists said that companies need to look at the root causes of why the attacks happened. And further, companies not only had an interest, but a role in promoting socio-political stability over the long term. That role would not be unilateral, however; it would involve working with other companies, governments and international organizations on a cooperative basis.

While the value of sustainability may continue to be lost in the markets for the near future, the panelists agreed that U.S. corporate interest in sustainability is not a flash in the pan. It will continue to grow, and that is good news for social investors.

"

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development, Internet programming,

real estate web design and hosting needs. Our service includes domain name
registration and real estate web design. Real Estate Designers provides the
complete solution including design, application development and marketing.

source: socialfunds.com

Special Report: Become a Green Super Hero

Ever wanted to achieve super hero status? Everybody has sometime. Here’s how you can save the planet for future generations, make your facility a greener place to work, and put a smile on your CFO’s face. The best part – wearing the tights and a cape while doing it – is optional.

The conundrum aspiring super heroes face is: “How can I stop global warming when most of my time is spent finding ways to reduce costs?” The key to solving this perplexing equation is buried at the bottom of page 48 in the Environmental Protection Agency’s (EPA’s) EnergyStar® and Other Voluntary Programs 2001 Annual Report.

There, the EPA states that in 2000, a total of 1.64 pounds of carbon dioxide (CO2) was emitted into the atmosphere for every kilowatt-hour of electric generation. The EPA calculates that continuing investments in energy efficiency will reduce the marginal emission rate over time. In 2005, it drops to 1.20 lbs. CO2/kWh.

In 2010, it drops to 1.09 lbs. CO2/kWh. In short, a domino effect occurs. You save money by reducing energy consumption, which reduces CO2 emissions, which helps reduce global warming.

The Greenhouse Effect

We know that the greenhouse effect is real. Without the heat-trapping effect of water vapor, CO2, methane, and other naturally occurring greenhouse gases, our planet would be a cold, lifeless rock. As part of nature’s carbon cycle, some of these emissions are captured and stored in the oceans, forests, and agricultural land.

Over the past 200 years, the concentration of CO2 in the atmosphere has risen from 280 parts per million to a current level of 375 parts per million. It is expected to increase to 550 parts per million by 2050. This increase is the result of mankind’s use of fossil fuels, and, to a lesser degree, deforestation and other land-use changes. Consequently, both surface temperatures and sea levels have been rising for some time.

Scientists had assumed trees and plants would offset much of the global warming to come. This theory is based on two facts: Plants need carbon dioxide to grow, and experiments in greenhouses have shown that plants grow better with extra carbon dioxide in the air. This concept was supported by the phenomenon that CO2 emissions were growing faster than the actual level of CO2 in the atmosphere.

However, studies conducted by Duke University and others have concluded that existing forests are not going to solve the problem of rising carbon dioxide. While trees were growing faster, they depleted other nutrients, like nitrogen, from the soil. This accelerated growth accounts for 30 percent of the changes in carbon being stored by plants and soil in the country. Most of the carbon absorption comes from an overlooked but important fact – more trees. In the eastern United States, forests are re-growing on formerly cleared land. In the western states, aggressive fighting of forest fires has allowed forests to grow thicker than in the past.

Planting more trees is a good idea, especially in urban areas. They offer shade, help control rainwater run-off, absorb noise, and generally make cities a better place to live. That’s in addition to their ability to absorb CO2. An average, middle-aged southern pine will absorb about 100 pounds of CO2 during a year, according to William H. Schlesinger, dean of the Nicholas School of the Environment and Earth Sciences at Duke University and author of Forest Ecosystems. Of that 100 pounds, 34 pounds of CO2 will stay out of the atmosphere.

While planting trees is wonderful, it doesn’t get us to a level of net zero CO2 emission. This brings us back to making your CFO happy by reducing costs. The easiest and most efficient way to reduce energy costs is to eliminate unnecessary use, which in turn reduces CO2 emissions.

The average energy consumption for office buildings over 5,000 square feet is 19.6 kWh/sq. ft./yr., according to the EPA. Consumption drops to 12 kWh/sq. ft./yr. or less for the almost 500 office buildings that have qualified for the EnergyStar label. That’s a reduction of 40 percent!

Let’s put this in financial terms. Using data from the Building Owners and Managers Association (BOMA) International’s 2002 Experience Exchange Report, the average downtown private-sector office building comprises 334,840 square feet. Using an electricity cost of $0.08 per kWh, that’s an annual savings of $205,407 ($0.61/sq. ft.). Better yet, it increases the building’s value by $2.5 million at an 8.25-percent capitalization rate.

From the global warming perspective, this translates into an annual reduction of 2,086 tons of CO2 emissions, or the net CO2 uptake of 122,748 southern pine trees.

Best Strategies to Reduce Electric Consumption

While significant strides have been made in energy conservation, the EPA’s EnergyStar program has demonstrated one can still find energy savings. There are two basic strategies that can be employed to reduce electricity consumption:

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Better control of building systems.
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Upgrade building systems with more efficient components.

Operating any building effectively and efficiently is difficult because of the complexity of buildings. Determining the power requirements for lighting, HVAC, and receptacle loads is a moving target based on changing factors such as weather, space use, and work schedules. The process begins with an audit to model usage and pinpoint waste. Remember, no one has found a more effective way of reducing energy costs than eliminating unneeded kWh from their electric bill.

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source: buildings.com

Energy: Balance Sheets Get A Charge from Conservation

Rising energy costs and a heightened environmental awareness have forced owners of office buildings to scrutinize their energy consumption like never before. By implementing operational changes, building owners can achieve annual energy savings of 40 cents per sq. ft., industry experts say. Capital improvements can boost the total savings to as much as $1 per sq. ft. In a 100,000 sq. ft. building, for example, the investment can shave $40,000 to $100,000 off annual costs.

Arden Realty, a Los Angeles-based REIT, is keenly aware of the savings potential. Over the last six years the publicly traded firm, which owns 19 million sq. ft. of office buildings in Southern California, has spent $25 million to increase energy efficiency across its portfolio.

It generally takes five years to recoup the cost of the investment, says Scott Lyle, president of next>edge, a Los Angeles-based energy management company and Arden subsidiary. Depending on the extent of a particular building upgrade, Lyle adds that the internal rate of return on energy-saving investments can range between 20% and 40% annually.

At 8383 Wilshire Blvd. in Los Angeles, Arden's payback took less than two years. The REIT spent $1.8 million to revamp the 417,463 sq. ft. office building built in 1971. Improvements included an energy management system — software that controls all electronic devices — the replacement of low-efficiency bulbs and ballasts with more efficient ones, and new chillers. When completed in 2001, the retrofit helped reduce Arden's electrical costs by nearly $1 per sq. ft.

Such dramatic cost savings are not unusual for buildings 25 years or older that undergo a building systems overhaul, Lyle says. Lower operating costs equal higher net operating income, and thus higher net asset value. Building owners can pocket the savings going forward, then pocket more when they sell. Or, when the markets are soft, owners who have invested in efficiency can undercut competitors on rent. “However you look at it,” Lyle says, “you have a positive impact that is coming out as increased cash flow.”
Growing Awareness

While Arden and other large office building owners such as Houston-based Hines led the office sector's efforts to become energy efficient, the sharp rise in prices and shocks such as the California energy crisis of 2001 have made energy awareness a more prominent issue throughout the commercial real estate industry, Lyle says. But the vast majority of office building owners lack energy-saving strategies, he is quick to point out.

Stuart Brodsky, national manager of commercial property markets for the Environmental Protection Agency's Energy Star building label program, says the industry collectively is just beginning to understand the potential for savings. “For a long time, the industry didn't have a standard way of measuring what is, and what isn't, efficient,” says Brodsky.

In late 1999, the EPA introduced the Energy Star building label program, an initiative to make commercial buildings more energy efficient. The program centers on Energy Star's “Portfolio Manager” tool, which enables owners to assess building efficiency.

Portfolio Manager assesses a building's energy use, occupancy, space use and other information and then ranks the building on a scale of 1 to 100 on how it performs compared with similar structures. Variables such as weather and location are taken into account to standardize the comparisons. For example, a ranking of 40 means that 60% of similar buildings are more energy efficient. A ranking of 75, which puts a structure in the top 25% of efficient buildings, earns a building the Energy Star label.

REITs were the first to embrace the Energy Star's building program, but recently pension funds and advisors have become active — as a way to enhance their returns. Late last year, the EPA and Energy Star recognized Lend Lease Real Estate Investments and TIAA-CREF for their involvement in the building label program. The EPA estimates that strategies implemented by the two investing giants have reduced energy costs by about $14 million on 35 million sq. ft. of property annually.

Since 1999, the Energy Star program has grown from 1 billion sq. ft. of office space to more than to more than 4 billion sq. ft., according to Brodsky. He anticipates about 250 million sq. ft. annually will be added to the program over the next few years.
Incentives

Still, only about one quarter of all office structures in the U.S. will be able to achieve a ranking of 75 or higher, Brodsky says. That, he adds, should not deter office building owners from pursuing power-saving programs.

Any building can benefit from the Portfolio Manager program. It is free and can be found on Energy Star's Web site (www.energystar.gov). To use it, users don't have to become Energy Star partners. The idea is to persuade building owners to make simple operational changes to improve efficiency, such as making sure the cleaning crew turns off the lights, says Jim D'Orazio, senior vice president of the facilities resource group for Grubb & Ellis in Chicago. “We're not necessarily looking for (Energy Star) certification,” he says, “but this is a no-cost thing, so we're saying enter your data and see where you stand.”

So, what are the obstacles to greater energy efficiency? While owners will gladly make operational changes to improve energy efficiency, short-term investors generally won't invest capital in new lights, chillers or other building systems, say industrial professionals.

That's especially true in markets where low utility costs mean that any payback on the investment won't be realized for five years, says Roy Cook, vice president of engineering and construction for Transwestern Commercial Services, a full-service real estate firm that manages more than 100 million sq. ft. On the other hand, Cook says that building owners in California — home of sticker-shocked energy buyers — may recoup the same investment in two years.
Do It Your Way

Chicago-based Equity Office Properties hasn't been shy about spending money to make its portfolio more efficient. The REIT saves some $30 million per year in operating costs thanks to programs that began in the 1990s, according to Frank Frankini, senior vice president of development and energy operations.

Now, Equity Office has taken a more aggressive tack. The REIT has an effort under way to generate its own electricity at its buildings. Known as “distributed generation,” the strategy has been practiced for years by large manufacturers and owners of campus settings. But deregulation has made it attractive to smaller users as well, and today distributed generation is touted as a way to create cleaner, more efficient electricity.

It also reduces grid demand and provides buildings with backup power. Those advantages have convinced office owners to pursue the cost-saving technology, especially in California where high electricity costs and blackout worries persist.

Equity Office has committed $15 million for natural gas-fueled co-generation power plants powering nine buildings. A reciprocating internal combustion engine, essentially an automobile motor, already is producing about one-third of the power for 30 North LaSalle, a 926,000 sq. ft. office building in Chicago. In addition, plants that power buildings in Boston, San Diego, New York, San Francisco and Los Angeles will be operational this summer.

The amount of electricity the plants provide to each building will vary between 15% and 35% of total consumption. The heat created by the power generation will be used in other building systems.

An Equity Office subsidiary will own and operate the systems, offering tenants power at 99.5% of the local utility rate. That doesn't seem like much of a price break for tenants. But the systems will reduce the amount of electricity buildings buy from utilities during peak usage times. Those are periods of high demand, such as in the middle of a hot afternoon when air conditioners in homes and businesses are all running at full-throttle.

Peak times also are when electricity costs the most, and less demand for a utility's electricity during those periods will allow Equity Office to negotiate for lower rates from utilities. That will save tenants money in the future, Frankini says.

Frankini estimates that energy savings in the nine buildings will pay off the initial investment in about five years and provide an average annual cash-on-cash return of about 20%. Equity Office intends to expand distributed generation to as many as 100 buildings.
Starting from Scratch

While Equity Office chose to own and operate its systems, other options are available. RealEnergy of Woodland Hills, Calif., for example, builds generation plants at office buildings, typically providing the structures with half of their power.

Since starting up about four years ago, RealEnergy has built some 20 systems in California and has contracts to double the number of plants there. The company also has penetrated the Northeast, and late last year agreed to provide half the electricity for Transwestern's Park 80 West, two buildings totaling 488,000 sq. ft. in Saddlebrook, N.J.

Signing with RealEnergy is part of a two-pronged strategy to reduce costs and beef up efficiency, says Randy Bessolo, managing director of Transwestern Investment, which has acquired more than $3 billion in real estate assets in the United States, including 10 million sq. ft. of office space. He anticipates saving $50,000 a year in energy costs with the RealEnergy system.

“Everything being equal,” Bessolo says, “tenants would prefer to be in a building that has been given a stamp of approval for operating cleanly and efficiently.”

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source: nreionline.com