Benchmarking - Washington, DC Area

Energy-Saving Actions Yield High Returns -- And Attract Tenants

Cliff Majersik ( ) and Lotte Schlegel ( )
Institute for Market Transformation

Energy and green building improvements in our city have great potential to benefit building owners, operators and tenants, while making DC the “greenest” city on the east coast.  Energy is the largest operating cost for DC office buildings: utilities account for 32% of total operating costs. As the recession hammers DC real estate, green and efficient buildings will likely continue to enjoy higher occupancy rates than their peers as tenants focus on total occupancy costs and gravitate toward green buildings with low energy costs and smaller carbon footprints. DC’s new energy and green building laws show promise for environmentalists and business people alike: they encourage actions to reduce building energy consumption.  Such energy-saving actions typically yield high returns on investment by increasing building occupancy rates and net operating income.

In fact, many DC firms have long employed energy assessments and improvements to strengthen their bottom line and benefit the environment; they are leading the way for the future. Through retrocommissioning at 701 9th Street NW, Cassidy & Pinkard Colliers and its contractor Strategic Building Solutions restored the building to high productivity by adjusting controls and setpoints, modest upgrades and a “tune-up” of existing systems.  The program has resulted in annual cost avoidance of over $154,000, yielding a simple payback of just over 2 years and an annualized return on investment of 31%, over 5 years.  Energy savings of over 11% produced carbon-dioxide emissions reductions of 1,075,160 lbs per year, and earned the building the Energy Star label in 2008.   The team also prioritized occupant comfort by calibrating all major building control systems and providing staff education to support ongoing efforts for continuous improvement.  (Local buildings which did not start out so energy efficient have achieved energy savings of 30% or more – sometimes without significant capital investments.)

Two recent DC laws are driving the city to follow the lead of businesses like Cassidy & Pinkard Colliers to improve the bottom line: the Clean and Affordable Energy Act of 2008 and the Green Building Act of 2006.  This article focuses on the Energy Star benchmarking and submetering provisions of the Energy Act and modifications to DC’s building code which resulted from the Green Building Act.

As Peter Drucker said, “You can’t manage what you don’t measure.”  In order to improve the efficiency of a building or portfolio of buildings, you must know where the building stands relative to other buildings and what areas need improvement.  The federal government created the Energy Star building assessment and labeling system to assist building owners in comparing their buildings to similar buildings, identifying and employing best practices and to assist potential tenants searching for the most energy efficient buildings.  Benchmarking allows for the comparison of buildings’ energy efficiency performance using an apples-to-apples uniform rating scale (in the case of Energy Star, a scale of 1 to 100).  Regular benchmarking of commercial buildings can aid in setting efficiency goals; tracking the efficiency of buildings over time; identifying, replicating  and rewarding best practices in building operations; and prioritizing investments in energy audits, retrocommissioning and retrofits.  It also allows potential tenants, buyers, lenders and appraisers to understand how buildings’ energy costs compare with their peers’ costs and to thereby better assign value to buildings’ energy efficiency.  Even before introduction of the DC Energy Act, several best-practice leaders recognized these benefits by Energy Star benchmarking every one of their buildings at least annually or monthly.  Hundreds of buildings in DC have been benchmarked and 82 of them have earned the Energy Star label.  Buildings earning a benchmark rating of 75 or higher are eligible for the Energy Star label.

Energy efficient buildings are prospering in the competition for tenants.  Research by the CoStar Groupshows the benefit to building owners of earning the federal government’s Energy Star building assessment and labeling system: building occupancy rates of Energy Star buildings are 306 basis points above those on non-Energy Star rated buildings. Similarly, direct rental rates for Energy Star buildings are $3.36/sq ft/year greater than non-Energy Star, and sale prices differed by $16/sq ft.  Energy Star occupancy rates and rent premiums have expanded over the past two years; the sales price differential has narrowed, but remains significant. The U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED) labeled buildings see occupancy, rental, and sales premiums are all even larger and growing. Given these handsome financial rewards, it is not surprising that participation in the LEED and Energy Star programs continued to increase dramatically locally and nationally in late 2008 even as the economy shrank.   

Sixty percent of the Fortune 500 and over 75% of the Global 500 are already participating in the Carbon Disclosure Project. In this economy the most desirable tenants are financially strong with low default risks. Whether public or private, such tenants are especially likely to favor green or energy efficient buildings.  The federal government, one of the city’s most reliable tenants, has a green leasing preference that the General Services Administration began to enforce more effectively even before the advent of the Obama administration.  The federal government’s preference for the LEED green building rating of Silver for single occupier buildings over 10,000 square feet sets an aggressive goal for the DC building market.  And, pursuant to the US Energy Independence and Security Act (EISA) of 2007, beginning in 2010, in general “no Federal agency shall enter into a contract to lease space in a building that has not earned the Energy Star label in the most recent year." 

The Energy Act makes Washington DC the first city in the nation to mandate Energy Star benchmarking and public disclosure for private and government buildings.  California enacted a somewhat similar law in 2007.  Other cities and states are likely to follow in 2009.

In practical terms, the process of generating an Energy Star benchmark rating is free, simple and easy.  It requires no special knowledge or expertise.  One enters building size, type, occupancy and 12 months of energy consumption data into the free Energy Star Portfolio Manager software.  The software provides a comparison to buildings with similar building and operating characteristics.  To comply with the DC Energy Act’s benchmarking requirement, the benchmark ratings and related information will be submitted to the District Department of the Environment, which will make the data publicly accessible upon receipt of the second annual benchmarking data.  The benchmarking requirement applies to DC-owned buildings of at least 10,000 square feet, effective this year, and privately owned buildings of at least 200,000 square feet starting in 2010 and ramping up to buildings of at least 50,000 square feet by 2013. Appropriately, DC government is required to begin benchmarking and disclosure before the requirement kicks in for privately-owned buildings.  In fact, DC has already disclosed the ratings of ten of its buildings.  The benchmarking requirement does not apply to residential buildings.

We recommend that large and medium nonresidential buildings be benchmarked as soon as possible.  Doing so will provide plenty of time to improve ratings before they must be publicly disclosed -- in addition to providing all the benefits already described.

The “submetering” provisions of the Energy Act will allow owners of nonresidential buildings to directly pass through the costs of each individual tenant’s actual electricity and gas consumption rather than allocating costs on the basis of square footage or some other inaccurate measure.  The Act calls on the Public Service Commission to write rules and standards to allow building owners, operators or managers to install submetering equipment for electricity or gas in non-residential units and to bill the tenant as if it were a utility.  Submetering not only allows building owners and operators to pass on operating costs to tenants fairly and accurately, but also gives tenants incentives to become smarter consumers and partner with building operators in order to manage their energy consumption in a cost-effective manner. 

Provisions of the Green Building Act of 2006 require that revisions to the building code “incorporate as many green building practices as practicable." To accomplish this, DC hired the Institute for Market Transformation to facilitate a taskforce of developers, engineers, architects, building owners, officials, and other experts and advocates. The taskforce developed greening amendments to the new DC code.  These amendments were informed by research by IMT and the Institute for Building Technology and Safety into best building-code practices from across the nation. The new building code was passed by the DC City Council in December of 2008 and became effective immediately with a 1-year transition period during which new building permit applications can use the new or old building code.  Greening amendments raise the bar for water efficiency by requiring low-flow fixtures, specifically faucets, showers, toilets and urinals.    They reduce the “urban heat island effect” caused by dark surfaces of the built environment by requiring that flat roofs be cool roofs, green roofs or limestone ballasted.  The new codes increase energy efficiency requirements by 30% for low-rise residential and by 7% for commercial buildings.  The task force actually agreed that a 30% reduction for commercial buildings was technically and economically optimal, but a delay in publication of a building standard forced delay in adoption of this recommendation.    So instead, the code achieves a 7% improvement by referencing American Society of Heating, Refrigerating and Air-Conditioning Engineers voluntary consensus standards (ASHRAE 90.1 2007) for energy efficiency in insulation, windows, systems and lighting.

The two laws are catalyzing market transformation toward more efficient and environmentally healthy building construction that will benefit building owners and businesses.  The incremental cost of building green is diminishing as green building becomes business-as-usual in the District.  As trained professionals, building materials, distribution channels, and other green building resources become more prevalent in the region they create network economies of scale and a self-reinforcing virtuous cycle. This transformation could enable the region to match or exceed best practices in energy efficiency and green building from around the world.  For example, in the Pacific Northwest a similar transformation has resulted in new buildings that routinely use at least 20% less energy for lighting than their peers on the East Coast, and they achieve this at no increase in initial cost.  Laurie McMahon of Cassidy & Pinkard Colliers observes, “The economics of [our 701 9th Street NW] case study are quite compelling and confirm that ‘greening’ does have a payoff, not only for the environment but for our clients’ bottom line.  This is why Cassidy & Pinkard Colliers is deeply committed to applying sustainability to the way we build, operate and maintain our buildings.”

Lenders have traditionally paid little attention to energy efficiency during the underwriting process.  But lenders are also traditionally risk averse and now more so than ever.  Electricity prices continue to rise (even as gasoline prices fall) and are likely to rise even faster in the future.  This Congress is likely to pass federal cap-and-trade legislation.  With coal as DC’s largest source of electricity, prices will likely rise in a carbon-market environment. “Energy price volatility risk” is the risk that rising energy prices will impair the value of a building.  Inefficient buildings expose their owners and lenders to much more energy price volatility risk than do efficient buildings.  As lenders becoming increasing aware of this risk and its contribution to their losses from loan defaults, they are likely to increasingly favor efficient buildings in their underwriting.  The Energy Act’s benchmarking requirement will provide sales comparisons, enable more accurate factoring of energy efficiency into property valuation and facilitate lenders’ assessments of efficiency during underwriting.  So, new and renovated buildings which meet DC’s new building energy code requirements will fare well in the competition for financing.

Cities and states around the country are competing to “out green” each other.  The winners won’t just earn civic pride and bragging rights.  We’ll attract businesses that value the triple bottom line and the coveted “creative class” workers who drive real wealth creation and who tend to highly value living and working in green buildings and green cities.  These workers will in turn attract more dynamic employers seeking top talent.  The resulting demand will raise all boats, helping occupancy rates and rents to weather the economic storm and laying the groundwork for accelerated growth when the economy recovers.  For all our problems, this region is already blessed with beautiful open spaces, tree-lined streets, walkable neighborhoods, the nation’s second highest subway ridership, a high concentration of green buildings, and a relatively strong economy. With continued business leadership and wisely crafted policies, DC could become the greenest city in America while prospering economically as a place that businesses and their employees are proud to call home.

The nation is moving toward higher environmental standards.  DC can serve as a national model for building efficiency.  Tenants, owners and operators are using the Energy Star benchmarking and tools to become more competitive as they manage their energy consumption more effectively.  Of course, improvements to building efficiency and other green initiatives in the District will also foster the development of green jobs.  Training will be needed to narrow the gap between the green job skills needed in the future and the skills possessed by local residents who need jobs.   Partnerships among builders, building operators, the District government, training providers, national accreditation and curriculum setting organizations and others in the community could help to provide training and make our workforce among the most highly skilled in the nation.  Washington DC can lead the nation as it moves in a greener direction, proving that green is not just about the environment, but about cost savings and gaining a competitive edge in marketplace.

To learn more about DC energy and green building laws, green collar jobs or benchmarking, visit the DC page of Institute for Market Transformation’s website www.imt.org/DC.html or IMT’s building codes page:www.imt.org/codes.html.  To participate in the greening of the next revision of DC’s building codes, email  .

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