How Can Cities Help Class B and C Building Owners Optimize Their Energy Performance?

September 4, 2019 | Zachary Hart

Research from Carnegie Mellon University reveals some of the biggest roadblocks preventing class B and C building owners from investing in energy efficiency. Here’s a look at the top three challenges and what cities should consider as they aim to reduce building emissions, revitalize infrastructure, and help owners take action.

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Class B and C buildings are integral to the fabric of every city and town in America. They are small businesses’ office buildings and retail stores, doctors’ offices, grocery stores, and other centers of commerce and community. Class B buildings are characterized as new buildings in non-prime locations and older rehabilitated buildings in prime locations with generally good upkeep, while Class C buildings are usually older structures in need of renovations and maintenance. One area where both classes of buildings need concerted attention is energy efficiency.

Although more building owners and tenants of these buildings are awakening to the importance of and opportunities for improving building energy efficiency to reap outsize economic, social, environmental, and health benefits, there are many barriers standing in the way to investing in upgrades. What are these barriers or conditions that prevent deeper energy savings from happening? What policies, programs, or other initiatives could jurisdictions implement to address these barriers or otherwise speed up adoption of energy efficiency in Class B and C buildings?

Research conducted by Dr. Alex Davis at the Carnegie Mellon University helps answer these questions and more, looking at top challenge areas in these buildings that need to be addressed by city sustainability leaders in conjunction with the private sector. In no particular order, here are three of the top challenges and some potential solutions for how the public and private sectors should approach them.

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1. Financing

Class B and C building owners are debt averse and prefer to self-fund improvements. Owners that participated in Carnegie Mellon’s research claimed that local government financing, commercial loans, and small bank loans are the least preferred means of paying for an energy efficiency improvement. Knowing this, cities and states working on energy efficiency financing programs should be aware that these likely will not see much uptake from Class B and C building owners, short of a concerted effort to market the programs to them and/or the passage of some kind of building performance law.

2. Contractors and Trust

Carnegie Mellon learned through interviews that owners rely heavily on contractors for information concerning the care and upkeep of their buildings and that they had longstanding, friendly relationships with them. Out of 99 surveyed, 77 had known a contractor for a median of 10 years. It is not surprising then that survey respondents rated a contractor of their choice as the entity most likely to have their best interest in mind.

Respondents also rated local nonprofits as generally neutral to trustworthy, and rated local government, large commercial banks, and their utility company as generally untrustworthy. Jurisdictions wanting to encourage energy efficiency among owners of Class B and C buildings should look for opportunities to partner with local contracting firms, chambers of commerce, and other appropriate non-profits or business organizations. Visit IMT’s Small Business Energy Initiative, which is based on this premise, and download IMT’s Action Guide to see how local business organizations can play a valuable role in establishing contractor networks and connecting small businesses with energy efficiency opportunities.

As an example of such a partnership,  the Consortium for Energy Efficiency (CEE), a Minneapolis-based non-profit that provides a full energy efficiency concierge service for businesses, began working directly with vendors and contractors as key lead generators and salespeople. Between 2003, when contractor outreach began and 2011, program participants coming from contractor referrals increased from less than 5 percent to over 60 percent.

3. Tenants and Split Incentive

No matter the lease structure, standard rental agreements discourage landlords and tenants from investing in energy efficiency. Split incentives are created when one party is responsible for paying utility bills while the other is in charge of capital investments, such as a better HVAC system. For example, where tenants are directly billed by the utility, the landlord may forgo energy upgrades to a building since all of the energy savings would go to the tenant. However, Carnegie Mellon’s research found that there was “little relationship between split incentives and respondents’ hypothetical decision to invest” in energy efficiency improvements.

Of the respondents that faced split incentives, 58% said they’d invest in energy efficiency technology such as occupancy sensors; as did 57% who did not face split incentives. When asked about who pays the energy bills and whether that matters, interviewees did not consider it a significant issue. Instead, many mentioned that their main goal was tenant retention and they were less concerned about energy bills. Owners who believed improved energy performance would help retain tenants were more likely to say they would invest in upgrades such as occupancy sensors or more efficient lighting.

Jurisdictions and firms trying to encourage class B and C building owners to invest in energy efficiency should look for ways to tie investments in energy efficiency upgrades and technologies to tenant attraction and retention, as these benefits appear to be more resonant than reduced energy bills. Additionally, cities should connect owners with green leasing resources and best practices to educate them on win-win lease terms that are good for business and the environment.

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