Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
In recent years the real estate sector has been focused on educating itself on the importance of managing climate risk and encouraging the major players to set aggressive goals for carbon reduction by 2050, or earlier. With leading climate indicators (like storms, flooding, wildfire, and heat stress) elevating our sense of urgency and those deadlines getting closer, we are moving into an era where real action to improve the climate performance of assets is being demanded. This is especially true of many of the largest institutional investors.
Improving the operational efficiency of assets is obviously crucial to meeting net zero targets of all stripes. However, implementing efficiency programs is often handcuffed by finite capital expense budgets and runs counter to the limited hold periods of many fund strategies. Additionally, moving from portfolio-level goal setting to real action within individual assets can involve a massive increase in complexity, requiring integration with a far larger group of stakeholders, with each step in the process offering an opportunity for friction to either slow things down or stop things altogether. As the saying goes, “You can’t boil the ocean all at once”- so a clear strategy for action is critical.
Managing data to define risk
Knowing where to direct your limited resources requires baseline knowledge about the carbon performance of your assets. The challenges of collecting data across the real estate sector are myriad and fairly well understood at this point. Acquiring data is often an unholy mix of APIs, invoice parsing apps, spreadsheets shared by email, and phone calls to facility managers. Ensuring that the resulting dataset inspires confidence requires both a clear team structure and clear processes. Educating everyone involved on who is responsible for which link in the chain is critical and requires laying out what to do when the most common issues arise – from defining what constitutes an outlier, to how particular coverage gaps are addressed.
While our complicated data environment is improving each year, the risk ecosystem we operate within is evolving rapidly. Most portfolios are diversified either by asset type or region, or both. In the U.S., ground up regulations like Local Law 97 in New York City and BERDO 2.0 in Boston are creating a complicated ecosystem of financial risk. Physical risk – once thought of as a concern for specific places like Miami Beach – has now established itself as a challenge virtually everywhere, and internal challenges can be as complex as the external ones. Portfolios typically include assets that, while outwardly similar, might have wildly different drivers for action (equipment life, tenant turnover, utility costs, etc.).
All of these factors impact the complexity of prioritizing and managing efficiency projects and make choosing the right tools of paramount importance. Whether an internally designed dashboard or a flashy tech product, providing your team with the right tools will be critical. But to properly leave spreadsheets behind you have to ensure that everyone is confident in the data architecture and integrity of the tools, and when considering the usability of the tool you have to keep in mind the diversity of backgrounds that will be interfacing with the tools. That can range from C-suite folks to facility managers, and everyone in between.
What efficiency means to me
The list of relevant efficiency measures varies significantly across asset types and regions. For instance, the simplicity of industrial sector assets and their typical triple-net lease arrangements leave only a few options when compared to a large, multi-use urban building. Similarly, the energy used by assets is typically determined by either ‘skin-load’ (like housing) or ‘internal loads’ (like data centers), dramatically impacting which efficiency measures should be considered. The right tools can help you identify typical measures for different asset types, and then map them to other critical factors in prioritization, such as:
Length of your hold period
Timing of major tenant turnovers
Expected end of equipment life
Local regulatory drivers
When we speak of improving efficiency we are often talking about significant capital expense projects, like upgrading lighting and other equipment, reskinning the building envelope, or electrifying heating and hot water systems. But money isn’t always the answer. In buildings that are not currently well managed, simple changes in operational systems and processes can lead to major efficiency improvements, from the addition of simple building management systems, to incentivizing facility managers for reducing utility bills.
Finally, you can use the tools and processes described above to backcast when projects have been completed to measure their effectiveness in meeting your goals, whether those goals are reducing carbon, attracting tenants, or increasing net operating income.
A holistic approach is key to effectiveness
While it can be tempting to break operational efficiency projects into small, bite-sized chunks, there are good reasons to consider the overall performance of an asset from a holistic perspective, realizing synergies across a variety of issues.
Firstly, packaging multiple efficiency projects together may increase the total cost, but it also provides an opportunity to see the ROI of all the measures together, even if execution is phased over many years. Viewing them separately often leads to low-hanging fruit like LED lighting upgrades getting done, with more expensive measures left on the table.
Second, there are often very real synergies between efficiency measures and other projects that may not impact energy use, but are part of a broader program of asset improvement. Health and wellness strategies, for instance, can act as the tangible face of a broader program to improve an asset, a reminder that the whole reason for caring about energy use in the first place is improving the quality of our lives.
Lastly, mobilizing your stakeholders requires time and energy (not to mention money). If you use these resources wisely and package aligned strategies together, you can avoid program fatigue and improve engagement over the life of the projects. Put simply, don’t view energy efficiency in a vacuum.
In summary, an effective program to improve operational efficiency requires the right team, the right tools, and the right processes, but is critical to meeting your climate goals and protecting your financial returns over time.
This article was written by Yetsuh Frank, Head of North America at Scaler.
