March 11, 2019

Energy Efficiency Adds ROI to Redevelopment

Increasing rental rates underlies the thinking behind redevelopment strategies, but maximizing efficiency contributes directly to ROI — that was one of the findings of a fascinating panel discussion that focused on the strategies that deliver the best risk-adjusted ROI in today’s market, during the Anchin Construction and Development Forum in New York City.

“To drive rental rates up, building systems don’t make the difference. Across all sectors, the key differentiator is building amenities that help tenants attract talent, said Simon Wasserberger, Senior Vice President, Equity Office Properties. “That’s the driver of ROI.” He was interested in building features, like food providers or common areas that are valued by tenants.

“it’s easier to raise rents than it is to reduce operating expenses,” he added.

But in planning a renovation or repositioning, efficiency has to come into play. “Lowering operating costs is extremely important,” said Michael Witek, Executive Vice President of Construction at Naftali Group. Any little edge you can implement in development or redevelopment may cost you a little more but will help on the back end.”

“New York landlords are incentivized to reduce operating expenses,” acknowledged Gregg Popkin, President of RFR Realty. “But what technology will drive rental rates?” He noted that it is important to find the cost-benefit balance for environmental benefits.

“A renovation has to bring something different to a property,” agreed Matthew Frank, Senior Vice President, Development, at HCP. “People don’t go to a building for its great mechanical systems.”

But he added that it is harder to quantify the value of amenities in terms of ROI than it is for systems improvements: “You have to take a leap of faith,” he said of amenities. Efficient systems, on the other hand, directly reduce operating costs. He pointed to the value in focusing on the basics — building envelope and systems — as a way to leverage greater efficiency to reduce operating costs.

Andre Rochette, Ecosystem’s CEO, agreed, saying that “there is good ROI with basic technologies.”

Wasserberger acknowledged that there are fashionable technologies on the market, but their essential benefit is untested. “Watch the battle between the smart building guy and the chief facilities officer in a building – it’s fun,” he said. “Some of the less glamorous new infrastructure is more impressive – for instance a new chiller can be significantly more efficient and easier to operate.”

Brendan Weiden, Partner, JBB, cautioned building owners to future-proof their buildings: “Whatever we do today, there will be a new technology tomorrow. Leave space in your core for future runs.”

One way to mitigate the risks of redevelopment projects is by choosing the optimal procurement model, Rochette pointed out. “When you enter an outcome-based model, you share the risk,” he said. “We have to commit to those results.”