It’s 5 pm on a Thursday. You and the other asset managers have just left (yet another) internal meeting on ESG. Yesterday was a meeting on air quality. Next week there’s a review of upcoming property management contracts and the week after, a discussion of work orders and tenant requests across the portfolio.
If there’s one theme that ties these meetings together, it’s the lack of transparency.
The asset management team, knowing their own strengths and weaknesses, have always tried to keep a distance from the operations of the portfolio. As long as calls weren’t coming in from tenants, the assumption was that things were going alright.
But the team has been getting pulled into the weeds more and more as the expectations from investors and tenants have increased.
All of this would be okay, except the efforts haven’t necessarily borne fruit.
That’s because the information needed to make decisions is simply not there. These meetings tend to devolve into a discussion of the groundwork that needs to be laid first, about gaps in the data, how nothing is apples-to-apples comparisons, and about the need to go deeper.
Take this most recent ESG meeting. Even a couple months ago, the goal was straightforward.
Investors are demanding ESG measurement and disclosure. So, let’s figure out how to collect all of the utility cost and consumption data across the portfolio, spin that up into a report and get back to work.
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Going Deeper
Apparently, things are different now, they say that ESG reporting is now just the cost of doing business.
To attract capital, to get leases signed, to hit IRR targets, there has to be a plan of action on how to demonstrably improve efficiency. This has always been a goal, but it’s the first time the company is seriously looking at it from a portfolio perspective.
One thing is clear, the data collected to meet ESG disclosure requirements is not sufficient to drive action.
There are bright spots, however. Segments of the portfolio have deployed various technologies and seen positive results.
With these data points, the asset managers are doing what they do - crunching the numbers.
Broadly, the technology can be split into two buckets: real-time monitoring coupled with analytics to optimize how the building is run and infrastructure upgrades to improve the efficiency of what is being run.
According to the number-crunching, real-time monitoring coupled with analytics drives solid returns. Turns out some buildings were poorly run and the analytics identified big savings and a sizable return on investment. On the other hand, some buildings are already well-run and there were only a few optimizations, but that’s good to know too.
Aggressive Targets
However, on an absolute basis, analytics and optimization don’t seem to drive savings deep enough to hit the portfolio’s new aggressive goals.
More specifically, this “continuous commissioning” tends to reduce energy consumption by about 15% on average.
On the other hand, infrastructure upgrades tend to reduce energy consumption by 45% or more.
The problem is that these retrofits are highly technical, capital intensive and site specific.
There are also inherent risks, whether the capital is supplied upfront or through an energy performance contract, where the energy services company (ESCO) gets paid back from savings produced.
Under the guaranteed savings model, the ESCO guarantees a level of performance sufficient to pay back installation and financing costs if proposed energy conservation measures (ECMs) are implemented and verified.
When actual savings fall short of the guarantee, the ESCO compensates the shortfall to the client or otherwise makes the client whole. The ESCO does not benefit from performance levels that are above the guarantee.
However, a benchmarking database of about 6100 projects maintained by Lawrence Berkeley National Laboratory (LBNL) shows that realized savings often deviate from the guarantee in both ways, sometimes significantly so.
A Combined Approach
On that Thursday afternoon ESG meeting, one of the asset managers made an offhand comment that was more powerful than she originally realized.
She asked why these two buckets were being thought of separately. It seemed to her that the data collected for optimizations could help drive more accurate, targeted, and scalable infrastructure upgrade decisions.
And she’s absolutely correct.
In fact, she has stumbled on the strategy of the largest and most sophisticated owner-operators in the industry.
Instead of hand-wringing over the ROI of real-time monitoring, leaders are recognizing that granular data provides the transparency necessary to make the capital investment decisions that will be necessary to hit aggressive targets.
The savings from optimization are there to essentially make the investment in data free by paying for the cost of the system.
Moreover, this data eliminates the credibility gap with infrastructure upgrade proposals, allowing both owners and ESCOs to prioritize projects and be very specific about performance guarantees.
In aggregate, this data flows directly into underwriting new projects. Armed with this data, a buyer can underwrite specific upgrades and savings to OpEx in a much more systematic and accurate way possible, giving them a big edge in an ever more competitive market.
The first step is gathering the data.
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