Long before ESG was the hot topic in commercial real estate, owners understood that their ability to save costs through energy efficiency was limited.
That’s because tenant consumption generally makes up 60-70% of the total utility expenses.
That’s not to say that reducing base building costs is not worth pursuing. There are plenty of case studies of owners seeing material increases in net operating income through optimization of base building systems.
But for the most part, tenant consumption was treated as outside the locus of control.
Now, shifts in the macro political and economic environment are forcing owners to look again at what can be done to influence tenant consumption.
For one, as outlined in our recent white paper: 5 Ways to Reduce ESG Reporting Burdens, ESG frameworks such as GRESB are becoming more granular and performance indicators, including energy, water, GHG emissions, and waste, must be monitored and reported in both landlord and tenant-controlled spaces.
Whether it’s fair or not, investors are looking for an industry standard measurement that will allow them to say “this portfolio has a lower environmental impact than that portfolio.” In fact, according to a McKinsey report, 82% of investors said that companies should be required by law to submit sustainability reports.
Speaking of laws, local regulations are starting to institute fines for carbon emissions at the building level. While some owners are fighting this on the grounds that it incentivizes buildings to be turned into storage facilities rather than dense offices (assuming density is permitted), the overall trend towards mandating efficiency with penalties is unlikely to be reversed.
Finally, more and more tenants are looking to be ENERGY STAR Recognized for their own ESG goals. This is the most promising development as it aligns landlord and tenant interests in a way that hasn’t been the case before.
The writing is on the wall. Landlords have to get more savvy when it comes to understanding and influencing consumption in tenant spaces.
Many portfolios are not set up to operate like this today, but the journey to do so is not as daunting as it may seem.
Step 1: Submeter Tenants
The first step is to submeter at all. In New York City, Local Law 88 requires all landlords to submeter their commercial tenants but it’s generally a good practice for any commercial asset.
Now, submetering can be done the old fashion way. That is, a building operator or a third party “meter reader” manually records submeter readings on a clipboard each month. From there, readings are transcribed into a spreadsheet and sent, along with the utility bill, to a submetering provider. That provider creates a PDF bill for each tenant and sends it back.
This gets the job done, but it’s time consuming and error prone. More importantly going forward, it ignores a valuable touchpoint with the tenant that can be used to influence behavior.
This process can be streamlined to save time and eliminate errors while also setting the foundation for a deeper partnership with tenants down the line.
The modern way to do submetering is for meter readings to be performed on a mobile app that connects directly to the submetering provider’s software, which automatically pulls in utility bills to calculate the tariff and generate bills.
An even more advanced strategy is to utilize digital, remotely-readable submeters so that the meter reading step can be removed entirely. This can be a significant capital investment, so many owners have started with app-based meter readings and transitioned to digital meters over time.
Step 2: Tenant Engagement
Whether meter readings are done manually or automatically, this modern approach eliminates transcription and significantly speeds up recovery.
It also allows for bills to be customized to begin influencing tenant behavior. Customizations can include environmental equivalencies, such as the equivalent number of trees consumed, that are more tangible than kilowatt hours as well as benchmarking to let tenants see where they rank in the building.
Furthermore, it supports tenants interested in becoming ENERGY STAR Recognized.
For example, while commercial tenants may have a facility manager, keeping track of meter inventories to submit to ENERGY STAR is far from their core competency - they are lawyers, financiers, and software developers, not building engineers.
The great part of modernizing tenant submetering is that the meter inventory also becomes digitized as a byproduct.
That means that the landlord can easily provide any tenant interested in submitting to ENERGY STAR with their metering information instantly.
To take it a step further, landlords can have the provider integrate directly with ENERGY STAR Portfolio Manager as a service on behalf of tenants.
This removes data entry for the tenant, makes the process faster and easier, and serves as a true value add in an increasingly competitive market.
Step 3: Delivering Insights
Looking into the near future, the most savvy landlords will be able to provide their tenants with specific recommendations on how to decrease energy consumption.
This will have to go beyond the generic tips to “turn off the lights” or “purchase more efficient equipment.”
It will have to be treated like energy optimizations for base building systems, with machine learning algorithms identifying specific actions to take and analytics constantly verifying that changes are being made.
Some of these insights can be delivered through the data collected by digital submeters, but that’s limited in the same way that base building optimizations are when you only have utility meter data.
One of the interesting aspects of ENERGY STAR Recognition is that in addition to a meter inventory, it requires tenants to submit a full equipment inventory report.
These two data points, the real-time consumption from a digital submeter and an equipment inventory could potentially be used to disaggregate the loads in order to identify highly specific and contextual alerts.
With this information, owners can truly begin to influence the 60-70% of their building consumption that is beyond their direct control.
Conclusion
Recently, we were fortunate enough to have Ron Becker, the SVP of Operations and Sustainability at Brandywine Realty Trust, to join us for a fireside chat. Many topics were discussed, but the conversation eventually led to tenant analytics and creating partnerships with tenants.
He said it better than we ever could:
“We want our tenants to know what they're using through your invoice, we're able to show them and really create a partnership out of it, how they rank within that building, how much they’re using... where they rank against the group.”
“That sort of new education for tenants is one that when they get it, they've actually called up and said, ‘This is amazing.’ You know, we're being asked, because certainly in our buildings where you've got Class A operations, they have their own sustainability goals. So our question generally is, what can we do to help them achieve that?”
“They can take this invoice now, and not just pay it, but look at it and see ways for reducing ways to help our building operate better. So hence, the partnership to give them the absolute understanding of ‘here's what you're doing, here's what you can do better. And by the way, the guy across the hall is doing it much, much better.’ So let's create some competition and make it fun. Right? And what is that fun yields is reduced consumption of electricity, water, whatever it might be, it certainly gives that opportunity back to us that we didn't otherwise have, which is a tremendous advantage.”
Looking to modernize tenant submetering to create a partnership for ESG goals? Watch a demo video of the Enertiv Platform today to see how it works.
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