Sequences are critical
Real estate can be a surprisingly complex choreographed sequence of actions, with one tactic depending on the proper execution of multiple other actions. Any real estate renovation relies on careful timing and execution, but Building Renewals in particular rely on proper sequences of actions, both technically and financially.
Conceptually, one idea dominates the technical approach to a Building Renewal: reduce loads first and then upgrade equipment. Building Renewals are made possible through integration, sequencing and cohesiveness. The interdependent nature of energy use, systems, occupants, and envelope all require recognition that decisions in one aspect of the project have obvious – and not so obvious – implications on other parts of the project.
The following three phases of implementation provide a way to organize which upgrades and investments need to happen in which order:
Phase 1 Load Reduction (General)
Reducing energy loads as much as possible through lighting upgrades, envelope improvements, plug-load reduction, natural ventilation and lighting strategies, adjusting occupant schedules, and optimizing space layout and use.
Phase 2 Load Reduction (HVAC)
Reducing loads through HVAC optimization, including heat recovery, controls strategies, improving fan efficiencies and other building operations techniques.
Phase 3 Upgrade & Downsize
Replace chillers, duct work, and HVAC infrastructure with the intent to migrate to smaller equipment sizes – or eliminate equipment entirely – due to the reduced loads from Phases 1 and 2.
By adhering to this sequence through an integrated design process you can more likely schedule and implement different energy efficiency upgrades in either a staged or bundled scenario. This allows for more flexibility to match up with tenant movements and lease terms, but only if the project is carried through to completion. Whether you implement all phases in one year, or across five, the energy savings will more likely be obtained if the integrated design approach is kept intact and properly sequenced.
Location and velocity drive success
"Location, Location, Location." Real estate always boils down to the reality of where your building is located. Is it in the downtown core? The suburbs? Are you surrounded by buildings with high vacancy rates? What infrastructure and amenities nearby are appealing and available to tenants? Each of these questions helps determine the competitive environment for your property.
Sustainability considerations may never outweigh location as a driver of real estate value, but it can act as a powerful supplement. When competing against properties within a similar location, the focus shifts to that of bringing new features and amenities to distinguish your building. Sustainability offers one such edge when locational differences are minor. Increasingly, significant numbers of premium tenants are seeking sustainable, green office space. In a May 2011 report, 93 percent of businesses stated that sustainability is important for business and the future, over 130 Fortune 500 companies have high-level corporate sustainability officers, and 80 percent publish sustainability reports. Whether through corporate sustainability policies, employee recruitment and retention ambitions, productivity standards, or cost mitigation, the most attractive tenants in large and small markets are adding environmental performance to their leasing checklists.
The mechanism to capture this value is “velocity.” Put simply, velocity is the speed at which your building renovation attracts and secures tenants – in relation to competing buildings. High velocity situations are those where tenants are very interested in your building, quick to sign leases and claim their space within the “next, new thing.” The power of high velocity is that it gives you pricing advantage, the ability to negotiate from a position of strength. Conversely, low velocity implies low interest, softening the demand for space and limiting your negotiating power. If your building is average, you will be forced to accept average market rents.
You can’t change your location, but you can change your velocity. Building Renewals offer a tactic to accelerate leasing velocity by generating “buzz” about your building, reinvigorating interest and causing brokers and tenants to take a second look. By marketing the unique nature of your Building Renewal – shaping its “brand” and introducing a new consideration into leasing discussions - you have a unique opportunity to alter the narrative. You can tell the story that this building is different. The last thing you want is to become a commodity. You need to highlight that your renovation will yield a totally unique product and craft the messaging that brokers and local media convey about the project, generating that velocity – that speed - that will give you a winning edge.
Master your Market
Your building is almost always at the mercy of the local market. Market regulations, local preferences, competitor strengths, investor pools, financial institutions, and economic conditions all interact to define the nature of the market. The dynamics of the market determine what options are viable, what opportunities may be unexploited and what strategies most likely will lead to a successful project.
In his book "Value Beyond Cost Savings: Underwriting Sustainable Properties" Scott Muldavin discusses how linking sustainability performance can only be tied to financial performance through “assessing the response of the market.” Muldavin articulates the logic necessary to conduct this type of investigation as follows:
Evaluate the market demand for sustainable property by regulators, occupants, and investors;
Assess whether brokers, appraisers, and lenders in your market recognize this demand;
Determine the key financial model/evaluation inputs, factoring in both sustainable and traditional issues into cash projections.
This analytical sequence equally applies to Building Renewals. Without clearly mapping the market demand and likely response to a Building Renewal, the project may never get financed or implemented. To counter this begin with an examination of your market, seeking to understand if Building Renewals can generate positive reactions:
Tenants: Will the Building Renewal appeal to the local tenant base? Are there clean-tech tenants or environmentally-oriented tenants to target? What specific leases in the market are coming due and can you synchronize the Building Renewal to coincide? What tenants have external environmental or carbon tracking policies? Which tenants are concerned with recruiting young talent?
Investors: Who will eventually buy this building? What criteria do they use? Are they a local investor, an institutional fund, an international investor? How can you link the Building Renewal to their needs? Do they report environmental performance across their portfolio? Are they subject to local or national political pressures?
Regulators: What entitlement and tax policies are linked with energy performance or green buildings? What neighborhood planning and zoning issues will this building be subject to? Are there other public policy areas that a Building Renewal can alleviate or mitigate? What does the political future look like, and can a Building Renewal generate public goodwill for your project?
With each of these target audiences you are identifying market needs and demands through which you can better argue for funding, investment and regulatory approvals. This type of analysis is integral to most real estate decisions and a successful Building Renewal will require predicting how the market will react, and how that reaction will translate into financial performance.
This is not anything new. Real estate developers understand that they are essentially predicting demand in the future, anticipating a favorable market response to a new building or renovation. Yet by definition, you can’t prove a prediction before it happens.
That’s why sometimes you have to “set the market.” If you can’t prove that there is demand, sometimes you have to create the demand. This can be a risky strategy, but one that many real estate professionals are familiar with. Often the best method to raise the value of a property is to enhance the neighborhood around it by building infrastructure and services that bring renewed interest. Another way to set the market is to simply offer something new and innovative. As Steve Jobs once said “…people don’t know what they want until you show it to them.” Cultivate the playing field, or even change it altogether. For Building Renewals, three approaches to consider are:
Secure first-mover advantage – In marketing terms, the first-mover is the product or firm that secures competitive advantages by introducing a new concept to the market ahead of others. In terms of real estate, first-mover advantage exists for buildings that are the first to renew a property, locking up premier tenants most attracted to green buildings, generating press and media interest, and establishing a reputation for innovation.
Build the market’s capabilities – Building Renewals require coordination and communication across many disciplines. Engineers, architects, lenders, contractors, government officials all bring necessary skills and resources to a project. But given the challenge of a Building Renewal, you may find that some skills or technical knowledge is lacking. You may run into code or policies of traditional design and construction practices that prevent a Building Renewal’s success. When faced with these issues you may need to import skills, educate stakeholders and lobby to change the established patterns of development. In doing so, early adopters have often gained a reputation for re-engineering the market and tilting the playing field to their advantage, establishing themselves as a market leader and innovator. By cultivating new skills among your team and altering the competitive landscape in a direction that you choose, you lock-in long-term advantage for the second Building Renewal, and the third, and so on.
Highlight the risk of inaction – Sometimes the fear of losing something is more compelling than the hope of gaining something. Social scientists call this “loss-aversion.” When selling the concept of Building Renewals to project stakeholders, it may prove more powerful to focus on the negative consequences of NOT proceeding. What if we lose our main tenant to the new LEED® Gold or Platinum building across the street? What if energy prices double over the next 5 years? What if the city passes the building energy disclosure policy? What if we can’t sell the building because it’s too outdated? Highlighting these risks with lenders, investors and other stakeholders can change the dynamic of the conversation and force a more honest market- based assessment of the value and potential need for a Building Renewal.