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It’s All Hands on Deck as Environmental Mandates Increase

June 10, 2022
The mandates for environmental action are intensifying for property management professionals.

Communication and coordination. On those two pillars stands the property management industry’s response to growing mandates for environmentally sustainable assets.

And make no mistake. The mandates are intensifying: from municipalities across the nation, which in increasing numbers are folding carbon reduction deadlines into their codes; from the ratings agencies, with their demand to see proof of environmental performance; and from the ticking clock of climate change, which every year seems to deliver more horrific weather headlines.

Facing the Decarbonization Challenge

“There’s a lot of pressure at the municipal level,” says Henry Chamberlain, president and chief operating officer of BOMA International. “But our focus has always been on making the business case for sustainability, in all of its forms.” He notes that that focus is often at odds with broad-brush city and state mandates that can levy heavy taxes or fines for compliance failures. The irony is that “that money could be better spent invested in the building infrastructures that would solve the problem.”

The key issue is the misalignment of private and public sector timelines. “Nothing seems to happen at the same time,” says Audi Banny, former associate director of Business Engagement for the Washington, DC-based Institute for Market Transformation. Cities around the nation have created their own milestones, but “building owners and managers may have 15-year leases that are out of sync with municipal deadlines.”

This is where coordination comes in. All the experts interviewed agree that the industry is evolving rapidly in its embrace of decarbonization. That speed of adaptation is the result of “coordination and communication among ownership, property managers and our sustainability consultants and vendors,” says Stephanie Cummings.

The Denver-based VP for LaSalle Investment Management explains that her firm is piloting a Net Zero Carbon Pathway Program in nine office and multifamily assets in different geographies. The goal is to “evaluate the technical cost and the business case for system and equipment upgrades.”

Cummings, who will be presenting at the 2022 BOMA Conference & Expo in Nashville, June 25-28, (in a session appropriately entitled Hitting the Target: Decarbonization in Existing Buildings) explains that long-term capital planning is key. While new buildings can more easily bake carbon reduction into their designs, the initiative is trickier with older assets, and “long-term capital planning is necessary to approaching goals set by municipalities.” With that in mind, the pilot program is geared to evaluate “different levels of ambition, the highest being net zero carbon emissions.”

The baseline, of course, is what Nashville-based Clay Haynes, principal of development/brokerage firm Public Square, calls low-hanging fruit. Such relatively low-cost, quick-fix applications include LED lighting and increasing the R-value of insulation “beyond code minimums.”

For larger (read: more costly) initiatives, “You must get all the stakeholders aligned,” says Cummings, and at LaSalle, this is done by starting with their engineering consultants to spec mechanical systems to ensure they can hit various sustainability targets. “Then we work closely with the property management team and the appropriate vendors on implementation.”

Along the way, she states, vital questions have to be scrutinized, such as: “Does the proposed mechanical equipment have a strong track record? Are there any available financial rebates?” But at the end of the day, “It comes back to coordination and communication to keep everyone aligned with our targets.”

As stated, the pilot program is focused in part on various LaSalle multifamily assets, which in this application bear key similarities to office properties: “Multifamily leases are like gross leases in a commercial property,” says Cummings, “where any expenses for capital equipment come out of our bottom line.” (More on this shortly.)

And much like in an office asset, that CapEx should return greater value and market competitiveness, “driving returns that can translate into rent premiums and downstream cost savings,” she says. And that touches on another level of coordination: resident (or tenant) buy-in.

“Ultimately, residents vote with their feet,” she says. “But we see such environmental awareness as a definite market advantage. We all benefit from fewer service requests and resident complaints, cheaper utilities and reduced operating costs. But buy-in by our residents is really a moral and ethical choice. At the end of the day, we’re confident they’ll see what we’re doing to combat climate change.”

But that still leaves the hard nut of achieving those goals within municipal timeframes. As those goals, large and small, take shape, property managers would do well to partner with BOMA local associations in their coordination with city and state leaders. (Chamberlain reports that BOMA recently joined the National Conference of State Legislators “to take our case directly to the 50 states and applicable cities.”)

All Hands on Deck

As stated above, a key stakeholder in these initiatives is the tenant, and alignment of goals here can start at a much more rudimentary level: the lease, specifically, the green lease. One of the questions typically leveled by those municipalities is how compliance will be achieved.

And that’s where a green lease differs from more traditional lease formats, says Banny. There’s a baseline of mutual expectations spelled out in a green lease, including the enumeration of priorities and how they’re to be implemented.

“But the major difference is the ability to track performance,” she explains. “Green leasing requires a point of contact and some method for landlord and tenant to communicate regularly on those priorities.” The ultimate goal here, she adds, is transparency.

“It’s key to identify priorities and then create the pathways to achieve them,” says Banny (whose BOMA Conference topic will be Green Leasing: A Critical Tool to Meet Carbon Targets and Advance ESG). “The green lease is the tool to get there, all the time providing the methodology for tracking progress.”

New Concerns, Old Building Stock

The mounting call for municipal codes for decarbonization is not the only growing threat facing building owners, managers and tenants. There’s also a mounting awareness of climate risk, bringing with it a unique and potentially frightful mandate of its own.

According to the National Oceanic and Atmospheric Administration (NOAA), 2021 was the seventh consecutive year in which 10 or more billion-dollar climate events—such as increasingly intense hurricanes—impacted the US. And don’t forget the threat of wildfires, which alone “threaten $1.3 trillion of property value annually just in the US,” says Lindsay Brugger, the Urban Land Institute’s (ULI) vice president of Resilience.

Those are the statistics. Here’s the human factor: Clay Haynes reports that in Nashville, “We’ve experienced two 500-year flood events in the past decade.” He has personally fought off rising tides by literally sandbagging his assets. “It’s not fun.” (Brugger and Haynes will also be presenting at the BOMA Conference. Their topic: Retrofitting Buildings for Climate Risk.)

But the question is, obviously, how do building owners and managers respond to these increasing threats and climate-proof (and future-proof) their assets? To accomplish that, we have to begin with information, says the Washington, DC-based Brugger:

“First, understand the risk, now and throughout the lifetime of the building,” she says, explaining that there are numerous assessment tools available to help stakeholders quantify their climate risk. The next step then becomes a vulnerability assessment, “to identify the expected performance level of a building during a disaster.” (Brugger refers to ULI’s own Resilience Retrofit Report as a “good place to start.”)

Armed with this knowledge, owners and managers can both identify the highest and most immediate need and plot downstream improvements that will deliver “the biggest bang for your bucks.”

And the CapEx consideration is key, especially given the aforementioned aging stock of US commercial assets. “The estimate is that a quarter of the US office building stock is 60 years old or older,” says Chamberlain, “which translates to roughly four or five billion square feet.”

It’s a challenge often made more difficult by the type of lease. We’ve seen the clarity a green lease can provide. But there’s another factor here. Haynes explains that his shop utilizes modified gross leases primarily, which leaves both the responsibility and the flexibility to upgrade at his doorstep. Triple net leases, on the other hand, give that control over to the tenant.

Which again brings us back to the issue of communication and coordination. “Engagement is key to successful implementation,” states Brugger. “We need to make sure our tenants are on board.” It’s not solely about risk. It’s also about rewards. “As important as the issues you’re trying to solve for is the value-add that comes with properly planned retrofits, benefits such as protection from prolonged downtime.”

The experts interviewed here are betting that this is not a hard sell. “These issues are universal,” says Chamberlain. “We’re making the business case that we—property managers and all our constituents—get it, that we all agree on the goal. We all need to embrace the fact that different properties need to take different pathways to get there.”

About the Author:

John Salustri is editor-in-chief of Salustri Content Solutions, Inc., a consultancy focused on content creation. Prior to launching SCS, John was founding editor of GlobeSt.com. He is a four-time winner of the National Association of Real Estate Editors’ Award for Excellence in Journalism.

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