Werewolf: Convincing The Landlords

Wellington street images by Anna Lamotte

New Zealand is not a country known for its imposing cityscapes. Looking back over the Wellington skyline from Oriental Bay at night would probably seem quaint to those more intimately familiar with a city on the scale of Manhattan or Hong Kong. Globally, cities account for 75 percent of energy use, and about 80 percent of emissions. This figure sits below 50 percent in New Zealand.

New Zealand has an unusually high level of emissions from agriculture for a developed country, at half our total. As the heat goes on for emissions reductions, the buck starts with agriculture in New Zealand. New Zealand’s commercial real estate accounts for only nine percent of New Zealand’s energy use (compared to the United States of America, which uses 35 percent of its energy in commercial real estate). Stated like this, you can see that from a political standpoint in New Zealand, there are much bigger fish to fry.

Context, however, is vital.

To view the sector as a singular pie, you miss the sheer enormity of what you are breaking into decimals. The energy consumption of the commercial real estate sector in New Zealand could power over 1.1 million households. It is the equivalent to over 80 percent of our domestic power use. This energy could power the whole of Nelson, forty times over. We’re talking about 50,000 buildings and 48 million square metres of floor space.

This nine percent of our total energy use is still a remarkably big piece of pie.

Poking around inside this community, you can talk to people in the State Insurance Tower, where the archaic air-conditioner leaves one either freezing or sweating. Or look up at the Majestic Centre on your way home at 9pm to see all the lights still on - and chat with workers who suffer through futile audits of their wasteful water and energy use, only for nothing to ever change.

Even in a smaller corner of the market, there is room for massive improvement. 10 percent savings are attainable just by changing behavior, 20-30 percent savings are attainable with only moderate investment in improved infrastructure - with easily attainable collective nationwide gains of 300 million dollars. It seems like some easy work, with a nice payday at the end of it.

Take a walk down Willis St at 5.30pm. You are in the heart of the business community. As workers spill down from the city’s concrete towers, it is a spectacle to look up, and look around, at what has been constructed around us - even in what is a quite modest city on the modern scale. If climate-change is a destructive symbol of the darker elements of human ambition, then cities are a calling card for modern capabilities; the triumph of naked expectation over the realities of bare necessity.

In New Zealand our cities may not be driving our carbon footprint to increasingly higher levels - but on a more conceptual level, the two feel tied.

The Majestic Centre is a 20 year-old building. It is one of the few defining buildings of the Wellington skyline, built in another time. Older buildings are not (yet) officially part of the Green Star rating system; although Jason Happy, commercial buildings manager for the Kiwi Income Property Trust (KIPT) who manages the Majestic Centre, is one of a number of people banding together to start a pilot program to develop a rating system for older buildings.

The Majestic Centre sports consistently updated electronic management systems, but the core equipment is the same as it has always been. “We are consistently investing capital to improve the way we operate. Electronic systems have a finite life. We roll out new systems all the time.” Happy says.

Main plant systems often have to be tended to. Happy points to a situation in the Unisys building in Wellington, when a replacement chiller lead to a fifty percent energy saving, but there’s a limit to what can be done. You’re dealing with a fixed envelope – and when you go past new electronics and new insulation, the improvements become quite capital intensive.

It is tough to know exactly how these older buildings stack up against newer, five Green Star structures such as the Meridian Building, which comes complete with solar panels, captures rain water, traps or deflects sunlight to help regulate the building’s temperature, and recycles much of its waste. Valued at $107 million dollars, the Majestic Centre is a major piece of real estate, and has major clients such as Ernst & Young, Opus and IBM. It is the archetype for the typical building in this sector.

The greening of the CBD will hinge on the retro-fitting of middle aged structures such as the Majestic, not in showpieces of the new technology such as the Meridian building. Yet little is known directly about its explicit efficiency. Happy is open and transparent about his company, and his thoughts on the environment – but he is not obligated to supply hard data on the building’s energy use.

Not that there is rotting neglect, or any apparent subterfuge. There is simply nothing revelatory to add to what you’d imagine a building like the Majestic’s footprint would be. It really is just hundreds of workers piling into buildings and running appliances and turning on lights all day. People like Jason Happy are the ones that need to take action to realize this building’s share of that possible 300 million dollars in savings. Yet while EECA ( the Energy Efficiency and Conservation Authority) considers energy savings in the 20-30 percent range are easily attainable, KIPT is currently shooting for a mere 5 percent efficiency savings across the board, in their portfolio.

Alistair Hines, from EECA, states emphatically that 20-30 percent is an easy, attainable figure. And he and Happy come into conflict on the options available. Hines insists that the technology needed to execute savings is simple, right under our nose and makes economic sense. Happy is quick to point out that he doesn’t “feel that there is a lot new under the sun.”

The way Hines puts it, it all seems so simple. The first ten percent comes from simple behavioral changes in the office. Good habits amongst employees, using energy efficient appliances and turning lights off. The next twenty percent comes from targeted electronics (making sure that massive rooms of lights aren’t attached to just one switch) sensible air-conditioning systems, and improved insulation. Past thirty percent you can be limited by the structure you’re dealing with. But thirty percent itself seems a worthy cause, and one that definitely does not rely on drastic measures.

Jason Happy is satisfied with the quality of the buildings under his care. He says that his company operates “Grade A” landmark towers, and they are always intending to set their offices apart. Happy is wary of being taken in by the “New Car mentality; the basic mechanics can be very similar. You get taken in by the new electronics, when the core mechanics can be the same.”

The struggle to improve the energy efficiency of older premises leads back to the same issues every-time. The incentive is low. Energy is relatively inexpensive, and it equates to about one percent of an office’s running costs, paling in comparison to the human costs of keeping a business going. And the benefits are diluted. Happy estimates that maybe through (probably expensive) investment, he could only bring around five dollars a square metre in energy savings to his tenants. Even if a retrofit of an existing block led to a 5-star rating on the new Green Star ratings system, the savings in energy costs are estimated at less than eight dollars a square metre.

Hines tells me that we’re “talking about big savings from straight forward technology. It makes great business sense.” And Happy readily concedes that when added together the gains are large. Essentially, it is a corporate version of that same issue that tackling climate change always faces. How do you convince somebody to act for the collective - rather than individual - gain?

Happy and Hines concur that the solution hinges on information and education driving the market. Alistair Hines states that the availability of information about energy use will allow for informed decisions. Thus creating a situation where energy efficiency becomes a way to attract clients and sell space - and can be a bargaining chip in negotiating with a tenant, or committing to a longer lease with a landlord.

Creating premises that are appealing to his tenants is central to what Jason Happy is trying to do, and he says that there has been a push to meet a perceived greening of demand. “These requirements are not always articulated consistently by tenants. We've interpreted, anticipated this demand. The Green Star system has been a rallying umbrella. People have started asking for specifics, and they're keeping well informed. Ratings systems drive market behaviour. Increase the worth of the issue, allow for differentiation, and a potential increase in information for tenants.” Happy says.

But there’s an even larger snag, due to an inherent split incentive in the situation. The landlord pays, but the client gains. "The resource base is on the landlord’s side, but we can't access those savings that tenants have," Happy says. "We can influence central services, we can bring savings of about 10 percent or so to us. But when improving on-floor services, the benefits do not accrue to the landlord."

This is a pressing dilemma. Globally, it has ground many movements to begin greening the existing stock of buildings to a halt. This has included a recent push from New York Mayor Michael Bloomberg, for all 22,000 office-buildings to undergo energy audits and mandatory upgrades. In the USA, President Barack Obama set aside 2.8 billion dollars to prioritise retrofitting. In those countries where reducing the carbon footprint of the CBD is the most pressing concern in getting immediate emission reductions ( and thereby getting an upper hand in the carbon battle) the fact that landlords and tenants have different incentives is fast turning into a massive dis-incentive.

It can even introduce a secondary dilemma. In some cases, landlords can’t get financing for the upgrades, because they can’t illustrate to a bank where the gains in this investment in energy saving technology will come back to them.

Such systemic market problems are difficult to solve. No one denies that the problem exists, but few direct solutions are proffered up. It is much the same sort of luxury afforded to our country by the focus on the farming sector, as we look to attain our own conservational goals.

Hines and Happy were cagey to endorse - or even judge - a system where a building with a higher green rating would cost more to rent, in compensation for the lower power bills. But Happy is aware that “a scheme where benefit accrued to the landlord in some way would help underpin a market for retrofitting.” Green Party MP Jeanette Fitzsimons endorses this view, stating that landlords and tenants will probably need to start sharing the costs of this work. Fitzsimons also says that we need to set clearer, tougher building standards so we do not have to face this issue again.

This all seems very counter-intuitive. The market is supposedly driving the need for greener, more efficient office spaces through more informed and educated consumers. But these market forces are acknowledged to be extremely weak at key points. They work slowly. Ultimately, the market alone can’t provide for greener office spaces. Even the weak market forces that do exist are hard to capitalise on – since the very nature of the rental agreement is actually spinning the wheels of the situation backwards.

This landlord/tenant divergence of interest is a genuine head scratcher. “It is hard to change the split incentive. It is inherent in the structure of the market,” says Ralph Chapman, from the NZ Sustainability Council. Chapman is deadly serious when talking about the need for energy improvement. In every area, even in the nine percent that commercial buildings take up, and even in the two-tenths of a percent of global emissions that New Zealand represents, we have to cut back. “Any use of energy is a problem, I guess.” Chapman says.

“Carbon emissions are almost a runaway train. If governments don’t act, if we don’t all act, the overall impact will be extremely damaging.” Chapman says. And he’s right. It is far from a new sentiment – the reality of what needs to be done about emissions is challenging at best, and catastrophic, at worst.

“Every sector adds up, all cuts add up. The world can get to where it wants to be. But there’s a huge incentive to free ride, even though attaining these savings isn’t that costly.”

We all have to pitch in. Chapman concludes. And his all hands on deck rhetoric is the perfect antidote to the notion that smaller areas of the problem don’t count as much. It all counts.

With commercial real estate, you come back to the basic dilemma that you’ve heard before. It is hard to get individual companies, as it is individual people, to be socially responsible when no one is looking, and when the benefit of a single action is small. The monetary incentive to them is low, the market forces weak.

Even if and when a landlord has seen the light, and the greater good….how do you then convince them to pay for a change that they won’t benefit from ?

ENDS

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