Brenden Millstein, CEO and founder of San Francisco-based Carbon Lighthouse.
Copyright 2015 JBJ Pictures
Industries of all kinds are grappling with the pandemic’s uncharted territories. Commercial real estate is no exception. But unlike many other industries, commercial real estate is uniquely positioned to embrace initiatives that could help absorb the incoming economic slump, win back moneys lost and navigate clear of the hazardous shoals looming ahead.
One of the measures is to invest in profitable climate solutions. More than a few CRE executives, fearing the cost, were initially resistant to the idea of investing money in energy efficiency. Only later, upon coming to understand energy efficiency could generate savings that traveled directly to the bottom line, did the wisest become smart energy advocates.
“Utilities are tied for the highest percentage of controllable costs for building owners,” says Brenden Millstein, CEO of Carbon Lighthouse, a San Francisco, Calif.-based energy-as-a-savings clean tech company. He notes cost of energy efficiency is 0.025/kWh, compared to as much as $0.10-$0.30 kWh utility rates in regions like New York City and Hawaii.
“It would be a business no-brainer, except the efficiency industry has been rife with overpromising and underdelivering. This is one reason so many firms have a 1- or 3-year pay-back requirement for efficiency, even though they’d be excited to return 12% to investors. The opportunity is there, however, and utilities make up the single largest controllable cost for landlords. When selecting an efficiency firm, make sure the dollar amount of savings is in the contract. If it’s not, run for the hills.”
Future proofing
Another investment well worth considering is modernizing to future proof, Millstein says. COVID-19 laid bare a few of the built environment’s greatest technological vulnerabilities. For instance, the majority of real estate building management systems (BMS) lack remote operation capabilities, meaning facility managers have to actually be on premise.
“In order to prepare for future disruption, and avoid putting employees and tenants at risk, now is the time to consider investing in modernized BMS, in tandem with pursuing cost-cutting energy-efficiency measures,” Millstein says. “Pursuing investments that mix advanced software with physical changes to the building – for example, AI/ML in the BMS while enabling the BMS for remote operations and improving building filtration/outside air use – can provide positive NOI while also making the building more robust.”
ESG scrutiny
ESG investments have been notorious for an absence of standardization, Millstein notes. But in a recession, we can anticipate greater market demand for uniform, statistics-based reporting that tracks ESG investments to reveal precise dollar returns, not greenwashing.
“Investors will prioritize environmental investments that offer proven data aournd climate impact and ROI,” he says. “In a recession, they are unlikely to prioritize any investment that does not track directly to dollars. Every dollar spent will carry more weight in today’s environment. Before embarking on a new ESG project or cool new tech gadget, decision makers will want to carefully plan and assess the elements they will be able to track, attribute and report on to demonstrate success and ROI.”
Lease cost reduction
In the wake of the pandemic, tenants may want to renegotiate their leases, shift office space usage or simply show less demand for office space, among other changes. “It will be important to evaluate how new cost-cutting measures impact leases, paying close attention to who benefits – tenants or owners – and by how much,” Millstein says. “Finding vendors that will pay access fees direct to landlords while also cutting costs for tenants, similar to telecom firms, can be another way to offset other expenses.”
Now is the time for CRE to make smart future/forward decisions, taking steps today to ensure portfolios are recouping costs where they can, Millstein asserts. “Strategically consider how everything comes together,” he concludes.