Commercial Buildings & the Retrofit Opportunity

The trend in building construction is shifting from new construction to retrofits. A “green” retrofit means upgrading the building to a higher environmental certification standard, achieving genuine sustainability requires something more.

Countries around the world are showing new signs of readiness to act on carbon emissions. That means new pressures to make buildings highly efficient in their use of electrical power, particularly as a recent report  from the U.S. Environmental Protection Agency shows that, between 1990 and 2013, indirect greenhouse gas emissions from electricity use of homes and business increased 28 percent. However, perceptions of ultra-modern, high efficiency commercial buildings may not align with the realities of the low-carbon built environment challenge. Rather, the United States will need to work primarily with existing commercial buildings, not new construction. Thus, the future of high-performance commercial buildings is linked integrally to retrofits – and a successful retrofit strategy for environmentally sustainable building solutions will require a fresh approach and new kinds of innovation.

Citing McGraw Hill data, the U.S. Green Building Council observed that 61 percent of all construction projects today are retrofits; in many population centers the percentage is much higher.

Buildings by the Numbers
First, it is vital to understand that the profile of commercial buildings in America is changing. According to the U.S. Energy Information Agency’s Commercial Buildings Energy Consumption Survey (CBECS), there were about five million commercial buildings in the United States in 2003. By 2012, the number rose to 5.6 million – a 14 percent increase over a decade. In the same period, total commercial square footage increased 21 percent – from just over 70 billion to 87 billion.   

Buildings are durable and, on balance, not large. The median building today is 32 years old; about half of America’s commercial buildings were built before 1980. Only two percent of all buildings are larger than 100,000 square feet, while about half are 5,000 square feet or smaller.  

The importance of retrofit grew in the wake of the 2008 financial crisis and recession, which were hard on commercial properties and created uncertain loans and major losses for banks.

America’s building profile varies significantly by region. For example, the South has 46 percent of new buildings and 37 percent of the population. Almost half of all buildings built in the United States since 2000 are in the South. By contrast, the Northeast is home to the largest and oldest building. Whereas the median age of a commercial building in the South is 29 years – less than the nationwide average, in the Northeast the median age is 46 years, and the buildings are on average 4,000 to 5,000 square feet larger. Buildings in the Northeast’s Mid-Atlantic region average 22,300 square feet.

The Rise of Retrofits
The trend in building construction is shifting from new construction to retrofits. Citing McGraw Hill data, the U.S. Green Building Council observed that 61 percent of all construction projects today are retrofits; in many population centers the percentage is much higher. The importance of retrofit grew in the wake of the 2008 financial crisis and recession, which were hard on commercial properties and created uncertain loans and major losses for banks. In fact, the impact remains significant as bank losses have weakened capital reserves and their ability to make new loans. Falling real estate prices and tighter credit standards weakened the new construction market.   

The rise of retrofits, however, has not translated directly into more sustainable buildings. Whereas “retrofit” means changing out elements or components of the building and a “green” retrofit means upgrading the building to a higher environmental certification standard, achieving genuine sustainability requires something more.

Deep Energy Retrofits
The Rocky Mountain Institute has been working on what that something more might be: the deep energy retrofit. In 2010, the RMI proposed a deep energy retrofit plan for the Byron Rogers Federal Office Building in Denver, a project they regard as “a powerful case study for dramatically improving performance of existing buildings.”

The plan was very aggressive with a goal of reducing the building’s energy consumption by 70 percent. The U.S. General Services Administration, which owns the 620,000-square-foot building, bought into the concept and used $147 million from the American Recovery and Reinvestment Act to fund a large portion of the project, which, in total, cost about $160 million.

The Byron Rogers Federal Office Building houses eleven government agencies and would deploy new ideas in space use, including flexible work spaces and shared meeting rooms. Central to the retrofit strategy was chilled beam technology, where chilled water is fed through beams that then act as radiators. Solar collectors also were added to provide 100 percent of the building’s hot water.

The result: GSA reports that the building now uses less than 45.1 kBtu per square foot per year (note the “whole building” metric) and achieves annual energy savings of about 55 percent.

In addition to chilled beams and solar collectors, the deep energy retrofit toolkit also offers designers access to demand response technology, thermal energy storage, cogeneration (combined heat and power), and others. Integrated together, these technologies can dramatically improve building performance in absolute terms and relative to peak load. By not only cutting total energy use, but also shifting the time at which electrical power is demanded by the building, such technologies woven into a whole building systems strategy can draw on the grid during low demand periods and reduce the load during peak or high demand periods – cutting the need for the added high-cost, high-carbon peak power generation otherwise required.

Despite so many advantages of a deep energy retrofit, owners have been reluctant. As Building Sciences Corporation’s Ken Neuhauser said in an Energy Circle Pro interview, “Deep energy retrofits are hard. They are not simple, quick or cheap.” And in most cases that translates directly into a financing challenge – because to a bank with tight credit standards for buildings, hard, complex, slow, and expensive means risky.  

Financing Deep Energy Retrofits
Financing deep retrofits will require innovative and collaborative thinking. As an example, the Mayor of Seattle announced in 2013 a pilot project between Seattle City Light and the Bullitt Foundation “to make deep energy efficiency in new and existing commercial buildings economically feasible.”  

The goal was precisely on target. “Very few building owners now make the large, long-term investments needed to achieve ‘deep’ savings of 35 to 50 percent,” the Mayor’s announcement of the project noted. “Yet the rates of return on such investments would be attractive to utilities and other investors that have access to cheap, long-term capital. The new pilot program aims to overcome that obstacle.”

The pilot concept relies on two pillars – an “energy efficiency meter to objectively measure real-time energy savings and a 20-year contract between a utility and energy efficiency investors,” the latter of which “allows an investor to profitably invest in energy efficiency upgrades with longer payback times.” This benefits a building’s long-term investors who are not necessarily the building’s owners. The investment could be made through traditional investment instruments, such as bonds, though the best mechanisms for getting the return to the investor remains to be sorted out.

But the project has demonstrated the viability of the concept. Writing about it in the Daily Journal of Commerce in 2015, Thulasi Narayan, a manager at Paladino and Co., highlighted the potential impact. “At the net-zero [energy] Bullitt Center, Seattle City Light and the building owners are pioneering a potentially game-changing power purchase agreement termed MEETS, or metered energy efficiency transaction structure. City Light pays the building owner for energy saved against a baseline, similar to the credits that homeowners receive when solar panels on their roof generate more energy than the house is using. Making this incentive structure a reality relies on sophisticated technology that identifies how multiple factors (such as occupancy, schedule or weather) impact energy consumption, and comparing that to how the building actually performs at the utility meter. By understanding the environmental factors that influence energy consumption, the utility knows it is paying for real energy savings rather than incidental savings coming from fewer occupants being in the building or unseasonably mild weather.”  

The project is a “way to enable a true pay-for-performance market,” Narayan observed, quoting an industry CEO, “including long-term power purchase agreements that will allow deep energy efficiency retrofits to join wind and solar as at-scale solutions for our energy system.”

It is not hard to see how monatized energy savings could add to the book value of a building and create new incentives for transparency on energy consumption. Owners have not always warmed to the idea of reporting energy use and disclosing it at time of sale; transparency has been seen as more of a risk factor in determining the building value, though cities such as Philadelphia and Boston have mandated reporting energy use for midsized and large buildings, and others are exploring the possibility of doing so. A building that creates an income flow to the owner or investor, however, is a different matter.
That said, valuation in a new era of high-performance buildings is a science yet in its infancy. Projects in the US and Europe are exploring possibilities, some building brokers have built such calculations into their business models, and the underlying logic is clear enough. But establishing the value of an investment in deep energy retrofit with sufficient specificity to influence the price of a building remains a work in progress.

More Than Timely Innovation
The Denver and Seattle projects illustrate how new alignments and opportunities can develop for breakout levels of energy savings through retrofits – from those in technology and integrated building systems to those among the public and private sectors, foundations and NGOs, and others. The case in Denver highlighted the advantages of holistic retrofit design and Seattle then identified a value not being accessed by the marketplace and created an instrument to permit the marketplace to access that value. These innovations made it possible to activate a wealth of technology and know-how that would have otherwise remained dormant.  

Increasingly, the world is facing up to its carbon emissions and sustainability challenge – and the opportunity within America’s millions of aging commercial buildings is significant. But typical improvements in building energy performance are too modest and too slow to meet the goals now being deemed necessary. Building performance is stalled; there is less of the dramatic new construction many thought leaders have envisioned and more of the “lite” retrofits that lack impact. Together, the Denver and Seattle experiences represent a new standard for innovation that will need to be met if the world’s aspiration for high-performance and efficient buildings is to become a reality and the retrofit opportunity is to be realized.

Lisa Tryson is director, corporate communications and public relations, Danfoss.

 

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