Tenants get more say in a tight economy

Claire Woolley

As a sign of the times, more and more commercial office tenants are looking for ways to make their business operations more resource efficient. Those finding success will commonly create a sustainability plan that starts with the "low-hanging fruit." It's easiest to start with low- or no-cost initiatives, such as paper reduction and energy conservation measures that produce the greatest cost savings and effect on environmental impacts. Underpinning such initiatives should be a robust measuring and monitoring regime.

Starting with initiatives that get tangible and easily achievable results can create the necessary momentum for further, more advanced sustainable business initiatives. For commercial office tenants, such initiatives often focus on energy efficiency, recycling and indoor air quality issues.

However, tackling such initiatives, for the large part, requires working with landlords, which can sometimes be problematic. Achieving desired outcomes can simply start with a tenant actively forming a better, more collaborative relationship with a landlord. Moreover, with the slacking real estate market, landlords are more likely to act on tenants’ requests for greener building operations, such as expanded recycling programs (e.g. plastic and aluminum collections) and also “green cleaning”.

Worth the investment

In terms of energy efficiency, tenants should know that landlords are more often than not just as interested in reducing energy costs as their tenants are. Energy efficiency is fast becoming a key strategy in corporate America because it delivers many real benefits, such as lower lifecycle operation cost, increased building functionality and higher comfort level for occupants. There is also increasingly hard data on the excellent return on investment (ROIs) and increases in asset values associated with green buildings.

For example, an often cited study by CoStar Group released in 2008 reports that green buildings outperform conventional buildings in terms of occupancy, sale price and rental rates, sometimes by significant margins. Specifically, the CoStar study found that LEED (Leadership in Energy and Environmental Design) buildings command rent premiums of $11.33 per square foot over non-LEED buildings and have 4.1 percent higher occupancy rate.

Similarly, rental rates in Energy Star-certified buildings have a $2.40 per square foot premium over comparable non-Energy Star rated buildings, and have a 3.6 percent higher occupancy rate. In terms of increase in asset value, LEED rated buildings commanded $171 more per square foot. Even Energy Star-certified buildings sold for an average of $61 per square foot more than comparable non-certified buildings. These are clear signs of the marketplace demand for higher performing buildings.

The Federal Economic Stimulus Package also provides a boost for commercial office building tenants and owners that want to invest in energy efficiency. Two key provisions provide an additional $3.1 billion to states through the existing State Energy Program, as well as $3.2 billion to municipalities, counties and states through the new Energy Efficiency and Conservation Block Grant Program.

Currently, officials at both state and local levels are designing programs or providing proposals to augment existing energy efficiency programs that also best meet the other economic stimulus and job growth objectives. Both tenants and landlords should be looking at the opportunities for energy efficiency projects as the programs take shape over the coming months.

The "green" lease

In the past, there have been many barriors to introducing energy efficiency changes in commercial buildings. Many types of leases make it difficult to make efficiency pay. However, this is a function of the structure of the lease rather than the cost-effectiveness of the efficiency measures. For this reason, there has been a concerted effort to make energy efficiency work for both landlords and tenants. Enter the new frontier of green lease agreements.

A green lease is at its heart a traditional lease. However, it also includes additional provisions that allow a landlord and its tenants to work together to ensure that the building is operated in the most environmentally responsible and efficient manner, thereby creating cost savings for both parties.

Tenants should also seize the many benefits of a down real estate market. Tenants moving to new space or renewing an existing lease have significant leverage in the current market conditions. Therefore, they can more easily negotiate for "green" provisions in a lease which reflect their own sustainability goals as they relate to reduced consumption of energy and water, waste management, and indoor and exterior environmental quality.

For those tenants who are not in a new lease or lease renewal situation, are advised to go to their landlords armed with some basic examples of the payback periods of the measures they want to implement. It is also helpful to provide information on the state and federal incentives that are likely available to improve project ROIs.

Reducing carbon emissions

Commercial office tenants are also starting to be more aware of their impact on climate change. Many are actively reducing their business-related greenhouse gas emissions, some with a view to achieving carbon neutrality. For motivated tenants, conducting a greenhouse gas (GHG) assessment often goes hand-in-hand with overall responsible building management. Because a GHG assessment helps companies set reduction goals and strategies, they can help a company measure the overall effectiveness of its  sustainability program. 

For commercial office tenants who are reaching beyond the low-hanging fruit to green their business operations, the many benefits of doing so are enhanced in tightening markets. Not only do companies have the potential to gain public relations and marketing advantages by implementing a sustainability plan; companies undertaking more advanced sustainability initiatives can speak to the overall cost effectiveness and enhanced risk management resulting from such initiatives.

Claire Woolley is a Vice President of commercial tenant representation firm Howard Ecker + Company where she provides advice and assistance to commercial office tenants wanting to green their existing operations and office spaces.