Energy-efficient lighting is not only good for the environment, but good for the bottom line as well
Stuart Bradford
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Energy is the single largest operating expense for a commercial office building, according to the Environmental Protection Agency (EPA), comprising approximately one-third of a building’s operating expenses. Improving the energy efficiency of a building’s lighting has become a priority for many real estate companies because it can lower operating costs, increase net operating income, increase funds from operations (FFO), and—most importantly—enhance asset and shareholder value.
“Being environmentally sensitive and smart business people are not two mutually exclusive goals,” says Andrew Soble, executive vice president for strategic planning operations for Arden Realty, Inc. “Lots of energy efficiency initiatives can and should be married with financial incentives.”
Sophisticated investors are becoming more aware of the value of energy efficiency and companies are being asked about what steps they are taking. One sign that a property owner has met certain energy efficiency standards is the EPA’s Energy Star® program. Energy Star labels products that offer a high degree of energy efficiency, and now commercial properties can be given this designation as well.
“The EPA supports companies when they agree to the concept of lowering energy consumption,” says Deb Cloutier of the Real Estate Technologies Group, a consultant with Energy Star. “The EPA provides software training tools and gives companies a financially based message that they can make their companies more profitable and increase their investors’ earnings per share by lowering their energy costs. We use a five-stage approach to increasing energy efficiency, and improving lighting systems is one of the first and easiest things a company should do.”
Dispelling the Myths
In owner-occupied real estate, focusing on energy efficiency has a clear cost-benefit relationship. However, in the world of income-producing commercial real estate, the drive to develop more energy efficient buildings can be slowed by confusion over who benefits financially from the energy savings.
“There’s a myth that landlords couldn’t save money by improving their buildings’ energy efficiency because tenants would reap the savings,” says Mark Jewell, president of RealWinWin, Inc., which provides commercial real estate owners with Internet-based services for analyzing and implementing energy efficiency and operating profitability improvements. “The corresponding myth is that tenants wouldn’t want to spend their money upgrading [their lighting systems] because no financial incentive exists. Tenants would worry that their lease would expire before they would be repaid in savings for their upfront outlay.”
The biggest obstacle to having more energy efficient buildings is that landlords don’t do the calculations as to who would receive the savings benefit, Jewell says. He stresses that any cost-benefit analysis should incorporate owner/tenant expense sharing and other issues specific to income-producing properties.
“Lighting uses 35 percent to 40 percent of all power in a building. If [landlords] can reduce their lighting use by 40 percent, they can reduce energy demand overall by 16 percent,” Jewell says. “Reducing the amount of energy used reduces pressure on the power grid overall and in turn a building is less susceptible to price increases, too.”
A Marketing Tool
Many real estate companies, however, have completed a cost-benefit analysis and have forged ahead with retrofitting their buildings with new technology.
“A big incentive for building owners is that increasing a property’s energy efficiency can be a marketing tool to show that your building operates at a more efficient rate than your competitor’s and at a lower cost to tenants,” says Joe Summers, vice president of national operations for Prentiss Properties Trust. “A lot of companies got into looking at their energy consumption after the power problems in California, but our goal has always been to be energy efficient, period, whether it’s the flavor of the day or not. Energy is the single largest component of our operating expenses, so it receives a lot of focus.”
Prentiss began adding energy efficient lighting years ago when many of the utility companies were offering rebates and incentives to property owners who reduced their energy use, particularly during peak demand times.
“We moved to T-8 lighting in most of our buildings, put in new reflectors, and reduced some of our fixtures from three bulbs to two bulbs, which meant we saved energy and had fewer bulbs to recycle,” Summers says. “ Now we’re looking into whether it makes sense to change again as the technology improves.”
Ed Theil, corporate director of maintenance for Brandywine Realty Trust, says his company also continues to evaluate its lighting improvements regularly. “As we acquire new properties, and with older ones too, we’re replacing the light bulbs, changing the ballasts, and exchanging the old exit signs for LED (light-emitting diodes) signs,” Theil says. “We’ve found the upfront costs for this are negligible, especially because we’re doing it as we replace lighting rather than in all of our properties at once. We’re very conscious of the technology that’s available, and we’re improving our energy efficiency both because it makes sense from an operating standpoint and because it’s the right thing to do.”
Arden Realty has the highest number of Energy Star designated buildings in the nation, receiving the EPA’s “Energy Star Partner of the Year” award for the past two years.
“About three years ago we decided to invest in energy efficiency, and the result has been a huge savings in energy consumption and the operating costs that go along with that,” says Brooke Lauter, Arden’s director of corporate communications.
Arden conducts an energy audit in each building they own or acquire, and, in the lighting area, attempts to reduce the number of bulbs per fixture, upgrades the type of bulbs and ballasts, and introduces occupancy sensor systems.
Quantifying the Results
Quantifying the amount of savings improved lighting efficiency can generate was problematic for companies in the past. Now there are a few software packages that can help. The EPA offers Quickscope, a financial software package to analyze proposed energy upgrades and help determine how to allocate the costs and benefits of those upgrades between landlords and tenants. The EPA also offers an Internet-based benchmarking tool that helps buildings qualify for the Energy Star designation.
In addition, Jewell’s RealWinWin has designed more sophisticated software that can help landlords decide which of their buildings need to be upgraded first.
“My company can evaluate the economic savings of upgrading the energy efficiency of each building, look in a national database to find rebates which might be available to offset the cost of improving efficiency,” Jewell says. “Then we do a cost-benefit model which will help analyze who will get the savings and, finally, rank each building in order of priority.”
“Real estate companies using the income approach to appraising an energy project will recognize that the building itself will become more valuable when it’s more energy efficient,” says Jewell. “When you combine the increased value of the building with the energy savings, a real estate company can generate anywhere from 27 percent to 127 percent returns per year on the cost of retrofitting a building.
In general, savings are highest on buildings with the oldest, least energy efficient lighting systems in place. However, companies can still reap some benefits by turning to newer technologies.
“The payback on this type of work was originally estimated to be a modest amount of money, but it is generally a strong 15 percent return on the investment,” Soble says. “We usually recover the initial cost within five years, but then the benefits continue to roll forward in terms of additional savings, and in terms of marketing and a positive image.”
Sensing Savings
Many building owners have already conducted the initial conversions to energy efficient lighting. According to Eric Marsh, promotional marketing leader for Philips Lighting Company, “Most Class-A buildings, especially those in high-cost energy markets, have already made the conversion from T-12 (bulbs) to T-8s and from magnetic to electronic ballasts. Those steps alone can often result in 40 percent to 50 percent energy savings.”
Marsh says the next step most companies should take is to install light sensors which turn the lights off when a space is unoccupied. “Building owners need to look at how they are managing their lights, utilizing daylighting, lamp sensors and dimming systems,” he says. Occupancy sensors automatically turn off the lights when a room is unoccupied for a certain period of time. These sensors are particularly useful for rooms which are only sporadically in use such as restrooms and conference rooms.
“Three or four years ago, the EPA did a study in which they looked at four spaces in each of 60 office buildings. The study determined that occupancy sensors can save 55 percent of the energy used in personal office space, 70 percent of energy used in restrooms and 66 percent of energy used in conference rooms. Overall, a building can expect to save an average of 62 percent of its energy use if occupancy sensors are installed,” says Paul Vrabel, project manager of the Lighting Energy Efficiency Program for ICF Consulting.
“By using an automated system and eliminating the human factor of people forgetting to turn off their lights, we can save eight to 12 hours a day of lighting usage,” Prentiss’ Summers says.
Some people resist the use of occupancy sensors, according to Vrabel, because they don’t like lights switching on and off and worry that the lights will go out in their personal office space if they don’t move around enough.
On the Horizon
Innovations in lighting beyond T-8 fluorescent bulbs, new ballasts and light sensors include some products available now and others which companies can look forward to using to improve their energy efficiency in future years.
“For properties with 15 to 30-foot high lobby ceilings, high- intensity discharge lighting using metal halide or high-pressure sodium can be a low-cost retrofit,” Vrabel says. “There have been significant advances made in this type of lighting, so that they give off better color and quality lighting along with energy efficiency.”
The next big move in bulbs will be to T-5 bulbs from Europe that will probably be in use in some areas by mid-2002.
“The T-5s are a more efficient light source that depreciates less over time compared to other bulbs,” Vrabel says. “However, the T-5s are not necessarily designed for a retrofit because they don’t as yet come in the standard four-foot lighting space found in most U.S. offices. These lights are so compact and so bright you can end up with too much glare if they are used in a small space. Retailers will probably use them first because they are so small that they can fit under shelves for display lighting.”
Another area of innovation will be in the use of LEDs (light-emitting diodes, which are low-energy light sources). Exit signs are one of the first fixtures moving from incandescent lights to LEDs.
“Currently LEDs come in lots of colors and are used for the little display lights which show that a computer is on,” Vrabel says. “Now companies are developing white LEDs which use 90 percent less energy than incandescent light bulbs. It will take three to five more years of development and perhaps seven to 10 years before these will be available at the right price point, but these white LEDs could be used for recessed lighting and task lighting as either a string of lights or a single bulb.”
Technological advancements aside, property owners need to start today by analyzing the lighting used in each of their buildings to find where the most cost-effective changes can be made. The benefits to the environment, the owner’s image and the bottom line will follow.
Michele Lerner, a freelance writer from Washington, D.C., specializes in real estate-related articles.
