2020 Roundtable

Bottom Line Marketplace Realities Demand Sustainability Gains - Real Estate Conference Showcases Financial Drivers and Resources

October 25, 2010

"Change is coming to New York City and New York State," declared Anthony E. Malkin in a keynote address at an October 20, 2010, conference cosponsored by the Steven L. Newman Real Estate Institute at Baruch College and the Greater New York Construction User Council. Malkin made that statement in making the business case for sustainability, and he spoke with the tremendous authority of his firm's experience: Malkin Holding LLC is guiding the major energy retrofit that's underway at the Empire State Building, of which the firm is a principal owner.

Anthony Malkin
Anthony E. Malkin, President, Malkin Holdings LLC

Titled 'Real Estate Repositioning," the October 20th event [link to PDF of agenda] focused on strategies for improving the performance of existing properties by cutting operating costs and boosting market appeal. It also explored financial resources that can be tapped to implement those strategies.

Following welcoming remarks by the president of the Construction User Council, Jonathan Resnick, Newman Institute director Jack Nyman set the stage in introductory remarks [link to Jack's remarks]. Under the worst economic conditions since the Great Depression, he observed, with so little new construction, the bottom line is how to make existing assets more competitive. Sustainability features can enhance performance, and, he added, sustainability is evolving toward becoming simply business as usual. Eventually, he speculated,

. . . a firm won't be a "leader" because it provides energy-efficient office space, any more than it's a `leader' today because it provides air-conditioned office space . . . energy efficiency and other sustainability features will just be the norm.

Nyman introduced Malkin as a visionary change agent who's leading a project "of truly historic significance." Malkin cast himself as a pragmatic businessman who wants to reduce an $11 million annual energy bill and reposition his property as a trophy asset. The energy retrofit is being undertaken as part of a $550 million capital improvement program for the iconic building.

But Malkin also made clear that the Empire State Building renovation- a unique collaboration among his firm, the Clinton Climate Initiative, Johnson Controls, Jones Lang LaSalle, and the Rocky Mountain Institute- is intended to serve as a replicable model that can be widely emulated. The point is to demonstrate the business case for energy efficiency through verifiable reductions in operating costs and analysis of payback periods.

Grounded in a sophisticated analysis of market drivers and business opportunities, the project's approach to achieving greater energy efficiencyemploys a set of retrofit measures: reduce energy loads and usage, optimize systems efficiency, provide controls, employ an integrated lifecycle approach and quantifiable metrics, guarantee savings through performance-based contracts, and ensure measurable payback and return on investment.

"There are no silver bullets," Malkin cautioned. Rather, taking simple steps, in the right order, and monitoring and reporting energy consumption are key. (So, perhaps, is patience and perseverance: Malkin remarked that renovating the Empire State Building's lobby took 6 months longer than constructing the building itself.) Soon, buildings will have the equivalent of a "sticker" on them that makes their energy performance transparent, he predicted.

Malkin contrasted Empire State Building retrofit measures with conventional green building practices, which he characterized as "a nice suite of activities" but not focused on the bottom line. LEED standards are "woefully inadequate" to achieving the energy savings and cost reductions that are possible, he stated flatly. "Glass is passé" and green roofs are inconsequential. Green power is three to five times more expensive than fossil-fuel-based power. Thus, to achieve society's carbon reduction goals, "energy efficiency is where we need progress," he insisted.

And we can't rely on the energy efficiency of new buildings. In New York City, buildings consume 80% of total energy consumed; 85% of the buildings that will be standing in 2030 exist today. We must target existing buildings. And because there's a shortage of the talent needed to do retrofit work, it shouldn't be wasted on projects that tackle single-family homes. We must go after the biggest energy consumers, such as large commercial buildings and hospitals: "Change the Wal-Marts; change the world!" Malkin contended.

To achieve its statewide carbon-reduction goals, New York State should "look at every dollar spent in and around energy," he urged. Some savings won't be obvious. And "most engineers still don't get this," he added, referring to how wattage consumed per square foot can be reduced.

The detailed slide presentation he walked his audience through is instructive and in fact borders on exciting- rare praise for a slideshow on energy efficiency. The story of how 6,500 windows in the Empire State Building have been remanufactured is fascinating in itself. (A similar slideshow, "Empire State Building Case Study" is posted on the project web site as a PDF file.)

The bottom line? The project could achieve energy savings of 38%, and not within the expected 5 years but within 3- by any measure a whopping success.

Significantly, over half the energy savings can be achieved within tenant-controlled space, and after payback, tenants could realize 10% savings. Tenants will be given access to online energy consumption and benchmarking information, along with project updates and tips on achieving sustainability. Already publicly available on the project web site are rich information resources, including design, rating, and decision making tools that can be applied to other projects.

In reflecting on the significance of the project, Nyman drew a striking parallel:

. . . the Empire State Building was built during the Great Depression of the 20th century, and it rose as a symbol of hope for New York City's- and the nation's- technological progress and future prosperity. Its retrofit has been launched during a difficult economy . . . and it represents a visionary commitment by Tony and his partners to the pursuit of a sustainable form of prosperity.

Malkin, he said, is "helping to give that building new life and new meaning." Malkin's talk certainly energized the audience: its response was immediate and enthusiastic. Conference moderator Kenneth M. Block, a partner in Tannenbaum Helpern Syracuse & Hirschtritt LLP, then guided three panels of experts who explored the market forces driving repositioning; repositioning techniques; and sources of incentives, generous tax credits, and financing.

As mentioned by Malkin and several other speakers, New York City's Greener, Greater Buildings Plan requires ongoing efficiency improvements in existing large buildings, which now consume nearly half of the city's energy. The City's plan makes legal compliance a sustainability driver along with financial incentives.

The Newman Institute's next conference is a natural successor to "Real Estate Repositioning": Greening Modernism will explore how the powerful precepts of the 20th Century's defining cultural movement can directly advance 21st-century sustainability goals as they apply to existing real estate assets. That event, which will be free of charge, will be held on December 9 at Baruch College.

View photos from the October 20 "Real Estate Repositioning" event.