September 27, 2023

Regulating energy efficiency is a unique challenge

Steve Fletcher, CCIM
Industrial specialist,Gruber Commercial Real Estate Inc.

Building owners are used to facing challenges: keeping buildings leased, updating buildings to keep them from becoming obsolete, navigating changing market conditions, etc. But now, owners have an additional challenge in front of them – energy efficiency. As Denver and other municipalities throughout Colorado roll out energy-efficiency requirements for commercial buildings, industrial property owners face their own unique set of challenges. What makes industrial properties different when it comes to energy and energy efficiency are two primary factors: the diverse nature of industrial tenants and the lack of control owners have over the management of utilities in their buildings. First, whereas office and retail buildings can be occupied by a wide variety of different businesses, the uses for the space tend to not differ widely from one tenant to another. Multitenant office buildings are particularly homogenous in nature with regard to their tenants and their tenants’ energy usage. Conversely, one industrial building could house a wide variety of uses, including storage tenants that consume almost no utilities other than basic lighting, and at the same time, other manufacturing tenants that may have massive electrical needs to support equipment and require utilities to support a large workforce. Second, unlike office properties where the utilities are centralized for the entire property and ownership and/or property management is able to regulate its usage, in industrial buildings the utilities are generally all separate from tenant to tenant and separately metered. Without centralized utilities, in industrial buildings property management usually has little control of usage, and usage regulation is left up to the tenants and their warehouse employees.

Because of these differences, a “one-size-fits-all” approach to making industrial buildings more energy efficient is not only ineffective, but also detrimental to owners and the industrial businesses that occupy their buildings. As municipalities roll out energy-efficiency requirements and energy tracking programs, the first step ownership groups should take is to identify their tenant spaces and tenant uses accurately. For example, the energy tracking program currently in place in the city and county of Denver allows building owners to use the software to input individual industrial units differently, within the same building, to account for functional differences from one space to another as well as different uses that might exist within a single building. The energy targets Denver has established differ based on how these spaces are used (nature of use, number of employees, equipment use, space improvements, etc.). For this reason, property owners should look to first identify and input their properties correctly so as to take full advantage of these differences in how their buildings’ energy usage is collated with regard to the energy targets being set before implementing more costly energy saving improvements to their properties. Further, ownership groups may want to look at the cost benefit of engaging consultants who are trained in the systems the municipalities are using to track energy usage in buildings and can help owners input their properties as effectively as possible.

Next, because industrial owners generally have little control over their tenants’ utilities, and those utility bills are paid directly by the tenants, it’s often a case of “out of sight, out of mind” with regard to their tenants’ energy usage. Now, with the implementation of energyefficiency requirements and large fines for noncompliance, owners are being forced to take a more active role in monitoring their tenants’ utilities and energy usage. As mentioned above, for owners new to these requirements, a good option may be to hire a trained consultant. Before investing in property upgrades, an energy consultant can help owners identify what is the primary source of energy being used at their property. It doesn’t make sense to outlay a massive amount of capital for solar panels if almost all of your building’s energy usage is coming from gas in the form of heating. Or vice versa, if all of your building’s energy is from electrical consumption, spending your capital on heat pumps would not be the most effective strategy. Once a direction for your course of action is established, owners can start to look not only at what improvements are most cost-efficient to bring down utility usage (example: solar panels), but also what improvements can give owners more control over the energy usage in their buildings (example: smart thermostats).

Also, owners may not want to look solely at “adding” new energy-efficient systems to their buildings, but also to look at outstanding deferred maintenance repairs that can be made to keep energy from going out the door, literally, in the first place. For example, properly caulking and insulating building joints as well as seals around doors, particularly dock and grade-level loading doors, might do as much in the way of energy conservation as upgrading mechanical units.

In conclusion, in order to achieve the aggressive energy standards that are being set for commercial buildings by local municipalities, owners may be faced with large capital expenditures for energy-efficient upgrades or face fines. Simply passing along fines to tenants isn’t the best strategy; it wouldn’t help to improve energy efficiency in buildings or help owners retain tenants – quite the opposite in fact. In facing these new challenges, it will be important for owners to gain a better understanding of their property and their tenants. Then, industrial property owners will be in a position to work with their contractors and consultants to implement best practices, to stay ahead of the energy curve.


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