What does the Empire State Building retrofit mean for building energy efficiency?

Jake and I had the pleasure of taking a brief tour of the Empire State Building recently with Dana Schneider of Jones Lang LaSalle, the person responsible for shepherding the landmark building through its high profile retrofit.

Given the massive amount of articles that have been written about the building, we won’t recount all of the cool things being done to the building as part of the multi-million dollar makeover and retrofit. (Be sure to check out the building’s website, which has an amazing level of detail on the retrofit. They even posted a copy of the energy performance contract the ESB signed with Johnson Controls.)

However, we would be very remiss to not mention the various things the ESB can teach us about the current state of the retrofit market.

  1. Retrofits are cheap relative to renovations. Of the $500+ million spent on renovating the building, only a fraction – $13 million – was spent on the actual retrofitting and energy savings measures of the building. Now that really puts things into perspective, doesn’t it? When undergoing new construction or major renovation, it almost always makes financial sense to evaluate the opportunities and incremental capital needed for building energy efficiency.
  2. Self-funding makes sense for large owners. When a large, well-capitalized Class A office owner buys into the financial case for efficiency, the owner has not traditionally utilized an outside source of financing for the project. Johnson Controls, one of the largest ESCOs, was involved on this particular project, but played the role of a project manager for the retrofit and provided a performance guarantee.  In the MUSH market, the ESCO helps to arrange financing for the building through its performance guarantee backstopping the performance concerns of potential lenders to the project.  Notably, the retrofit did not utilize any outside capital. This is interesting, because as you’ll recall from the post on LBL’s report on ESCOs, ESCOs don’t currently play a large role in the commercial building market, and if it’s true that large owners are more interested in self-funding, this may not change anytime soon.
  3. The long tail problem is real. The Empire State Building retrofit really puts the scope of the long tail problem into perspective. This building, one of the largest in the world, cost only $13 million to retrofit. This further drives home the point that any individual building energy retrofit project is almost too small for many institutional sources of capital to approach individually, yet it does nothing to change the fact that in aggregate this market has massive potential. The key will be how to effectively aggregate a number of $5-$10 million projects into something that is useful for institutional investors who are most likely to drive the market to scale.
  4. Retrofits work. The ESB expects to save $4.4 million per year on the $13 million invested, which works out to a 30+% return on investment. It’s safe to say that most investors would be very pleased with that level of return.

Thanks again to Dana for a great tour of the property, and congratulations on all the hard work on this building paying off so handsomely.

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