Sustainability is becoming a financial consideration for more and more property owners. A combination of increased interest in ESG investing and new government regulations drive this shift in thinking. Property owners are taking a closer look at their HVAC systems as a result and spending more in some cases.
A panel at the recent Urban Land Institute family meeting discussed how a push for net zero carbon emissions affects their decisions about HVAC equipment. Alexander Hancock, a portfolio manager for real estate domestic equity at Nuveen, said the path there is a major undertaking. It’s something Hancock thinks about daily.
Nuveen is a subsidiary of TIAA-CREF, a company that provide investment and insurance products. The Federal Insurance Office recently announced a move toward a firmer stance on regulating how insurers prepare all aspects of their business for climate change. This includes the insurers’ property portfolios.
Some areas of the country are easier for a move to more sustainable building operations. Hancock said the availability of renewable energy is becoming a factor in site decisions. In cases where the building already exists, Nuveen looks at ways to increase energy efficiency and reduce carbon output. Panelists shared a few example of recent projects that worked to accomplish those goals.
C-Pace Financing “An Incredible Tool”
The first example is TIAA-CREF’s own headquarters at 730 3rd Avenue in New York City. The building was constructed in 1954 and acquired by TIAA-CREF in 1973. A $120 million investment project included an upgraded HVAC system, but new windows also produced savings in heating and cooling costs. Hancock said the windows dynamically tint as the sun moves through the day.
Part of the funding for this project came from commercial property assessed clean energy (C-PACE) financing. This is a government-sponsored private finance product that rewards property owners for seeking out clean energy retrofits. The program is available in 30 states.
“It’s an incredible tool for property owners who want to upgrade their props to be more sustainable,” Hancock said.
The next project was a new construction build. Commonwealth Charlotte is a 567,000-square-foot mixed use development consisting of an office building and an apartment building in downtown Charlotte, North Carolina. The biggest issue on the residential side was hot water heating. This was addressed through a combination of DHW heat pumps and low-flow fixtures.
Cost Considerations Remain
On the office side, Jessica Long, head of sustainability for Nuveen's U.S. real estate portfolio, recommended going with a more efficient HVAC system that included VRF. Hancock said the cost of that system initially made him uneasy.
“For sustainability practitioners, VRF is a no brainer,” he said. “As an investment professional, it’s not as straightforward.”
Jones explained replacing the system later would be difficult, so it was better to get ahead of any changes to the energy code. Hancock said that made the price work from a value standpoint. He said every decision about energy consumers such as HVAC systems needs to factor in the risk of future non-compliance that triggers either a lower appraisal or a discount at sale.
Still, there are limits to how much a developer budgets. Richard Monopoli, senior vice president of development for Boston Properties’ New York region, said the firm is looking at using air source heat pumps for a building located at 343 Madison Avenue in New York City. Having to add another mechanical floor at the 37th story presents the biggest hurdle.
“That’s not inexpensive in Manhattan at the corner of 44th and Madison,” Monopoli said.
Having only one tenant for a building makes these decisions easier. Monopoli used the example of a very sophisticated air delivery system installed at the San Francisco headquarters of Salesforce. Monopoli said it was likely something they wouldn’t install in a multitenant building, but the customer wanted it.