Energy in buildings: what is the beast you're wrestling with?

Inside the bowels of the steel and glass towers you see downtown

We walk around our cities surrounded by giant towers of steel and glass and concrete. Some of us spend most of our waking days inside a commercial building, and they’ve been a looming physical and emotional presence for a century. They are also a looming part of our carbon footprint – commercial buildings account for nearly 20% of energy use in the U.S.

What we never see is how these buildings operate – what makes them tick both physically and organizationally. To decarbonize our physical environment we have to understand it. Here’s a little primer on those looking to understand the inside of a typical office building.

The physical plant

Think of an office building as composed of three physical parts: the building envelope and structure, the improvements and the mechanical systems. The envelope (windows, exterior walls, roof) and structure you see from the street, or when you head through a big lobby. It doesn’t move or change much, so we won’t get into it.

The improvements are the fancy lobby fixtures, the sweet tenant spaces with exposed ceilings and kombucha taps nearby. Or the cubicles and drop acoustic ceilings. Improvements change over time, and affect how much tenants will pay for space. Lighting is often part of the improvements, and so part of the energy question.

The mechanical systems1 are the heart of energy use in a building. They are large at a scale that is hard to grasp standing in a glassed-in conference room. Around you are pipes that carry hot and cold water through the building bigger in diameter than an adult human. Air handling units the size of railroad box cars move air around the building. Chillers so big they have be cut up if they need to be replaced sit on entire floors dedicated to space conditioning equipment. Miles of wiring (or pneumatic tubes in an older building2) link a building management system (BMS3) to the thermostats and variable air volume boxes4 that ventilate tenant spaces.

The takeaway is you really have to go after the mechanical systems if you want to affect the energy use of a building in a real way.

In a city like Chicago with more extreme weather, the mechanical systems are much larger than a place like San Francisco. Chicago office building Energy Use Intensities (EUIs, or amount of energy used per square foot) are also about 60% higher than San Francisco’s.5

Building energy use breaks down as follows for offices.6 I’ve colored the use related to mechanical systems yellow:

The takeaway is you really have to go after the mechanical systems if you want to affect the energy use of a building in a real way. Mechanical systems are hard. A building staff could run a lighting retrofit themselves. A mechanical and controls retrofit is a months-long project with operational impacts on the building and sometimes long, and often uncertain paybacks.

But the opportunities in most buildings are huge – a full controls and mechanical job, even without replacing chillers, can save 20+% of a building’s energy use. Savings from lighting are on top of that. The most common mechanical and controls efficiency retrofits in office buildings are controls work that brings the air handling units and VAVs under central digital control, fan and pump retrofits and boiler replacements.

About everybody’s favorite retrofit, lighting: It’s astounding the number of buildings you walk into that are still running old fluorescent lights. Paybacks on a fluorescent-to-LED lighting conversion are in the 3 to 7 year range. LED lighting uses 60 to 75% less energy than fluorescent lights. The quality of the light is great, and you can choose the color temperature you want to match the look of your office.

The great thing about having old lighting in your building is that you can use the quick payback of a lighting project to float a deeper retrofit of controls and mechanical systems. The bad thing about old lighting is that 1) the temptation is to do a lighting-only project because it’s easy and leave the deep retrofit off the table and 2) you probably have old lighting because of structural financial issues, not because people who run the building love old junky lighting. See finances, infra. California regulators finally got tired of this and banned the sale of fluorescent bulbs, including fluorescent tubes, which cannot be sold after Jan 1, 2025.

The people

The people that run the building are the the key to it all. They are steeped in a careful, conservative culture and hold the keys to how buildings operate and to how and when we will decarbonize the building stock.

Broadly there are two groups: building staff and contractors. Building staff call the shots and run the show, but the contractors have much of the expertise and do most of the project work.

Building staff

A caveat to the term “staff”. Many building staff members don’t actually get paychecks from the building’s owners, as they are employees of other organizations. It’s common for a building to contract out property management and leasing to one group (often CBRE, JLL or Cushman & Wakefield), engineering to another group (e.g., ABM) and janitorial to a third company. But these people, especially the engineering teams, remain in the building for decades, and while their employer may change as building owner preferences change, they stay with the building.

The engineers

The closest to the physical plant are the building engineers. The chief engineer (or “chief” in the industry) runs a building’s physical systems, from lighting to HVAC to water to the building envelope. The engineers come up through the ranks of a building, often spending a decade or more as an assistant chief before they get a chance to run a building. They are the ones who are in charge if a chiller breaks down or needs replacing. They are also the ones to respond to complaints about cold conference rooms or plugged up toilets. Their role is acting as Wizard of Oz in the background and making sure it all works.

Engineers tend to be interested in technology – I’ve seen their face light up when using a new building management system (BMS). They also tend to be conservative. The culture of building engineering is careful and risk-averse. They stand to lose their jobs if building systems go wonky and projects don’t go as planned. They put their trust in people they’ve worked with for a long time.

Engineers work in just a few buildings for their entire career. They are sometimes employed by the building and sometimes employed by an outside agency. In San Francisco, many class A building engineers work for ABM (formerly Able) and if building ownership changes the engineer will stay, sometimes changing employer.

The property managers

Property managers are in charge of all tenant-facing issues in a building. Their main job is keeping tenants happy and in the building and leasing out space. They’re very attentive to building appearance and functionality – you’ll often walk through a building with a PM and see them pick up small pieces of trash or close a door that shouldn’t be left open.

The property managers are either employed by a firm that building owners contract with to run the building – JLL and CBRE are the big ones – or employees of the building ownership. As such, they have a close relationship with the owners, who are their clients (or bosses). A good PM will be involved in all aspects of a building renovation project, as the project’s delivery will reflect on them. My most stressfull moments running projects have involved putting on a suit and going to apologize to an angry property manager.

The asset managers

Asset owners are the boss behind the scenes. They are employees of the owner with a financial background who oversee a portfolio of buildings. They ultimately make budget decisions and sign any large contract.

The involvement of the asset manager is where you know you’re talking to a decisionmaker. If you can’t talk to the asset manager early on in a proposed project sales process, you might as well walk away from the deal. They are the ones that will be looking at return on investment and will be thinking through any financing or financial risks. Asset managers are often hard to reach but once you’ve built a rapport, these relationships are absolutely key to a decarbonization project.

The tenants

The basic rule here is you’re hopefully not going to interact much with tenants if you’re working on building decarbonization. Occassionaly in a NNN building you might work with a tenant, or some tenants have special operational needs you have to address. But unless the owner is also the tenant you won’t deal much with tenants.

Contractors

The contractors are another part of the building. The mechanical and controls contractors likely installed the systems when the building was built and have been tweaking it and fine-tuning it ever since. They work closely with the chief engineer and they know where all the proverbial bodies are buried.

If there’s a major upgrade to a system to be done the contractors do that work. They can also be a great ally on a project, as they’ve wanted to do upgrades for years but there often isn’t the budget. Don’t make the mistake we made on some of my early projects and forget to find out who are the existing mechanical and controls contractors in the building. Sometimes a building will use a project as leverage to get rid of a legacy contractor but that’s unusual.

The finances

A commercial building is as much a financial instrument as a physical one. Think about your home – you own the home, but you have a significant financial interest by your side (or on your back) in the bank that owns the mortgage.

Repeat after me: a commercial building is not a creditworthy entity.

Commercial buildings are similar. Often buildings are run by a 5% owner who is a local player that operates the building. They employ the asset manager. The rest of the equity stake is a large pension fund or financial institution. And the rest of the capital stack, usually about 70% of the building’s capital, is a loan from a bank.

The financial entity that controls the building – call it 123 First St, LLC – is walled off from the owners, so that if it encounters financial difficulty it won’t affect the creditworthiness of the ownership groups. We’ve seen a number of office buildings, for example, handed over to the bank in the past couple of years, while the owners continue onward.

It’s this walled-off (or bankruptcy remote, in financial terms) nature of commercial buildings’ financial structure that determines much of what is possible in a building. Repeat after me: a commercial building is not a creditworthy entity. Despite the ownership by big financial institutions, large buildings are not cash-rich businesses.

A building asset manager does not have call on all the assets of, say, J.P. Morgan.

Because of that structure, commercial buildings have a harder time accessing loans to finance decarbonization projects. The mortgage holders in a building tend to look askance at loans that might impact the viability of their mortgage. And project lenders usually want some security in the building or in installed equipment in case a building goes bankrupt and they worry about being paid back. Equipment leases can work better than loans in some circumstances but that gets to pretty specialized territory.

Lease terms also vary between buildings. Various forms of leases allow buildings to charge tenants back for energy increases at various rates, and therefore affect a building owner’s incentives to install a new $1 million controls upgrade to save energy.

So this is much of your work as a decarbonization project developer – making the match between the financial needs and constraints of a building and the financing on offer in the market. Often the challenge is in finding financial partners willing to write loans or leases on a commercial building. Sometimes it’s figuring out how to place the costs of project payback in such a way that the costs can be recouped from the tenants. On-bill financing programs in their various flavors are often a great pathway for financing but require a lot of knowledge of how the programs function.

What does this mean

There are a few key things for organizations to keep in mind in their approach to decarbonize commercial buildings:

• Granularity will be your friend. Knowing your customers at a very granular level is a necessary but not sufficient ingredient to winning. I’m suspicious of the classic top-down McKinsey approach that says “put all your buildings in a giant database and let AI do the work of identifying decarbonization targets”. There are so many human factors involved in commercial buildings, and that data is so costly to gather – usually had in a face-to-face sales conversation – that feeding models good data will be a problem. This is exactly the kind of guidance that in-house or consulting expertise is valuable for.

• Being able to serve customers at scale takes a particular kind of reach across finance, customer access, technology and execution. Many groups will try but the few that succeed will have robust strategic plans and a team with the wherewithal to execute them.

• Regulators have largely gotten commercial buildings wrong. Unfortunately they haven’t understood the financial complexities, which has led them to believe that buildings will just pick up the savings lying in the street. Instead of designing programs that work to decarbonize buildings, they’ve fallen back on (failed) incentives and (slow to affect the building stock) building codes.

• Use lighting to finance the rest of a deep decarbonization retrofit. Redaptive built a nice business off of selling lighting projects (quick payback) to creditworthy owners (AT&T was a major customer of theirs). But the vast majority of the building stock has carbon issues that need to go beyond lighting retrofits and owners that aren’t AT&T.