Industrial Strength Sustainability

By Jessica Bates

The word “industrial” is more likely to conjure up images of billowing smokestacks and miles of concrete than solar panels and bike racks, but innovative industrial property professionals are proving that industrial can be just as “green” as the office sector. Industrial properties present their own set of challenges around sustainability, but the payoffs are significant. Due to the sheer size of most industrial properties, even small reductions in energy usage can make a big difference. As the market becomes more competitive, property management companies that offer strategies to reduce operational costs may get a significant boost in both attracting and retaining tenants.

JDM Associates Principal Deborah Cloutier, who provides consulting services in commercial real estate focused on energy management, says the biggest hurdle to sustainability in an industrial space typically is the relationship between the property manager and the tenant, which involves much less contact than in the office sector. “A property manager might hand an industrial tenant the keys and not have another opportunity to engage with them for months,” she says. This distance can compound the “split incentives” issue: Because industrial tenants, unlike office tenants, typically pay for their own energy use, the building owner has little financial motivation to pay for energy-efficient capital investments. Furthermore, the tenant may have less incentive to contribute to the cost of these investments if they do not have plans to occupy the property long enough to recoup the cost through lowered energy use. However, Cloutier says there are strategies that allow both the owner and the tenant to benefit from reduced energy and water use, as well as a host of other sustainability initiatives. “There are many great resources available that can help make the business case for sustainability on both sides of the equation,” she explains. The U.S. Environmental Protection Agency, for example, offers a free online checklist of no- and low-cost solutions for reducing water and energy use in an industrial space, which can be a great place to start.

Luci Smith, senior property manager at EastGroup Properties in Orlando, Florida, says the key to engaging an industrial tenant in the process is to start small and demonstrate the profitability along the way. She typically begins the conversation around sustainability with her industrial tenants by sharing information on local utility company incentives. For example, EastGroup requires tenants to service the HVAC on their property every year, which qualifies for a recommissioning rebate through their local energy provider. “It’s extra money for them, and it can open their eyes to the profitability of energy management,” she says. Finding out what incentives and rebates are being offered by local utilities and sharing that information with a tenant is a simple way for a property manager to add to their tenants’ profitability.

Smith also works with tenants on benchmarking their energy consumption through ENERGY STAR® and their energy costs through the new Industrial Experience Exchange Report (Industrial EER). She takes care to explain the benchmarking processes and reassure them about the confidentially of their data. As more and more municipalities require mandatory benchmarking for building owners, managers who begin that conversation now will have an advantage over those who wait until it is required. EastGroup owned and managed the first industrial building to receive a BOMA 360 designation—which requires both ENERGY STAR and Industrial EER benchmarking—and she says gaining recognition for efforts can generate enthusiasm. “Our industrial tenants love to show off their BOMA 360 plaques and ENERGY STAR scores to their clients, their colleagues and even their bosses,” Smith adds. Including these honors in marketing materials can get the attention of brokers and tenants.

John Scott, BOMA Fellow, RPA, senior executive managing director for Colliers International in Tampa, Florida, works extensively with sustainability in commercial real estate. He says that now is the perfect time for those in the industrial sector to consider how sustainability factors into their business plan. “In some markets, with the pace of business and technology, up to 20 percent of industrial properties are becoming obsolete and the market is figuring out how to modernize these spaces,” Scott says. “A focus on efficiency and sustainability can be one way to make older industrial properties competitive again.”

The very structure of industrial buildings can make them ideally suited for sustainability: For example, a broad warehouse roof offering plenty of surface space with access to direct sunlight can make solar panels a smart investment. And the economies of scale found in large industry properties can make installing LED lighting much more attractive—and the return on the investment happen much more quickly.

The future can be hard to predict when it comes to the fast-moving sector of industrial real estate, but the ample benefits offered by energy management and sustainability initiatives should not be overlooked by industrial property professionals looking to stay ahead of the curve.

This article was originally published in the May/June 2016 issue of BOMA Magazine.