Energy Management Becomes a Central Concern for Building Owners

As one of the largest expenses in owning and operating commercial properties, energy costs can have a significant impact on valuations. Events such as the current situation in the Persian Gulf underscore the reality that energy costs may be affected by circumstances beyond the property owner’s control—and appear to be increasing regardless of any black swan events.  However, the team at Gridium offers a way to contain energy costs by managing them. Connect CRE spoke with Gridium CEO and co-founder Tom Arnold for an overview of the state of building energy management. His insights are provided here. 

Q: A key reason for energy management in commercial properties is financial, i.e., lowering costs. Is this argument easier to make when it’s widely recognized that energy costs are rising, or are building owners and managers aware that costs will be rising over time regardless of price fluctuations? 

A: We are in the biggest repricing of electricity in a generation, driven by an unprecedented surge in AI demand hitting utility rate bases. Some states are seeing 20-30% increases, busting building budgets and leading to tough conversations with tenants. 

Customers are hungry for ways to fight back and lower bills. As we get into the summer months, buildings will use our predictive analytics to avoid punitive demand charges, especially on buildings with chilled water systems. It’s not uncommon for a building to save $10,000 or $20,000 a month with no impact to comfort by just watching closely when peak charges are likely to hit. That’s music to the ears of properties that just see the bill going up and up. 

So yes, it is easier now because of the conversation around bills, but the broad trends have persisted across my 20 years in the industry. There is a long history of expense management in commercial real estate that ties energy management to NOI and asset value. 

Energy is the second biggest controllable expense for most properties, and how well you manage it drives real estate values. Savvy tenants and brokers are looking at total costs, including energy, meaning that buildings that waste energy are penalized with lower effective rents. That gap shows up in net operating income and when it comes time to value the asset, analysts will take a skeptical view of rent forecasts in a building that has outsized energy costs. 

That’s especially true as operating efficiency is a key dimension of sustainable space, which still is in massive demand across key US markets and tenant segments. 

Q: Can there be economies of scale in applying energy management practices to a portfolio, or is it equally cost-effective to apply these practices to a single building? 

A: There are clear economies of scale and leverage from taking a centralized approach to energy management. That’s been part of the proptech wave from the beginning, the increase in business value by implementing strategies across the portfolio, rather than just bidding blindly into a third-party managed model. 

Our customers increasingly view the energy management function as central to the real estate firm, and are investing in director-level roles that span the portfolio and look for strategies, tools and financial opportunities across buildings. Some of the evolution of sustainability teams is focusing on energy as the first wave of reporting and goal-making makes way to actually moving the energy numbers in the right direction. 

Our platform gives that director-level role a single view across every building in the portfolio. We connect directly to utility systems so teams don’t have to chase down bills or wrangle spreadsheets — the data just flows in, and the portfolio-wide picture is always current. 

The best organizations we see invest in training, help building teams learn from each other and take a positive attitude to the challenge of energy management. It is true that every building is a snowflake; there is no magic pill available that will suddenly fix all energy issues. Instead, firms need tools, processes, visibility and vendors that serve as partners and meet building teams where they are in their journey to improve energy performance. Our role is to turn the client’s existing energy data into a competitive edge. 

Q: Gridium has achieved considerable success in California. Talk about the energy market in California and how it has contributed to owners and operators adopting the Gridium platform. Are there aspects of the energy market in California that are unique to the state? 

A: California is the 4th largest economy in the world, our home state, and has the highest energy prices in the country. It’s no wonder it’s our largest customer base, with over 2,700 office buildings served! 

The energy market in California is maddeningly complex. Some trivia for your readers: wildfire expenses are 25% of the bill, a few summer days will set over half the power bill, we have the highest distribution charges in the nation, and also the nation’s cheapest energy market, with hundreds of hours of negative price energy! 

The pricing is terribly complex, especially for commercial customers. I met a Gridium customer that had printed all 26 pages of PG&E’s commercial tariff for our meeting. His comment, “I used to run a Nuclear Sub, and I don’t understand this document”. 

Customers are understandably frustrated. They just want to run their building and lower expenses. That’s where we can come in as experts, help explain why the bills went up, and then set in motion strategies to lower spend. 

Q: Legislation also plays a big part in creating a market for energy management. Have you found that owners are proactive about getting their buildings into compliance with energy-efficiency regulations before they take effect? 

A: The savvy owners see the writing on the wall. As federal action fades on regulation, local and state action has kept marching forward. For most building owners, that means paying attention to Building Performance Standards (BPS) across the nation. Think of BPS as kind of like a code, but for operating buildings. 

BPS regulations establish performance metrics and targets for emissions from buildings over a long time frame and are often accompanied by fines. Local Law 97 in New York is the most notable, but there are over 40 active or in-development BPS laws in the U.S., and California will have a statewide BPS in the next few years. 

These regulations are highly disruptive if the firm is caught blind. We’ve seen buyers walk from buildings in Denver due to non-compliance and re-financings get hung up on a potential BPS. It’s not everywhere yet, but it’s a major asset risk that smart teams are getting ahead of. 

The political cycle will ebb and flow, but I think there is general recognition across real estate investors that emissions from buildings will eventually be regulated, and the performance will be measured. That’s another reason teams are deploying technology, to build the ability to measure and manage the energy performance of the asset. 

Q: If potential clients resist the value proposition in energy management, what are their most common objections? How do you respond? 

A: We try not to speak energy, but rather commercial real estate. Mostly, I’m curious, and try to understand the investment strategy, the asset strategy, recoverables, lease terms, controls challenges, and comfort issues. The more we understand, the more we can help. 

Sometimes that is education. Some leaders think energy management is all taken care of because they have a Building Management System (BMS). If you haven’t sat in front of a BMS, it’s easy to overestimate the capabilities. Most of these systems are quite antiquated, and focus on comfort and system operation. As I like to say, there is no dollar sign in a BMS, it will simply do what you tell it to do, even if that means starting the building at 1 a.m.! 

Sometimes the objection is just not knowing about Gridium and being overwhelmed. We’re profitable and have been serving the largest real estate owners, life sciences and tech leaders on energy since 2012. Our customers started describing us as partners, and that’s the orientation we bring to new customers. 

Finally, everyone is nervous about spending without a financial return, especially in a tough market. That’s why we offer a free trial of the software where we can deploy and both examine the ROI of a Gridium rollout. Most of the time we find a two-month payback and then teams typically move to a full rollout to lock in those savings.