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How New Lease Terms Can Usher In a Net Zero Future

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If you read about the race to reduce carbon emissions, you’ll inevitably come across the stat that 40 percent of emissions come from the built environment. As compelling as that number is for the overhaul of our buildings’ energy system, the number seems to place the burden of blame on the four walls of the building, not the people inside it. 

Perhaps a more telling number about the breakdown of energy consumption in a building is the usage of tenant-occupied and rentable square footage versus common spaces. 

John Gilbert, Executive Chair at Prescriptive Data, explains that in order to hit emission reduction targets, landlords and tenants have to shift how they think about power, comfort, and the workplace experience overall. “Since a building owner has no control over the tenants’ power usage, it is difficult, if not impossible, to get to carbon net zero unless an owner can engage their customers to reduce consumption,” he said. “Owners and tenants have to come together to understand energy consumption and use that data set to modulate down electrical demand.”

On average, tenant spaces account for 60 percent of energy usage in a standard office building. The other 40 percent includes overall operational energy requirements and that needed to power shared spaces and resources like elevators and lobbies. So even if a building owner is focused on making the building more efficient, adding renewable energy to the picture, and investing in better energy management overall, they still can’t control how much energy tenants use. 

Larger, often publicly-traded companies are already turning to their landlords to understand more about their energy usage, spurred by many market drivers including a combination of new carbon reporting standards and their own climate promises.

Compliance meets corporate commitments 

In March 2022, the SEC announced rule changes that would require companies registered with the commission to report general climate risks, mitigation plans for those risks, and specific reporting standards for emissions. The new rule, currently under a public comment period, requires companies to disclose their direct greenhouse gas (GHG) emissions and indirect emissions from procured energy. 

When announced, SEC Chair Gary Gensler, highlighted the significance of the changes by connecting the impact of climate and emissions mitigation to financial performance. “Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”

Even if these SEC rule changes aren’t approved, cities and states have pending deadlines for their own emission reduction and reporting compliance laws on the books. Local Law 97 in New York City is quickly becoming the standard on the local level with emissions reduction targets starting in 2024, marching toward an 80 percent emissions reduction target in 2050. With its commercial density, those targets will be impossible to hit unless tenants, especially those with flagship offices, take an active role in reducing their usage. 

Beyond compliance measures, household name CEOs across every sector have outlined public commitments to hit net zero or carbon neutrality goals by 2030 or sooner. These promises mean building managers are getting frequent calls about how to actually hit these targets when in all actuality, it’s the leases that have to change. 

Creating a new standard lease 

Most standard commercial leases include service level agreements (SLAs) for comfort and lighting during specific time frames during the workweek and often on the weekends, too. These SLAs are large contributors to a tenant’s power load, even when no one is in the office. That includes when everyone was working remotely in 2020-2021 which explains why emissions in many dense urban areas didn’t dip dramatically during that time. 

Gilbert, who recently left his longtime post as COO at Rudin Management to focus on his leadership role at Prescriptive Data, highlights how Rudin used Prescriptive Data’s Nantum OS platform to work with Blackrock, an anchor tenant with 16 floors at one of Rudin’s flagship Manhattan buildings. 

Blackrock’s lease specified that all the floors be cooled starting at 7:00 am, even though the floor-by-floor occupancy data showed Blackrock employees weren’t coming into the office until closer to 9:00 am. Another SLA in the lease also required that each of the 16 floors be accessible, lit, and heated/cooled on Saturdays from 9:00 am to 1:00 pm in case employees came in on the weekends. These requirements were eating up energy when no one, or only a few, employees were there.

With the help of Nantum OS, building management was able to show their tenant the actual occupancy data in reference to energy consumption and suggest changes to the lease agreement. Now, the HVAC would turn on at 9:00 am, or when the first employee entered a floor. The introduction of hot desking by Blackrock meant that employees could work on three floors on Saturdays, driving the weekly energy curve further down on the weekends. 

Gilbert is quick to highlight that these changes aren’t minor savings. They represent hundreds of thousands of dollars saved each year in energy costs for the building and the tenants, and a significant reduction in energy use and emissions. These savings are all because the tenant could see the energy data in real-time by floor and understand that proposed changes wouldn’t hinder employee comfort or experience. 

JPMorgan Chase is another major company using Nantum OS to optimize its energy use across its real estate portfolio. Beyond continuing to reduce energy needs and environmental impact (JPMorgan Chase hit carbon neutrality in 2020 with additional goals to reduce emissions by 40% in 2030), Gilbert believes that key client partnerships like this will help usher in additional green advances. 

In Europe and countries across APAC such as Japan, carbon marketplaces give real estate portfolios and the corporate owners behind them a trading mechanism for excess carbon. This would allow company offices, buildings, or entire portfolios that have high-intensity carbon to balance out their excess carbon with buildings that have low emissions thanks to the trading of carbon credits. It’s not an easy marketplace to create or regulate, but it would allow for better carbon “averaging.” 

The first step in making this a reality is actually understanding energy consumption and emissions at a more granular level, floor by floor and suite by suite, not just building by building. Giving tenants these insights will empower them to be accomplices in making the changes necessary to make net-zero goals a reality because the physical structures of buildings alone aren’t the sole cause of our carbon problem. It’s about what happens inside that impacts required energy and then reducing that load. Adjusting lease agreements is just one example of the many aspects of real estate operations that have to change. And that’s a lot easier than retrofitting our buildings to create a greener future.

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