We caught up with Jonathan (JP) Flaherty, Global Head of Sustainability and Building Technology Innovation at Tishman Speyer, about ESG and decarbonization in real estate, trends driving innovation in the sector, and why the team at Tishman Speyer chose Aquicore for their building portfolio. Check out the full interview below.
Aquicore (AQ): Looking back over your time at Tishman, what’s been the biggest change regarding ESG in real estate? When did the emphasis on data come into practice?
Jonathan (JP) Flaherty: We went beyond a sole focus on energy efficiency. Historically, energy efficiency meant carbon reduction, and using less energy meant you’d achieve whatever goals you wanted to achieve. Today, energy efficiency is not the sole metric. In the past, every kilowatt-hour saved was good, and that remains the case from an economic standpoint, but the reality is that is not true in a lot of markets, and it’s going to become less true in the future.
What will be more relevant is when you are using that energy and where it came from. That changes how people run buildings, that changes how people run capital plans – it changes a whole host of things. When you use the energy is far more important today than the overall efficiency of the system. All energy is not the same – energy is worth very different things depending on the time of day and the fuel source.
AQ: Who’s placing the value on different types of energy?
JP: Right now, it’s the government, but clarity is needed on how to build a more efficient grid – no one’s done this before. The value was whatever it cost to start a fast-start gas plant. That’s the market seller in most grids – that value doesn’t work today. It’s very unclear how it is going to be set for buildings. Price signals alone are not going to work.
AQ: What was the impetus for Tishman Speyer to seek a data solution?
JP: We had known about the need for a while. Aquicore replaced a product that we had, which replaced another product that we had. We have been doing real-time energy management for a decade. We’re good operators, and that level of information allowed us to save money. Having that insight into real-time energy has led us to make much better decisions about our overall efficiency. Ten years ago, you couldn’t do real-time energy monitoring without spending a ton of money with a utility. Now, every building in New York has a smart meter. A decade ago we made a big move by installing pulse outputs instead of waiting on a utility. I figured this would be something that would be around for a while. We own all that hardware on the theory that there are a lot of other uses for the data. We’ve taken a pretty wide use case for real-time energy data.
AQ: You mentioned before that it was about money. It sounds as though it’s about more than that now.
JP: It definitely is. There are two other plays. One is carbon. Carbon can and does have a value, but not really. The other thing that gets mixed in more broadly is reputational risk. In a world with of all sorts of building disclosure laws and building performance standards, a D on the front door of your building is a problem. Those letter grades have nothing to do with carbon; in fact, buildings that get Ds are all-electric. These two concepts are getting to be very confusing to people – carbon versus energy efficiency.
You see this in the public policy approach. Imagine you have a 2x2 matrix with “absolute” and “relative” on one axis and “energy” and “carbon” on the other. For example, DC went with relative energy (ed. note: with DC BEPS), while New York City and Boston went with absolute carbon (ed. note: with Local Law 97 and BERDO).
Ideally, you’d do both, but no one has figured out how to create a metric that covers energy and carbon at the same time, and drives towards electrification, which are generally the goals that people will like. DC, with its relative energy-based standard, has no movement towards electrification, and now they are going to have to pass another law to get to that outcome. On the flip side, New York City went with absolute carbon, which made some buildings realize they have to do nothing at all and wait for the grid to go net zero. New York City’s stated policy goal is to electrify.
AQ: What’s the challenge with energy and carbon at the same time? Why is that hard?
JP: Carbon has nothing to do with energy efficiency. That’s the harsh reality. “Energy” doesn’t equal “carbon” anymore as a matter of the grid. Twenty years ago, every electron on the grid had roughly the same carbon profile, because all power sources were coal. Now, the quotient is different, as every second of every day changes based on different power sources coming on. When the New York City law was passed, lots of people who don’t understand buildings or commercial real estate assumed that to get the carbon down, you’d have to use less energy. That is not true. Furthermore, it’s not necessarily even correlated at all. They also thought they’d achieve these goals by making them super aggressive.
Rockefeller Center is on the trajectory for net zero. They want us to reduce carbon by 61% from 2024 to 2030. The only way to do that from an energy efficiency standpoint is to empty two of the buildings. There’s no known technology that can do that. You’re going to get there by fuel switching, renewable energy, renewable energy credits – a number of ways, but it won’t be energy efficiency alone.
Why do we need to be energy efficient at all in a carbon-free universe? If the grid was 100% carbon-free, then can’t I use as much energy as I want? You get into this interesting conundrum as you go farther and farther down the road of energy efficiency. It’s a good idea because you save money, but if the goal is to decarbonize, I should be able to use all the carbon-free energy that I’d like.
AQ: For you, when talking about carbon, is it just regulation that’s requiring this?
JP: No. Back to reputational risk, we’re getting huge pressure to do this, not based on laws, but based on investors and tenants. They both want all of the above as fast as possible. We hear very strongly that they want us to use less energy and have a lower carbon footprint. The government comes in and says that too, but we hear it first and foremost from our investors.
AQ: What’s the risk to Tishman if these steps aren’t taken?
JP: From an investor standpoint, they generally invest money on behalf of people who have long hold periods and long timeframes. As we move towards a world where carbon is a real issue and potentially a game-changer in terms of renting, we get questions – will this building be obsolete in 10-15 years? They mean obsolete in terms of, will people rent it? The danger is that if the building is highly inefficient, you’re not going to get tenants, and the government is also going to give you a very hard time for not meeting building performance standards.
AQ: Would you say it’s primarily focused on how the building will perform in the future, and not pressure that they’re getting for raising capital?
JP: I think it’s all part of the same thing. Investors are coming in and asking those questions – we get volumes of it. Investors see value in receiving large amounts of information about portfolio efficiency, but it is important that they understand what they’re getting back. It’s fair to ask for that information, because if you look at markets in Europe, we see in European city centers that 20-25% of offices are functionally obsolete and won’t be rented at all. I only say that in the context of an investor – if you’re buying office or residential buildings, these are good questions to ask. It’s not like this a rare occurrence. There are all sorts of concerns here.
AQ: Have you also noticed the themes in these questions changing?
JP: Themes have changed. Folks have questions on the non-E aspects of ESG. On the E-side, people want details. For a number of investors, quarterly financial reporting has two pages of operational data, including ENERGY STAR score, total energy consumption, energy per person, carbon per person, etc. Investors very much want that data.
AQ: Who is driving interest in sustainability – investors, tenants, political leaders, managers, etc.?
JP: If you had asked me 5 years ago, I would have said tenants, government and investors. It’s turned out to be investors, government and tenants, in that order. I’ve seen a much stronger push from investors and a much lesser push from tenants. I didn’t think about the longevity equation from investors, trying to avoid risks on the back end – can I really sell this building down the road? Are you able to sell this building without taking a “haircut”?
AQ: What are investors worried about fifteen years down the road?
JP: Obsolescence risk, which is a new term in the space. What they mean is, can you rent it, and can you sell it? They’re worried fundamentally about selling the building and the exit strategy. To get there is also part of that. They’re worried they’re going to lose money in the process. The government could decide it’s too inefficient to be rented. European city center office buildings will be completely obsolete – no one will rent them because they’re too poor performing, they can’t be certified, you can’t put residential in, it can’t be torn down because it’s attractive and there are historical preservation considerations, so what do you do?
AQ: What led you to Aquicore?
JP: Our history with Aquicore was such that when we picked the prior vendor, Aquicore was one of the final two in the previous request for proposals (RFP). We did another RFP four years later, and we knew Aquicore very well at that point. The competition got much harder – the RFP had twelve vendors. The world had changed significantly since then. But ultimately, we had a fairly robust selection process, we had all of our chief engineers and regional folks try out the platforms, we had everyone vote – we had all sorts of factors. No one got to see pricing because we didn’t want that to influence what people wanted. With all of that in mind, Aquicore was selected.
AQ: What did the chief engineers think? What were the differentiators and features that jumped out?
JP: Aquicore had the right combination of all the things we wanted. People liked the platform, what it looked like and what it’s like to drive it.
Our offices are a wide range from class B suburban to class AAA brand new properties. I needed a platform that would work consistently for every building. You had to be able to install the platform in less than two weeks, the chief engineers had to be able to do it themselves and it had to be installed below a certain setup cost, including TV screens so that it’s always on in the chiefs’ offices. That had to be able to be done in any building, regardless of the level of sophistication of the building. You had to be able to connect to a meter.
For example, we have lots of buildings where we want to do more. Take Rockefeller Center. They’ve got ice storage, energy storage, eighteen utility services and nine chillers. But the platform had to be able to apply to every building. Aquicore offered the ability to do just that.
AQ: How does Aquicore fit into your strategy now?
JP: It’s a great idea to use less energy all the time. The point being, we’re operators at our core – we’ve always operated our own buildings. We were green before it was green, in the sense that we were trying to get buildings to use less energy long ago, before it had anything to do with carbon. This was solely based on dollars.
We want that layer of real-time energy management (RTEM). I don’t see a scenario where that doesn’t have great value, no matter what the carbon future looks like. Energy still costs money at its core, so we’d like to use less of it. The price of electricity seems to be going straight up. We’re predicting significant increases in the price of energy across the board for the foreseeable future.
AQ: When you’re speaking to investors and getting quotes, what kind of boxes does Aquicore typically check off for you?
JP: People want you to have RTEM. Real-time carbon pricing will soon come. We view RTEM as table stakes of a good operator. What others see is that if you have Aquicore, you know what you’re doing. You’re showing that you know that RTEM is going to save you real money or make you real money. If you’re not doing it, it’s a significant red flag. People want to know that you are taking a sophisticated approach to managing energy with respects to costs and carbon, and you cannot do that without RTEM.
AQ: Are you looking at trend data to help you focus your efforts?
JP: Yes, but not in a matter of telling engineers how to do their jobs better. We rank the buildings on energy use intensity (EUI). You don’t want to be the one on the bottom.
AQ: When you’re looking at EUIs, what qualifies as a good reason for having a low one?
JP: Tenants. Post-COVID, the takeaway is that every tenant is a data center. Tenants use enormous quantities of energy for IT loads in offices, and we didn’t fully appreciate that that was the case before COVID. Laptops and computers would just be plugged in and crunching away with no humans in sight. We want to attract tenants, fill buildings, and get good rent, while acknowledging the ongoing regulations when considering EUI.