Four big landlords get paid to model green retrofits

L+M, Hines, ESRT, Omni take decarbonization challenge for $5M

New York Issue /
Feb.February 10, 2022 08:00 AM
From left: Empire State Realty Trust's Tony Malkin, Hines' Jeff Hines, Omni New York's Mo Vaughn and L+M's Ron Moelis (Getty, iStock/Illustration by Kevin Rebong for The Real Deal)

From left: Empire State Realty Trust’s Tony Malkin, Hines’ Jeff Hines, Omni New York’s Mo Vaughn and L+M’s Ron Moelis (Getty, iStock/Illustration by Kevin Rebong for The Real Deal)

Decarbonization is no longer just a  buzzword.

In the past few years, New York has tightened the screws on real estate, a sector that belches nearly 70 percent of New York City’s climate-warming emissions and one-third of the state’s. A city law demands that most large buildings cut them by 80 percent by 2050. A 2019 state law demands an 85 percent reduction in the state’s emissions from 1990 levels by 2050, an aggressive benchmark likely to trigger mandates for properties.

Sensing that penalties won’t be enough, the state is trying an owner-see, owner-do approach:
Slip $5 million into the pockets of four big city landlords to show others how it’s done.

Empire State Realty Trust, Hines and affordable housing providers Omni New York and L+M Development Partners are getting that incentive to slash emissions at seven buildings through a combination of retrofits and carbon offsets — off-site investment in carbon-reducing projects such as wind farms. The firms need to bring their buildings’ net carbon output to zero.

The four have also committed to replicating the energy-saving solutions across their combined 37 million square feet of buildings.

The idea of the state’s Empire Building Challenge is that if these landlords can scale their projects in New York City, others will have a blueprint.

“As the song says, ‘If you can make it here, you can make it anywhere,” said Richard Yancey, head of the nonprofit Building Energy Exchange, which is co-sponsoring the initiative.

Even if the four landlords’ retrofits succeed, there is no guarantee they will be replicated by the 26,000 buildings that must reform by 2030 to comply with city law.

The obstacles are numerous: finding the money, keeping shareholders happy and minimizing disruptions to tenants, to name a few.

Here’s how those four owners plan to rise to the challenge.

Greening the office

Empire State Realty Trust is the most experienced of the bunch, having deployed $31.1 million to slash the Empire State Building’s emissions by 40 percent. It has exceeded that ambitious goal: The REIT’s senior vice president and director of energy and sustainability, Dana Robbins Schneider, said emissions are down 54 percent.

To get there, Tony Malkin’s firm shored up its radiators, adding barriers that redirect steam back into the building; insulated windows and installed automatic blinds that adjust to the sun; swapped out old bulbs for LEDs; installed controls that save on “vampire power” when the office is empty on weekends; and refitted elevators to store the energy used to break for each stop, the Washington Post reported.

Even after all of that work, the iconic skyscraper only managed a B on its Department of Buildings energy-efficiency grade this year. The measure compares the buildings’ energy consumption to similar properties across the country.

For the Empire Buildings Challenge, ESRT aims to hit carbon-neutral by 2030 by reducing emissions by 80 percent and perhaps using offsets to take care of the rest.

Like the majority of large buildings in New York City, the Empire State Building is steam-heated: Boilers burn fossil fuels to pump heat through the buildings’ radiators.

The go-to fix for curbing emissions from these traditional systems is installing heat pumps, an electric replacement that will eventually be fueled by a much greener grid. New York state aims to generate 70 percent of its energy from renewable sources by 2030 and 100 percent by 2040. Moving the energy generated by upstate solar and wind farms to New York City remains a challenge.

For ESRT, the problem is making a business case for heat pumps. As a publicly traded company, it has a fiduciary duty to shareholders.

The job would undoubtedly be capital–intensive. The Urban Green Council estimated a heat pump installation in a high-rise at about $25 per square foot. The Empire State Building exceeds 2.7 million square feet, meaning the upgrade could cost over $67.5 million.

ESRT also has tenants to consider. A heat pump retrofit can require running new refrigerant and electrical lines throughout a building, work that requires temporarily empty floors. Office buildings typically have long tenancies, so waiting for turnover isn’t ideal.

For those reasons, Schneider said, the firm is considering a heat pump pilot project but will likely try other options first, such as upgrading ventilation with energy-efficient systems.

Hines’ demonstration building is in some ways a better candidate for retrofits.

The Houston-based firm is upgrading 345 Hudson Street, an office building in Hudson Square it owns through a joint venture with Trinity Real Estate and Norges Investment Bank. Hines plans to merge the property with a new building on the west side of the block, 555 Greenwich Street.

With new construction, owners can go green from the get-go. Hines’ senior managing director for its tri-state office, Tommy Craig, said for 555 Greenwich, the firm did away with the typical components of an office building: centralized chillers to cool the floors, a natural gas–powered boiler on the roof and an air-handling unit to circulate heat and cold air.

Instead, the building has a hydronic system. It heats liquids that run through the floors via electric-powered heat pumps.

“At 555 Greenwich, we have a 17-inch concrete slab. Think of that mass of concrete as a big thermal battery storage tank. It can retain energy,” Craig said.

Hines used the plans for 555 Greenwich to inform its retrofit of 345 Hudson — electrifying its heating and implementing a hydronic-based system that catches waste energy. The firm also plans to add systems that allow fresh air to enter a building while retaining heating or cooling and a dedicated outdoor air system that recycles energy.

The firm said it plans to complete that work when tenants’ leases expire. Its deal with Viacom, which spans eight floors at 345 Hudson, ends this Halloween, Craig said. If tenants renew or don’t have an expiration date approaching, the firm said, it can perform upgrades with them in place, if they approve.

Hines Chief Carbon Officer Mike Izzo

Mike Izzo, who in October became Hines’ first chief carbon officer, said the changes will reduce emissions by nearly 80 percent by 2030, hitting the city’s benchmarks 20 years ahead of schedule.

They will also address something that eats at him: that 54 percent of the energy the building uses is essentially wasted. For example, its cooling towers, which lower the internal temperature through evaporation, throw off heat that goes unused. Boilers that run on fossil fuel lose heat through convection.

“To me that [54 percent] represents dollars,” Izzo said. “If we think about the almost $3 million that we spend on energy for this building, that’s a significant portion that we throw outside of the building.”

The retrofits will cost about $26 million, a spokesperson for Hines said.

Affordable housing

On the multifamily side, Omni New York and L+M will upgrade affordable buildings constructed in the 1970s.

Omni’s retrofits of Whitney Manor will run about $12 million, said David Fleming, the firm’s executive director of development. To be carbon-neutral by 2035, Omni will focus on cladding the property’s exterior — applying a second skin to seal in energy.

Omni is also adding heat pumps. Fleming said the building is already electric, but the system is “not early as efficient as what you can do today.”

Omni New York Executive Director of Development David Fleming

Fleming said it does not expect the work to displace tenants. Omni has the added benefit of using the Low Income Housing Tax Credit program to help fund upgrades. Developers eligible for credits sell them to an investor, who fronts the money.

“What we’re looking to do — knock on wood that it’s successful — we envision as a model that we could replicate at other properties that we own,” Fleming said.

L+M is working on The Heritage buildings, a three-property, 600-unit complex on the corner of Central Park North and Fifth Avenue that the firm picked up in a joint venture with Invesco Real Estate in 2019. The buildings were part of the Mitchell-Lama program until 2005. Joseph Weishaar, vice president of the firm’s Workforce Housing Fund, said over 40 percent of the units are still occupied by Section 8 tenants.

L+M Development Partners Workforce Housing Fund Vice President Joseph Weishaar

Weishaar said the building’s previous owner had taken care of “a lot of the low hanging fruit” — installing LEDs and energy-efficient appliances and sealing openings to reduce drafts.

To cut energy in half by 2030, L+M is taking a similar approach to Omni by over-cladding.

The firm said the panels it picked will allow a new heat pump to run throughout the building. L+M will also use the state’s challenge grant to source hot water for electricity from local plants.

The investments will run L+M about $13.7 million. But Weishaar said the energy savings will be worth it. Over the expected lifespan of the improvements, L+M should save about $7.5 million in energy and maintenance and more than make up the $6.2 million gap with rent increases (on market-rate units) made possible by the aesthetic gains.

What smaller owners can do

Whether mom-and-pop landlords can or will make these upgrades is a question of knowledge, labor and financing.

Their first deadline under the city’s emissions-cap statute, Local Law 97, is less than two years away. Owners of high-emissions buildings must begin retrofits or face fines.

But without the sustainability experts and deep pockets that large landlords have, smaller owners will need help. The Real Deal has outlined the steps they can take to meet upcoming energy benchmarks.

Financing is available from the New York Green Bank, NYSERDA and other sources. The Property Assessed Clean Program can cover up to 100 percent of upgrades through a loan that is paid back in installments tacked on to property taxes.

By and large, the benchmarks set by city and state governments are a private-sector problem, but one that figures to benefit landlords who adapt their buildings. If they don’t, New York’s ambitious clean energy plan cannot meet its targets. Then we’ll all have the planet to answer to.




    This story has been updated to include that L+M purchased the Heritage Buildings in a joint venture with Invesco Real Estate.


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