Energy Loss Is Expensive. The Solution Needn’t Be.

By Anas Al Kassas

A power panel composed of leading commercial real estate (CRE) voices recently gathered on the top floor of the New York Design Center in Midtown Manhattan to discuss first-of-their-kind developments and financial stimulants in energy efficient facade retrofits. Leaders from Con Edison, JB&B, JLL, NYC Accelerator, and REDIST spoke in front of an engaged audience, including Hines, Marriott International, LaSalle Investment, Arup, Thornton Tomasetti, and SOM, among others. Entitled, “New Incentives & Opportunities for High-ROI Facade Energy Retrofits,” the invitation-only event was organized by my company — climate tech startup INOVUES — and hosted at Bendheim’s New York City showroom. Our collective objective was to provide actionable insights on the circumstances that are making facade and window improvements more accessible than ever before.

The Economic Factor.

Economic uncertainty seems to be on everyone’s mind these days. It is time-proven that when fluctuating market conditions or inflation threaten the bottom line, businesses tend to go on the hunt for smart measures that improve their efficiency, lower operating costs, and shore up assets.

So, only on the surface may it seem surprising that a discussion on large-scale facade retrofits — normally considered an extravagant capital expenditure — would garner such attention. Dig a little deeper, though, and the business case for revamping aging glass facades becomes clear and compelling. After all, CRE is one of the largest US industries, contributing approximately 5% of total GDP^[1] .

Shifting Long-Held Perceptions.

According to data from the US Office of Energy Efficiency and Renewable Energy and the US Department of Energy, commercial buildings lose about $57 billion per year to preventable energy loss, mostly due to poor thermal insulation. Up to 40% of that loss can be attributed to inefficient facades and windows. And, while many buildings have made great strides on sustainability through a range of low-cost energy conservation measures (ECMs), such as LED lighting, the most effective upgrades — building envelope retrofits — are still largely on the table. Because, until now, they have simply been financially unattractive.

Let me explain. Through dozens of face-to-face discussions with major NYC players, these are the pain points we have come to identify at INOVUES:  A typical tower facade reclad costs around $250 per square foot of glazing and could take two to three years to complete, adding up to tens of millions of dollars in total. It also usually requires vacating at least the perimeter of the building that is being worked on–the most desirable leasable space — which can trigger renegotiations. The loss of rental income alone could add up to tens of millions of dollars, not to mention the noise, dust, and general inconvenience that the remaining tenants have to live with for the project’s duration.

CRE decision-makers are well aware of the influence a dated exterior can have on occupant comfort and the property’s positioning in the market, but they are overwhelmed by the cost-benefit analysis of addressing it.

Views from All Sides of the Deal Table.

Without question, the most valuable outcome of this meeting was the mutual understanding that we need to embrace:

• Candid sustainability and climate tech dialogues that break down long-held misconceptions and decision-making silos;
• A more comprehensive building value assessment citywide.

There was also an overall consensus that what happens in NYC will impact the national market, and together, we must lead by example. 

My colleague, Tom Burke, who served as panel moderator, set the scene perfectly when he said: “CRE owners are pitched every 15 minutes, but a typical facade reclad or window replacement has a payback period north of around 100 years. You may also have to vacate the building and buy out the tenants. So it is not surprising that the demand for reclad projects in NYC has been lackluster. But, there is an opportunity here.”  

“Walking into a building, from an energy conservation standpoint, you would look at the facade first and assess its performance before automatically running to the mechanical rooms,” Burke added.
Tom Burke, panel moderator

Andrew Chintz, a financing specialist with NYC Accelerator, pointed out that, while energy-efficient facades help achieve the City’s decarbonization goals, façade reclads are challenged to yield a desirable savings-to-investment ratio (SIR). This precludes them from qualifying for NYC Accelerator’s Property Assessed Clean Energy (PACE) financing, which requires an SIR of at least 1.0. For many building owners who are unaware of the reclad alternatives available to them, this can be essentially a double hit to the bottom line. However, NYC Accelerator PACE program guidelines are expected to be adjusted to address this issue.

NYC Accelerator is a city-funded program that provides free technical services to building owners, as well as referrals to vetted service providers, to help owners lower emissions and avoid looming Local Law 97 (LL97) penalties, which are currently slated to go into effect in 2024.

Tyler Schott, Senior Project Engineer for JB&B Deep Carbon Reduction added:  “No two buildings are the same. Understanding the physical conditions on site is important — as facade performance can vary greatly.  We then use energy modeling tools to predict the effects of upgrades, which can result in double-digit improvements on energy performance.” Schott went on to emphasize that energy cost savings is only one piece of the decision-making process. “There are many other complex variables at play that our industry is working to solve,” he added. “For example, how much does a street closure and hoisting crane cost? To evaluate something effectively you need to know all of the impacts, from an energy, cost, and logistics standpoint. Change is hard, and we see barriers to implementing new climate tech. But we are optimistic that these challenges will lessen over time as government funding helps to derisk the early adopters.”

Adam Fisher, vice president of sustainability for JLL, who focuses on supporting real estate owners’ and occupiers’ carbon reduction efforts and driving building value, argued for recognizing the impact of energy efficiency and carbon reduction on the value of the building asset beyond the obvious operational savings.

“The conversations around sustainability upgrades often center around savings. However, from the building owner’s perspective, it is not just about savings. It is also about increasing the asset value and making sure it becomes part of the conversation, even when it is difficult to translate. In my experience doing technical and strategic advisory work, there is frequently a gap between the technical rigor and analysis and the ability to tell the story and engage the right stakeholders. For example, you might have a dedicated facade study that lives in a silo, until the team that is working on pushing the building forward can figure out how to put it into context and map it to the overall strategy. A lot of the work is 50% technical and 50% stakeholder engagement to make sure the building owner feels confident about their investment.”

Fisher added that “avoiding the brown discount” and “flight to quality” — i.e., when tenants and higher rents migrate to newer, more modern and sustainable properties — are other powerful business incentives to decarbonize.

Rising tenant expectations are now key energy efficiency drivers, especially among corporate clients with articulated decarbonization goals. Engaging tenants in decision-making has upsides, as well. It provides a path to collaborate on efficiency goals and set key performance indicators (KPIs), based on each tenant’s requirements and energy use intensity. This allows the owner to better manage the building’s carbon footprint, with the tenants’ buy-in and active participation. For the tenant, the upside is more control over how their space is run, lower energy bills, as well as clear ESG metrics to engage employees and stakeholders.

REDIST’s Atif Qadir provided a way to visualize this evolving, layered value proposition. “First is cost, above it is ROI, then comes building value, and the latest additional layer is SEC guidance on ESG. Publicly traded companies now have to include a declaration on the energy efficiency and carbon impact of their real estate portfolio and operations in their quarterly filings.”

Qadir doubled down on the importance of effective storytelling — to engage parties on the regulatory and incentive sides at the federal level, as well. His tech-enabled, VC-backed company is working to promote impact development by connecting projects like workforce and affordable housing development to the growing array of private financing interested in this area, including traditional lenders, private funds, institutional investors, corporates and foundations.

Another key consideration discussed was how Local Law 97 is affecting building owners’ decision making. Schott jumped in to explain:  “It is very impactful.  The law sets a framework for how buildings need to reduce their emissions over time, or face financial penalties. And we are now seeing building owners develop plans on how they can, over time, reduce emissions to get into compliance. Most buildings are first dealing with the low hanging fruit:  energy efficiency measures like lighting upgrades, controls enhancements, fixing building air leaks, things that can be done without incurring large costs. But as the emissions limits get more stringent, building owners know they will need to make more impactful changes, like facade upgrades, fuel switching from gas to electric with heat pumps, and air system changes. In many cases, buildings are considering hybrid approaches, where their heating systems are served partially by legacy gas-fired boilers, but supplemented by all-electric air source heat pumps connected to the renewable electric grid. Local Law 97 has really raised everyone’s awareness, and we have seen a lot of change in the short time since the law was passed in 2019.”

Largest Utility Incentives in History.

Rebates from the local utility companies can have a significant impact on the cost of energy conservation measures, such as building envelope upgrades. This is especially true in NYC, where Con Edison offers the most generous and extensive rebate program in the country. It has become a model for other utilities on how to drive decarbonization and electrification.

Laziza Rakhimova from Con Edison’s Commercial and Industrial (C&I) Energy Efficiency Program discussed their new commercial building incentive program as it pertains to facades. Rakhimova helps large commercial, industrial, and multifamily customers meet their carbon goals and optimize their utility incentives. She highlighted the active role Con Edison plays in accelerating the City’s transition to sustainable energy. Con Edison has already paid out over $115 million in cash incentives to CRE building owners through its C&I program over the past three years alone.

“We are building the grid of the future,” said Rakhimova. “A fully electric grid that will deliver 100% clean energy by 2040. We are also investing $2 billion in resiliency over the next 10 years.” She added that Con Edison’s C&I program is pursuing a very aggressive strategy this year, transitioning away from traditional lighting and HVAC incentives towards incentivizing deeper, more comprehensive retrofits. The recently announced three-year tranche of incentives, one of the largest in Con Edison’s history, now also features a fresh focus on building exteriors as the next big strategic investment opportunity.

“This year, the building envelope is in the spotlight. We understand that it needs to be tightened in order to achieve our electrification goals. And, starting this year, we have very robust incentives to drive facade efficiency projects.”

The Facade as a Heat Pump Technology Enabler.

Beyond improving the asset value and profitability of the building, both Rakhimova and Schott made a case for window / facade energy retrofits as an enabler for electrified heat pump technologies. In commercial buildings, heat pumps convert natural thermal energy from the air (most common) or ground / water (geothermal) into efficient hot water and space heating systems.

“Traditional gas-powered steam systems heat water to 180 degrees [Fahrenheit]. In comparison, heat pumps typically do not exceed 130 degrees,” said Schott. “To be able to transition a building from high-temperature steam to lower-temperature heat pumps, you need at minimum a double-glazed high-performance facade.”

For 30 to 40% of the buildings in NYC, switching to heat pump technology is therefore impossible, until they upgrade their inefficient, leaky, single-pane windows and curtain walls. “Heat pumps are a key technological innovation,” added Schott. “The real change is the mechanical system, but the facade upgrade allows this transition to happen. That is why facades are so important to electrification and decarbonization.”

Additionally, according to NYC Accelerator data, electrification of energy-inefficient properties (think underperforming building envelopes) would result in an unsustainable doubling of the peak load demand, overwhelming the capacity of the existing electric grid. Furthermore, not every building would benefit equally from facade energy efficiency retrofits and the resulting ability to electrify. The existing building structure and heating system configuration are key. Large buildings with open plenum spaces and 20-plus-year-old glazed facades — particularly those with 40% or higher window-to-wall ratio — are expected to see the greatest and most immediate benefits.

Operational Versus Embodied Carbon.

While the discussion centered primarily on how facades impact operational energy efficiency and carbon savings, the audience wanted to hear about the next frontier — embodied carbon — the emissions associated with the materials and construction processes used throughout the whole lifecycle of the building.

When the question turned to me, I qualified the issue by quoting data from Architecture 2030:  I explained how buildings are responsible for 40% of global CO2 emissions (27% operational and 13% embodied).[²] I also made the argument that it is inherently more sustainable, feasible, and cost-effective to address façade retrofits in a way that does not require removing, replacing, or wasting anything. It is for this reason that upcycling existing windows and facades into high-performing retrofits could be the answer the building industry needs.

Next-generation retrofit technologies are here now.

[1] Sources: Commercial Real Estate Development Association (NAIOP)’s 2022 Economic Impacts of Commercial Real Estate report, https://www.naiop.org/Research-and-Publications/Economic-Impacts-of-CRE/Economic-Impacts-of-Commercial-Real-Estate-2022-US-Edition; U.S. Bureau of Economic Analysis (BEA), https://www.bea.gov/news/2022/gross-domestic-product-fourth-quarter-and-year-2021-advance-estimate; and https://canyondata.tech/what-percentage-of-gdp-is-commercial-real-estate/

[2] Source: Architecture 2030, https://architecture2030.org/

Anas Al Kassas is Founder & CEO of award-winning, climate tech startup INOVUES, which offers the only patented retrofit solution in its class to renew existing commercial facades — using next-gen CO2-reducing and smart glass innovations — without removal, replacement, or disruption.