The Commercial Real Estate World Is Definitely Going Green!!!

If the following projects can manage to go green. There has to be a way for the rest of us to do the same.

When it opened in 1931, the 102-story Empire State Building capped a decades-long race to build ever taller skyscrapers. Now, its owners hope to position it at the vanguard of a new trend: retrofitting old commercial buildings to lower their energy use.

The new lights, refurbished windows and other upgrades being installed in the building will save an estimated $4.4 million a year on utility bills and pay for themselves in three years. What's more, over the next 15 years, the changes will likely keep 105,000 metric tons of carbon dioxide out of the air, the same as the emissions from roughly 1,300 cars during the same time period.

The Empire State Building is one of the most prominent projects by commercial-building owners who are putting their capital toward green retrofits. In doing so, they're betting that such investments will keep their properties desirable in a tough market, help them attract the best tenants, and give them a competitive advantage should the government pass tougher building energy standards.

Commercial real estate accounts for nearly 20% of U.S. energy use, making the sector one of the biggest opportunities for curbing greenhouse-gas emissions. Even as new buildings are built green, the bigger potential lies in the tens of billions of square feet already built, environmentalists say.

But financing these retrofits has been a challenge. Multi-tenant buildings, where the benefits of energy savings would be split between landlords and tenants, are especially tough. Lack of capital due to the sour economy and falling real-estate values has compounded the problem.

The Empire State Building and a handful of other projects suggest some possible approaches companies can consider as cash becomes more available and new financing models emerge. "There's money to be made here that's being left on the table," says Anthony E. Malkin, president of Malkin Holdings, which supervises the Empire State Building on behalf of a syndicate of owners.

Other building owners both in the U.S. and abroad are taking on projects of their own. In June, the partnership that owns the Willis Tower (formerly the Sears Tower) announced that they would undertake a $350 million retrofit of Chicago's tallest building to reduce energy use by 80%.

In Frankfurt, Germany, Deutsche Bank AG is spending €200 million ($290 million) to update its headquarters, a twin-tower complex originally opened in 1984, with lighting improvements, triple-pane windows and several other energy- and water-saving measures. When the retrofit is complete in 2010, the complex is expected to cut its energy use and greenhouse-gas emissions by 50% or more.

Thomas Properties Group Inc. is in the process of certifying its entire 16 million-square-foot portfolio in the existing-building portion of the U.S. Green Building Council's Leadership in Energy and Environmental Design program, better known as LEED. To certify their existing properties with this standard, owners must operate and manage their buildings in a way that saves energy and water and lessens the impact on the environment.

In 1931, the Empire State Building crowned a decades-long race to build the world's tallest skyscraper. Now its owners are at the forefront of a different type of race -- a race towards energy efficiency. WSJ's Christina Jeng reports.

Among other projects, Thomas Properties has spent $46 million over the past four years to retrofit City National Plaza, a 2.5 million-square-foot twin-tower office built in 1972 in Los Angeles. The retrofits have reduced energy use per occupied square foot by 35%. Buildings rated by the LEED program have consistently had higher rents and occupancy rates, according to research by CoStar Group Inc., which tracks data on the commercial real-estate industry.

Still, the companies that have the capital to do such retrofits are the exception right now, says Roger Platt, senior vice president and counsel for the Real Estate Roundtable, a Washington, D.C., trade group for the commercial real-estate industry. "The hurdle rate is substantially higher than it was even a year ago, because of the fact that real-estate owners and investors need to preserve cash to deal with the recapitalization of real estate," he says.

At the Empire State Building, the owners paired the retrofit with a planned $500 million remodeling effort. Taking the whole building into account allowed project consultants to look for synergies among all the different building systems that contribute to energy use.

Modeling Change
Johnson Controls Inc., a Milwaukee-based company that won the contract to oversee energy improvements to the building, developed a computer model along with teams from the Rocky Mountain Institute, a Colorado-based think tank, and Quest Energy of Arizona to see how different combinations of more than 60 suggested improvements would reduce carbon emissions—and at what cost. In the end they recommended eight.

All told, only about $20 million was added to the budget for the energy-saving improvements, such as 6,500 gas-filled windows that let in the same amount of light as double-pane windows but retain heat better during the winter.

The proposed changes had another upside: They eliminated the need for $7 million of planned upgrades. For instance, the owners had originally planned to replace the building's chiller plant, the massive machines that air-condition the skyscraper. But the energy improvements reduced the amount of cooling the building needs enough that a much cheaper retrofit of the existing equipment proved sufficient.

So, the incremental cost of the green retrofit was only $13 million, an amount that could be paid back in three years once the building achieves its expected annual energy savings