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The Debate on Energy Benchmarking of Commercial Real Estate Heats Up

State and local governments are increasingly debating legislative proposals on whether to mandate that property owners report the energy use or consumption of their commercial and industrial buildings, commonly referred to as benchmarking. Washington and a number of localities have already enacted laws mandating owners of commercial real estate report their energy consumption. However, these benchmarking mandates can be misleading by only disclosing a building’s overall energy consumption – without taking into consideration the advanced technologies incorporated into the design and construction of the commercial space in order to make it more energy efficient. During these policy debates, it is important for the commercial real estate industry to raise some fundamental questions for discussion.

The most important one is that commercial real estate owners only control the common or operational areas of a building, such as the lobby, bathrooms, parking lots and other common areas of a building. Much of a building’s energy usage is controlled by the tenant, outside the purview and control of the owner. Because of this, the energy benchmarking of a commercial building may provide a false and inaccurate representation of the building’s true energy efficient infrastructure.

In addition, regardless of whether measures have been taken by the owner to integrate and install the latest energy efficiency technologies, such as reflective or motion sensor lighting and energy efficient plug-ins, the tenant’s profession may significantly impact the energy consumption and drive up the overall benchmark of a commercial building as well. For example, a doctor’s offices may have medical equipment, such as x-ray machines, or a law firm may require an independent computer server in order to protect a client’s confidential information.

Another unpredictable factor: Weather. Weather impacts the energy usage of a commercial building and occurs outside the control of the building owner. You may have incorporated the most advanced and efficient air conditioning and heating system, but then along comes a heat wave or frigid Arctic blast that requires higher energy consumption in order to provide a safe and comfortable work environment for tenants and guests.

It is worth noting as well that the commercial real estate is also already taking steps to provide more energy-efficient buildings without government mandates. Owners of commercial real estate recognize that tenants want energy efficient office space in order to reduce energy usage, save money and lower their operating costs. This market-driven demand by tenants should be supported through incentives, such as the federal 179D energy efficient tax deduction, not arbitrary mandates that may inaccurately assess or label a building and, subsequently, may diminish the building’s value or deter potential tenants from considering office space that is truly energy efficient.

Recognizing that benchmarking may inaccurately label a building and that the industry is driven by tenant demand for energy-efficient space, NAIOP Arizona scored a major legislative victory earlier this year with the passage of bipartisan legislation (SB 1241) that prevents cities from enacting energy benchmarking requirements. Their advocacy and leadership on behalf of the commercial real estate industry was instrumental in the bill being signed into law, which many Arizona legislators view as one of the most significant pro-business bills passed this year. While the legislation addresses the growing concerns associated with having a patchwork of arbitrary and inconsistent local mandates, it does not prohibit the state government from taking steps to establishing a statewide benchmarking program at a later time.

Tenant privacy concerns must also be raised during the benchmarking debate. If the tenant refuses to give permission for the utility company to provide the building owner with their energy usage, a credible record of energy consumption is not obtainable from which to benchmark a building, which may lead to a false or inaccurate assessment of a building’s energy efficiency. This privacy concern was raised in Washington during the legislative debate. Washington decided to continue with the benchmarking mandate and addressed the privacy question by allowing the building owner to make an educated assumption on what they think the energy usage is for that tenant. What if multiple tenants refuse to release their information? These assumptions weaken the relevance of the benchmarking mandate.

NAIOP recognizes the importance of energy efficient commercial and industrial space and will continue to work with state and local lawmakers to develop sound policies

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