Our nation’s capital is leading an ambitious decarbonization experiment to tackle climate change through a policy called Building Energy Performance Standards (BEPS). Enacted as part of the Clean Energy DC Act of 2018, BEPS requires existing buildings to either bring their ENERGY STAR scores up to minimum performance standards or reduce their energy usage by 20% by the end of the cycle. With buildings accounting for more than 70% of the city’s emissions, improving energy efficiency is necessary to meet local climate commitments. However, the new policy and the costs associated with retrofits pose tremendous challenges to the local real estate industry. Forty-one other states and localities across the country have joined President Biden’s National Building Performance Standards Coalition, and they are watching the District to see what happens.
As the first major BEPS deadline—selecting a compliance pathway—approached this Spring, the Building Innovation Hub conducted interviews with building owners, general managers, condo owners, sustainability consultants, and others to understand the landscape.
It can be both challenging and expensive to upgrade building efficiency and performance. The numerous obstacles range from drafty building envelopes, to equipment replacement, to resident technology adoption, and to limited understanding of a very new policy. The dominant themes of the Hubs interviews were barriers related to evaluation, costs and communication.
A recurring theme in conversations with building owners and managers is that the ENERGY STAR metric, which scores buildings between 1-100, is unsuitable as the basis for future evaluation. ENERGY STAR scores are updated against a scoring curve that can mean the same building scores differently year over year, even when nothing has changed. As Joe Reilly, Vice President, Director of Property Management and Asset Services with Akridge, explained, “ENERGY STAR is a free tool created in the ‘90s to encourage buildings to track water and energy. It was not designed for a performance standard with million dollar fines on the line.”
The Institute for Market Transformation (IMT), which manages the Hub and which has deep expertise in building performance standards, has also concluded there are better performance metrics. In its Model Building Performance Standards Law, IMT recommends that BPS laws use performance metrics that are within the control of building owners, operators, and occupants. Two of the metrics IMT recommends are site energy use intensity (EUI) and on-site greenhouse gas emissions intensity. As part of its BEPS Greenhouse Gas study, the District Department of Energy and Environment recommended an eventual switch toward site EUI and on-site greenhouse gas emissions intensity metrics.
Building improvements are investments, and while they offer a valuable return, the upfront costs can be daunting. Planning cycles for buildings can be decades long, so an unexpected change, like a sudden focus on energy efficiency, can throw off prior cost calculations for maintenance, operations, and capital improvements.
Chris Horning, Asset Management – Office & Life Science at Nuveen, sums up the challenges this way:
“The average age of an office building in the District is over 30 years old. We have come a long way in how buildings are designed, built and operated during that 30 year span. However, the cost to redesign and retrofit some older vintage buildings can be daunting. In addition, the cost of all capital improvements has been further driven up by supply chain issues. Further compounding the issue are the challenges that have been brought by the capital markets in the last year, which has constrained liquidity required for the investments required for improving energy efficiency at older assets. All of the aforementioned challenges will make the sourcing the capital for said improvements next to impossible unless sourced through a green bank or green lending platform.”
Funding and Financing
The costs associated with building performance improvements are wide-ranging, but generally involve audits, consultant recommendations, the purchase of new equipment and systems, envelope upgrades, and retrocommissioning, as well as other measures.
For many commercial buildings, this is a challenging time to focus on BEPS: newly increased borrowing costs make it difficult to gather the funds needed to make building performance investments while sectors including office and retail are experiencing high vacancy rates.
Mayor Muriel Bowser’s budget proposal for fiscal year 2024 included a three-year BEPS delay. While the mayor’s office didn’t explain the rationale for the measure, it is likely related to these real estate challenges. Peggy Jeffers, executive vice president of the Apartment and Office Building Association (AOBA) spoke on record to WAMU, the local NPR station, in support of the delay. Representatives from both AOBA and the District of Columbia Building Association (DCBIA) testified in support of the delay during a DC Council hearing.
However, many commercial building owners and managers have already invested time and money in BEPS compliance work, and many in the industry support the current BEPS timeline. Cliff Majersik, Senior Advisor with IMT, addressed these points in his testimony objecting to the delay.
Hub Director Theresa Backhus summed up these perspectives in her testimony. On May 16, the DC Council voted to strip out the BEPS delay as part of its first vote on the District’s budget.
““When all of this started, I don't think anyone here had any idea of the level of costs that were going to be involved."Nigel Twose, Shoreham West Cooperative
“When all of this started, I don’t think anyone here had any idea of the level of costs that were going to be involved,” said Nigel Twose, Chair of Shoreham West Cooperative’s BEPS Committee. “And of course, this is just BEPS 1 we’re talking about.”
The luxury co-op opened in 1964 in Woodley Park. Since 2019, Shoreham West has worked with five consulting firms and received several reports. “Anything that conceivably could be recommended to us has been recommended by one or another of these firms,” Twose said. His team recommended the Performance Pathway for BEPS compliance which requires a 20% reduction of their site EUI by the end of the cycle. The total cost for associated improvements is approximately $1.5 million, to be raised over a few years. While they are hoping for some cost reimbursement related to audits, the options for raising this capital are unpleasant: borrowing at a new increased rate or a special assessment for residents.
Barry Barrett, General Manager of Plaza Condominiums, faces similar challenges. ”Dollar wise it’s extremely painful. You know, we’re looking at a minimum of $1.25 million, of which almost, at least 70-75% of that amount is trying to meet the BEPS standard, not just replacing equipment. So each individual unit owner is going to be paying $25,000 over the next year or so for this upgrade. And, and even with the upgrade, we have no idea what the end results will be.”
Located in Foggy Bottom, Plaza Condominiums has 10 stories and 51 units, and an ENERGY STAR score of 4 for 2019, the base benchmarking year. The 1975 building was “overbuilt” and inefficient according to Barrett—an example of the initial design lending to the challenges of meeting BEPS. They have chosen the BEPS Performance Pathway. To raise the capital for improvements, they are evaluating a loan or special assessment.
It’s always a challenge to comply with new policy because, by definition, no one is expert at it. In the case of BEPS, many of the more detailed regulations have only been available within the last two years. This means it is challenging to make the right people aware of the policy, and also to build understanding within the local real estate community.
Twose found that a few vendors hired for sustainability audits did not sufficiently understand BEPS requirements. He learned about BEPS himself primarily through his legal team. The Hub has noted in our own outreach that many names or contact information for affected buildings are no longer accurate, and have worked to update this information for the District.
Mike Barboza, Director of Business Intelligence & Sustainability for Borger Management has a different challenge: too many requests for data on a tight deadline. Barboza, who has 20 buildings affected by BEPS, and seven in the Retrofit Accelerator, had difficulty providing all utility information for required benchmarking the week prior to the compliance deadline; he suggested that the District consider holding off on some of the more detailed questions until third-party audits are required. On the flip side, he is working on a centralized database for his portfolio to track benchmarking- and BEPS-related proposals and energy improvements. This will make BEPS reporting easier going forward.
““For at least the last two years, we have been preparing in-house, making sure that all the managers and regional managers were aware of what BEPS is and how it ties into energy benchmarking,”Mike Barboza, Borger Management
Despite these challenges of the new program, approximately 80% of the buildings required to choose a BEPS Compliance Pathway had done so ahead of the April deadline. This high response rate is notable considering the law is the first of its kind in the U.S. Those companies which devoted time to planning and research were the best positioned to comply.
“For at least the last two years, we have been preparing in-house, making sure that all the managers and regional managers were aware of what BEPS is and how it ties into energy benchmarking,” said Barboza.
He also noted that the process has led to some culture shifts. “Getting everyone to understand the benefits of an energy audit has been challenging, but ultimately a success now that it’s something everybody’s familiar with.”
Chris Horning of Nuveen shared similar approaches. “Across the DC office portfolio we have made a lot of small changes at the building level to continue our BEPS compliance or in progression towards a compliance pathway (i.e. energy monitoring on base building systems, replacing less efficient HVAC units, replacing fixtures in common areas with LEDs to name a few). However, the biggest impact we are attempting to make is in partnering with our tenants to share best practices from an energy operations standpoint.” Ryan explained that many commercial tenants have Environmental, Social, and Governance (ESG) goals that align with carbon reductions, so their reactions have been “overwhelmingly positive.”
Some interviewees had also taken advantage of resources available to support BEPS compliance. Barboza’ explained, “We started relying on the Building Performance DC website. We just went through each of our buildings to see what it recommended. We used that as a starting point and to get a sense of where our buildings really stood.”
Tony Bates, General Manager at Riverside Condominiums, used Hub resources to help with compliance pathway selection. “This project was really dropped into my lap at the last minute. I really didn’t have any guidance except for an old reference from 2019 that wasn’t very accurate. I was able to do some research on my own and came across Building Innovation Hub, which definitely relieved a lot of unwanted stress on myself and co-worker.”
““I really love the BEPS program to date. We need to move society forward, and approaching that through real estate makes a ton of sense to me because these are the physical assets of our communities.”Evan Petrack, Tower Companies
Many buildings, and the people inside them, will benefit from the energy improvements. Interviewees noted that residents of multifamily properties may have more control over their heating and cooling with unit-based controls and that commercial tenants will benefit from a healthier and more comfortable workspace for their employees. Some affordable housing tenants may be able to significantly lower their utility bills. It’s also possible there could be more electrical capacity in some buildings.
“I’m anticipating that all of my residents, including myself, will take the time to appreciate and invest back into the planet. Improving the environment is very important for our future,” said Riverside Condominiums Manager Tony Bates.
This view is not universally shared, because it can be hard to miss energy you aren’t wasting, and because the investments are largely invisible to occupants. However, in the long run, the energy reductions can make a big difference.
Evan Petrack, Sustainability Associate, Tower Companies has a broader view of the benefits. “I really love the BEPS program to date. We need to move society forward, and approaching that through real estate makes a ton of sense to me because these are the physical assets of our communities. Regardless of if you live in a building or you use a building or not, that building is impacting your health. That building is contributing to air pollution, to the heat island effect.”
Michelle Diller, Policy Program Director for Enterprise Community Partners, focuses on Enterprise Green Communities certification for affordable housing properties nationwide. For her organization, lowering utility bills—and the associated energy burden—is a critical goal. Additionally, sometimes the process of building improvements also leads to improvement in ventilation and insulation.
She also noted that while cost can be a barrier, “what I have seen anecdotally in the greater residential building environment is that once you overcome that learning curve and it becomes part of your baked-in design, any incremental costs really start to shrink.” In the affordable housing world, sustainability certifications sometimes open up new opportunities, such as preferential loans from Fannie Mae or Freddie Mac, which can then help make a project’s financing work.
““I believe if a rep would stop by all the condos and make contact it would definitely help. There are a lot of properties that are in my same situation that would love that.”Tony Bates, Riverside Condominiums
As building owners and operators in the District look ahead, there are a number of opportunities for improvement.
- BEPS round 2 is generating uncertainty. So, the earlier regulatory decisions are made, the better and easier compliance is likely to be.
- The real estate industry wants to be at the table for key decisions. The same law that created BEPS created the BEPS Task Force to advise DOEE on how to implement the program and on complimentary programs and policies. At its last meeting, the Task Force, which includes several building owner representatives, voted to accelerate the cadence of its meeting to every other week in order to review opportunities to address key hardships, navigate a path forward, and work with DOEE to develop recommended legislation to improve BEPS.
- Building management teams need help to prioritize compliance-related decisions, and to understand the financial and strategic opportunities available.