HOUSTON—Multi-million-dollar capital investments in older properties can have them competing with modern-day office developments if owners focus on technology and sustainability, says Roger Vasquez, director of engineering and property management for Transwestern. In the following Q&A, Vasquez talks to the firm’s president, Kevin Roberts, about Pennzoil Place, a 1.8-million-gross-square-foot office property here whose owner executed technological and sustainable capital improvements and was able to slash its electrical costs, pass the savings on to its tenants and generate money through a nationwide initiative. He also talks about how capital improvements can provide landlords with greater gains and make their properties more valuable.
Roberts: Many building owners are not fully realizing the potential gains of capital-improvement projects. The owner of Pennzoil Place worked with Transwestern on an innovative rehabilitation that has attracted much industry attention. In a nutshell, what was implemented at Pennzoil Place that is so different?
Vasquez: Pennzoil Place consists of two 36-story, glass-walled buildings constructed in 1975. Following a multi-million-dollar capital investment by owner Metropolis Investment Holdings Inc., the 40-year-old landmarks are successfully competing against modern-day office developments in Downtown Houston. In June, Pennzoil Place and Transwestern won Realcomm’s 2014 Digie Award for Most Intelligent Office Building as a result of the improvement plan. The owner completed a major overhaul of mechanical, electrical, plumbing, heating, air conditioning and ventilation systems, but the project’s unique feature is the addition of a Cisco fiber-optic backbone that allows us to tie together all existing and future technologies in the buildings. Installing this Cisco IP-centric technology has revolutionized the assets and the way we manage them. The technology enabled metropolis to implement energy-efficient strategies, save money on vendor services and generate new revenue streams.
From an engineering standpoint, tenant and building issues are addressed immediately and can be done remotely from an iPad or tablet. This innovative breakthrough saves time, improves service quality and increases tenant satisfaction. The Cisco system also allows tenants to save resources by tapping into the backbone for Internet service. For example, when one Pennzoil Place tenant leased expansion space in the connecting tower, it faced a $25,000 fee for the cross connection and was told it would have to wait six to eight weeks for service. Transwestern completed the job in two days at one-tenth the cost. Additional tenants are tapping the Cisco backbone for data services, creating a new revenue stream for the building owner. In addition, the Cisco backbone allowed Transwestern to replace the security vendor; providing integrated services in-house produces a savings of $80,000 per year.
Roberts: How did the investment in technology and sustainable improvements affect operating expenses at Pennzoil Place?
Vasquez: Metropolis has been able to cut its electrical costs in half and pass the savings along to its tenants. In 2008, when Pennzoil Place was approximately 98% occupied, electrical cost totaled $4.3 million. In 2013, when the occupancy rate was the same and capital improvements had been completed, electrical cost dropped to $2.1 million. The savings are attributable to three factors: 1. Technology is used to optimize efficiencies from mechanical systems, some of which are 40 years old; 2. Transwestern, which manages Pennzoil Place, utilized open-market purchases to achieve lower rates; and 3. The best technologies were identified and implemented in-house by Transwestern.
Buildings with powerful energy programs can increase return on investment for owners. For instance, there are a number of energy-related rebate programs that owners are advised to consider. Stating approximate numbers, a $650,000 rebate was secured on a $5-million chiller project at Pennzoil Place, taking the payback period down to seven years. Also, using approximate figures, a $170,000 rebate was achieved on an $800,000 lighting retrofit project, resulting in a shorter, 2.6-year payback period.
Roberts: Pennzoil Place makes money through Demand Response. What does that program entail?
Vasquez: Demand Response is a nationwide initiative in which buildings are paid to reduce energy consumption and share their capacity with the nation’s three power grids during peak usage times to prevent blackouts. Most participants are manufacturers in industrial buildings that can shut down non-production areas to save energy or revert to their own power generator during the hottest part of the day—typically, from 3 p.m. to 6 p.m. Pennzoil Place is one of only a few office properties in the US that participates, and doing so was made feasible by the Cisco technology and our internal programs that provide superior control of energy usage.
Metropolis realizes three financial benefits by participating in Demand Response: 1. Energy costs are lower when capacity is diverted; 2. Pennzoil Place was paid $40,000 during its first year of participation; and 3. The lower anticipated demand capacity helped avoid higher fees from the energy provider, which charges more to buildings whose usage levels necessitate more reserved power.
Building owners are encouraged to seek avenues to fully leverage investments in capital improvements. More specifically, owners can capitalize on a number of strategies and programs related to energy consumption. Doing so will maximize the value of their real estate.