Rx for Energy Savings

This is an HTML version of a story that ran in the June issue of Real Estate Forum. To see the article in its original format, click here.

When developer Carter USA opened the doors to Phase 1 of its 7.3-acre Piedmont West Medical Office Park in January 2009, it was nearly 50% leased. Fast-forward four years and the 264,000-square-foot, nine-story healthcare facility is 92% leased and stacking up awards and recognitions for its operational efficiencies.

Developed in conjunction with Piedmont Healthcare Inc., which occupies 91,000 square feet of the $90-million building, Piedmont West won the Building Owners and Managers Association's 2012 International TOBY award in the Medical Office Building category. The award is the highest level of recognition from BOMA. “Some medical office buildings are just exam rooms and basic office space,” says Piedmont West chief engineer John Day of Cassidy Turley, the building's property manager. “In this building we have surgical centers, CT and PET scan machines, nuclear medicine machines, extra HVAC equipment. And all of this consumes much more energy. Energy conservation becomes a key part of the building-operations strategy in sophisticated medical office buildings like Piedmont West.” Indeed, engineering savings is a must in this energy-intensive building, which was constructed with green principles.

BUILDING TOWARD EFFICIENCY

The Piedmont West Medical Office Building is home to Piedmont Healthcare's Cancer Center, the largest tenant at 138,605 square feet—or 54% of the building. The cancer center spans the entire spectrum of care from detection, diagnosis and research to treatment, education and support.

Piedmont West also hosts a state-of-the-art imaging center, outpatient center and radiation oncology services, reproductive medicine, gastroenterology, hematology, gynecology and urology practice, as well as plastic surgery and urgent care. Other large tenants include the American Diabetes Association at 17,000 square feet, Morehouse School of Medicine at 23,000 feet, and Jenkins Clinic of Urology at 17,000 square feet. A mixed-use asset, there is also 9,000 feet of retail.

Without an energy-efficient design, the cost of running the building would drain the profits of the 11 tenants or force rents far above market norms. Cassidy Turley is determined to find the technologies and best practices that keep costs down.

“We've made a commitment to support the BOMA 7-Point Challenge with the goal to reduce our overall energy consumption from a portfolio-wide level by 30% over a five-year period,” says Holly Hughes, a senior managing director and principal head of property and facility management at Cassidy. The BOMA program aims to help incentivize commercial real estate companies to make voluntary market-driven efforts to reduce the use of natural resources, non-renewable energy sources and waste production. BOMA also asks participating CRE firms to position themselves as leaders in sustainability and help reduce the industry's role in global warming.

Beyond the 30% decrease in energy, Cassidy also committed to benchmarking energy performance and water usage through Energy Star metrics; provide sustainability education to engineers, owners and operators; perform energy audits to implement low-risk and low-cost strategies; and improve operations and building maintenance systems.

“Once the building came out of the ground, we continued to look for ways to increase efficiencies and create value for our tenants,” says Cassidy's Dan Joseph, property manager at Piedmont West. “Focusing on energy efficiency rings a large bell for our tenants. So we continue looking for ways to drive energy efficiency.”

Cassidy has taken specific measures to reach its energy management goals, including replacing tenants' standard incandescent light bulbs with compact fluorescent bulbs and further reducing the wattage of fluorescent bulbs for all lights. “Going with T5s saves energy and labor,” Day says. “We're down to 28 watts. That's the way the industry is headed.”

Engineers also wired all tenant lighting through the building's energy management source that contains a manual override capacity limited to two hours for tenants' after-hour usage. “Everything we do, we do with the goal of increasing our Energy Star rating,” says Joseph. “Anywhere we see even a small potential to save on energy consumption or expenses, we go after it—from low-hanging fruit to high-hanging fruit.”

From an ultra-practical standpoint, Cassidy Turley also works with tenants to administer proper nightly closing procedures, including shutting down computers, lighting, televisions and manually operated databases. Likewise, management requires all janitorial functions to be performed by an environmentally friendly cleaning service provider.

Other initiatives include installing occupancy sensors in all offices to reduce consumption when offices are not occupied and requiring tenants to submit after-hour and weekend HVAC requests for overtime. Finally, Cassidy audits the energy-management operation annually to drive maximum performance and identify further improvement areas.

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THE ENERGY STAR FACTOR

When you talk with Day and Joseph, you hear two words repeatedly: Energy Star, meaning, of course, the US EPA's voluntary program to help businesses save money and protect the climate through superior energy efficiency. Buildings need to achieve a score of 75 or higher to apply for the program.

Although other medical office buildings have followed in its green footsteps, Piedmont West was the only multi-tenant healthcare facility in Georgia to earn Energy Star certification when the recognition was first awarded. Cassidy has worked with Carter to bring Piedmont West's Energy Star rating from 86 in 2010 to 100 (its highest rating) in 2012 and continues to benchmark the building's compliance.

“Tenants are looking for buildings that are Energy Star-rated,” says Day. “Both Carter and Cassidy Turley made a decision to strive to be at the top of the industry. We want to lead by example. We want to drive more value for the tenants and the property. It was the Energy Star rating that helped us win the TOBY award.” Beyond the TOBY award and the Energy Star rating, Piedmont West also won the BOMA 360 Award in 2010.

Altogether, Piedmont West can report both cost savings and tenant satisfaction. For example, the energy cost for Piedmont West averages $1.95 per square foot compared to the national average of $2.54 per square foot. And from January 2011 through December of 2012 the building has shown no increase in utility cost. In fact, utility expenses decreased by $5,500.

“Tenants are looking at the overall operating expenses and how they can justify moving into a space where they're going to pay $25 a foot rent,” Joseph says. “They want to know what the expenses are going to run. Tenants may pay a higher rental rate for the class A space but their expenses are low. When they factor the total cost against a cheaper building down the street, it tends to balance out.”

According to Cassidy Turley, tenant satisfaction scores have posted above the national average for the past three years. The developer is happy too. Cassidy successfully appealed Piedmont West's real estate valuation, resulting in a tax reduction of $267,000 in 2010 and $67,000 in 2011.

All of this positions Piedmont West in an enviable competitive position in the Atlanta area's healthcare market. And with reform over the next decade driving medical office buildings, there's bound to be more competition in the years ahead.

HOTLANTA?

According to Marcus & Millichap, about 10.3 million square feet of medical office space is slated for delivery in 2013 nationally. That's up from 7.8 million feet in 2012. M&M predicts medical office vacancy will dip another 20 basis points in 2013 as tenant demand continues rising and new supply comes to market largely pre-leased.

Furthermore, the Southeast is likely to end the year with vacancy in the high-8 to mid-9% range. That's about where Piedmont West currently sits.

Medical office real estate activity has been hot in the Atlanta locations so far this year. There are at least four major healthcare projects coming out of the ground in and around the MSA.

With competition rising, Cassidy Turley isn't resting on its energy-efficient laurels. The property managers are still looking for more ways to save energy consumption and costs. As part of that research, Day and his team also visit other building sites to see first-hand how other properties are tackling energy issues.

“We have metal-halide lights in our parking lots now, but we're looking to make the switch to LED,” says Day. “We expect this will be another strong move toward energy savings. Our tenant retention is high because we provide a class A building and make it easy for them to feel good about participating in sustainable programs.” (The energy-savings program passes costs along to the medical practices.)

Once a year, Cassidy's senior technical team ticks off a 98-point checklist at all the assets in its portfolio to examine everything from accounting processes and financial reporting to safety compliance and energy consumption. Holly says those audits are passed along to clients for the sake of transparency.

“Every property that we manage is different,” she says. “This checklist provides us with a tool whereby we can identify best practices that can be shared throughout the portfolio. We take a proactive approach to deliver the best possible experience for our clients. That transparency builds trust with our clients.”