FOR IMMEDIATE RELEASE

ZAPPED!

FARMINGTON HILLS, MI, July 18, 2006, –
Increasing energy rates put squeeze on businesses
By DOUG HENZE Of The Oakland Press

Think your utility bills are steep? Try taking a $114,000 bump in your yearly gas bill or paying $3.5 million annually for electricity. That's what the owners of the Southfield Town Center faced in 2005, and the energy crunch doesn't seem to be going away anytime soon.

While hikes in residential utility bills have gotten much of the attention, rising energy costs are squarely on the radar screens of commercial building operators these days. In major buildings—such as those found in Southfield's and Troy's high-rise office corridors—landlords are paying to heat, cool and power thousands, if not millions, of square feet of space.

And with metro Detroit's weak economy bringing historically high vacancy rates, owners are under pressure to keep rents low.

“It's a pretty major issue for any commercial building, nowadays,” said William Jansen, property manager for the 25-story, 500,000-square-foot American Center in Southfield, owned by REDICO and built in 1975. “It's very concerning to us. We saw an increase of 45 percent from 2005 to 2006 in January in (the) natural gas (rate).”

The commercial real estate industry spends $24 billion on energy annually, estimates the trade group Building Owners & Managers Association International, which is targeting costs with its recently launched BOMA Energy Efficiency Program (BEEP). Rolled out in April as a way to teach people in the industry about low-cost energy savings techniques, the series of seminars already has trained 3,000 people, said Brenna Walraven, chairwoman-elect of BOMA, which has a metro Detroit chapter.

“It's a huge issue because you're seeing (costs) increase for all types of energy—gas, electricity, as well as heating oil costs,” said Walraven, who also is executive director of national property management for USAA Realty Co., an Irvine, Calif.-based company that has a portfolio of 60 buildings totaling 35 million square feet. “You're certainly going to see costs continue to increase, not decrease. You've got China and India increasing their demand, and demand has outpaced supply.”

Jansen is all too familiar with the problem. He watched the rate the American Center pays for natural gas jump from $6.20 per thousand cubic feet in January 2005 to $8.99 per thousand cubic feet in January.

With the demand for natural gas lessened in June, the rate slid slightly to $8.70 per thousand cubic feet, but Jansen already is anticipating another spike this winter.

And he fears the mild winter of 2006 won't be repeated, meaning usage will be up, as well.

“Because of the temperatures, we were able to cut back on our usage (in 2006),“ said Jansen, who could not provide exact utility costs for the American Center. “I don't think the populace is realizing how hard it's going to hit them (this winter).”

Until then, both homeowners and landlords will deal with air conditioning bills.

For New York-based Blackstone Property Management, which operates the five towers at the Southfield Town Center complex, that means paying to power 2.5 million square feet of space. The center, which opened its first tower in 1975, still has one building with electric heat.

Being a large consumer of electricity, Town Center has a long-term agreement with DTE to keep its prices consistent, said Rick Golding, property manager for the office complex. The five-year deal with the utility shaved 10 percent off the Town Center's electric bill in both 2003 and 2004 and reduced costs by 8 percent in 2005, Golding said.

Still, the complex used 50 million kilowatt hours of electricity in 2005 and had a $3.5 million electric bill.

“We do not have a longterm contract for natural gas,” Golding said. “It's not available, so we are subject to the volatility of the market just as the average consumer is. My annual budget for fuel for the complex is about $500,000 for natural gas.”

That 2005 cost was up nearly 30 percent from $386,000 in 2004.

In a booming office market, such as the one metro Detroit saw in the late 1990s, landlords could easily have adjusted rents to pass on extra utility costs for building common areas to tenants. But with occupancy rates dropping from the high 90s then to slightly below 80 percent today, building owners are seeing rents slide, as well.

“It would be suicidal,” Golding said of landlords ratcheting rents to try to cover energy costs. “We reduced our rents this year dramatically to remain competitive in the market.

“It definitely makes it tough to remain competitive.”

Keeping rents low for tenants means making cuts in operating costs, Golding said.

“It could be landscaping (or) personnel cutbacks,” he said.

Building operators also use electronic energy management systems to reduce utility usage in non-peak hours and infrared testing to make sure loose electrical connections or other problems aren't draining power.

Upgrading equipment to the latest and greatest technology isn't always practical, Golding said.

“The upfront costs prohibit people from making those changes,” he said. “Owners and managers do not have that capital available to make those changes.”

Few landlords have budgets for large capital improvements today, meaning energy savings will have to come through low and no-cost means, Walraven said.

“There’s a big myth in our industry that the only way you can improve energy efficiency is through capital investments,” she said.

Walraven’s company, USAA Realty, surveyed tenants and learned that, while most had leases calling for heating and cooling on the weekends, less than 20 percent used their offices then. That prompted USAA Realty to contact those tenants.

“We said, ‘We would love to turn off the floors we're not using,’” Walraven said, adding that tenants were assured heating and cooling could be restored at no charge if they needed to work on a given weekend. “You can save 5 percent to 8 percent on the weekends just by turning off energy.”

Other small changes could include a lighting retrofit to more energy-efficient lighting, which would have a payback of a year to a year and a half, Walraven said. Changing an exit sign from one using 40 watts of electricity to LED lighting that uses only two watts also reduces energy bills, she said.

“They're all cumulative,” Walraven said. “You do a little bit, little bit, little bit and now you're at 30 percent (savings). It's about being a continuous process. You don't just say, I did a lighting retrofit in 1979 and I'm done.”

The American Center was one building that received capital improvements, with $3.5 million invested in 2001 to do lighting improvements and to upgrade from electric to gas heating. Named an Energy Star building, at the time, by the U.S. Environmental Protection Agency, the building has saved $600,000 per year in utility costs, Jansen said.

“It's always a first step,” Jansen said. “You have to continue looking at it year in and year out. It's a constant battle.”

Cutting energy use also has a benefit for the environment.

“We contribute almost one-fifth of the greenhouse gas emission in the USA,” Walraven said of commercial building owners. “We also have a huge benefit to the environment in reducing energy consumption.”

More than 70 buildings projects in Michigan have been registered with the U.S. Green Building Council to get Leadership in Energy & Environmental Design certification. The program recognizes “green” building efforts that reduce energy usage and lessen environmental impact.

Lawrence Technological University in Southfield earned LEED certification for its A. Alfred Taubman Student Services Center based on plans for a plant-covered roof that would reduce runoff and a 12,000-gallon underground cistern to capture water for landscaping and flushing toilets.

Building owners may begin to see tenants demand such environmentally friendly measures, Walraven speculated.

Even if they don't, controlling energy costs will give landlords a competitive advantage in setting lower rents, she said.

“If you can better manage (energy use) you can have a huge financial impact,” she said.

Founded in 1908, BOMA of Metropolitan Detroit is a professional, nonprofit trade association whose nearly 400 members either own or manage commercial real estate, or provide goods and services to the industry. BOMA Michigan members represent organizations managing more than 250 million square feet of office and industrial space, with employees and tenants totaling more than 1.25 million people in Michigan. BOMA of Metro Detroit provides commercial real estate professionals the opportunity to work together for professional growth, advocacy rights, corporate profit, and the benefit of the nine Southeastern Michigan communities it serves. For more information on BOMA and membership, visit www.bomadet.org.