Barriers to adopting high-performance façades are the focus of a newly published research report by the Façade Tectonics Institute (FTI) for the U.S. Department of Energy (DOE). Stephen Selkowitz and I, supported by Valerie Block, conducted the study.
This month, we’ll dive into the underlying causes of a second barrier (see last month’s blog for the first): “There is insufficient return on investment (ROI) on the first cost increase of high-performance façades.” Plus, an interesting case study by PAE Engineers provides a financial blueprint for developer-led high-performance buildings.
We also ponder the possibilities of transforming high-performance windows from an often-forgotten building element to a cultural must-have alongside marble countertops and flooring. Creative marketing worked for everyday milk, so why not for windows?
Low-stringency codes set the baseline from which the investment for high performance is measured (see last month’s blog). In addition, we identified five additional drivers for why there is insufficient ROI in high-performance façades:
- Owners can’t get a lease rate premium because tenants are not aware of the full range of benefits delivered by high-performance facades
- Simplistic payback models are used that only focus on energy cost savings
- There are split incentives accruing to owner and tenant
- Perceived market demands drive developers to designs that often do not align with low-energy, low-carbon, resilient buildings
- There is a lack of knowledge and quantification of the non-energy benefits provided by high-performance façades
The bottom line is that tenants, owners and other market participants do not understand the importance of high-performance fenestration and facades for energy efficiency, thermal resilience, carbon performance and their impact on occupant comfort, productivity, health and wellness.
While tenants desire and are willing to pay for the aesthetics of interior finishes such as marble floors and countertops, they typically overlook the importance of windows and façades. Not only do they lack knowledge and awareness of the benefits of high-performance windows/façades, but they also lack awareness of the expensive issues encountered with poor façade systems.
Closing this awareness gap will be challenging without the tools to demonstrate the full benefit set. Currently, façade and fenestration investments are typically evaluated based on energy cost savings alone. In the FTI study, architects told us that estimated energy savings often do not show the necessary ROI, especially in high-load buildings such as laboratories and hospitals. We conclude, “There are no validated payback or ROI models available that monetize the non-energy benefits, although there is growing recognition that these impacts are potentially important.”
Ted Kesik, a professor at the University of Toronto and a building consultant, told us, “When a full life cycle cost analysis is performed, high-performance facades always come out on top. Simplistic payback and ROI are simply means of profiting from unethical building performance, which is subsidized by passing on externalities to the next generation. Payback and ROI metrics from cost-effectiveness analyses should be discouraged.”
Since developers and owners of leased buildings do not directly benefit from lower energy costs and a more comfortable, productive environment—and since tenants are not yet asking for high-performance façades—developers have no incentive to invest in higher performance.
Lack of understanding of the impacts of façade performance is borne out by the market demand for certain designs that provide a desired aesthetic but are costly to deliver at high-performance. Floor-to-ceiling glass, for example, requires significant investment to deliver high performance but can also be (and typically is) delivered at lower cost and at much lower performance. There is also a trending desire for façade articulation, where various parts of the building envelope are projected and recessed. This creates a more interesting design but can cause more challenges for performance because more corners and interfaces increase opportunities for thermal bridging.
The absence of validated tools to credibly quantify non-energy benefits also limits the ability to communicate the benefits of and to advocate for investments in high-performance façade systems. This is linked to another barrier (#7): “Insufficient capacity of architects and consultants to design better façades.”
Closing the awareness gap in the general market is a significant lever for market transformation. Building owners and occupants must value their windows and façade systems as much as, or more than, they value their high-end interior finishes.
The Real-Estate Market Outliers
The San Francisco Bay Area is an example of an outlier in the U.S. real-estate market where the “awareness gap” appears to be closing. This high-end market has started asking for high-performance façades and better-performing buildings. There is a general desire for sustainable, low-carbon, well-daylit, comfortable buildings, a willingness to invest in these qualities, and an appreciation of the façade’s importance in delivering such performance.
Technology and healthcare companies such as Apple, Google and Genentech understand the built environment’s impact on the productivity, attraction and retention of their knowledge workers. Google is a sustaining member of the University of California-Berkeley’s Center for the Built Environment’s Industry Advisory Board, which undertakes applied research focusing on delivering strategies for high comfort for building occupants.
Such companies also must meet corporate sustainability commitments. In addition, their building stock—whether owned or leased—is key to their decarbonization strategy.
For example, Genentech and their general contractor Webcor, invested in research and development at DOE’s FLEXLAB facility at Lawrence Berkeley National Laboratory (LBNL) to optimize the façade design for Building B35 in Genentech’s South San Francisco campus.
The FTI report indicated that understanding the history and drivers of this market could “provide a blueprint for influencing other real-estate markets.”
A Recipe for a Developer-Led High-performance Building
The report identified another case study that could act as a blueprint for change in the developer market. PAE Engineers, a B-corporation and mechanical engineering firm, focuses on high-performance buildings. The company’s work demonstrates the feasibility of an economic recipe that could attract real-estate developers to invest in a Living Building Challenge (LBC) building. LBC certification for sustainable buildings is very difficult to attain.
PAE, together with developer Edlen & Company, architect ZGF and Walsh Construction Company, designed and built the world’s first for-profit, developer-led LBC office building in Portland, Oregon. The building itself is net-positive energy, with net-zero water, a net-negative carbon lifecycle and a 500-year resiliency projection. This performance required significant investment in a high-performance façade.
PAE became the anchor tenant after the company’s president emeritus, Paul Schwer, persuaded his board of directors that such a building would pay back the necessary 10% rent premium over the market. He convinced them that payback would be achieved by achieving either a 2% increase in employee productivity or a 2% reduction in employee turnover. They also committed to a 15-year lease, further reducing the real estate developer’s risk.
According to Schwer, the recipe for economic feasibility for the developer was:
- Achieving a 10% rent premium. For knowledge worker-based companies, such as those in technology, engineering and consultancy, the payback on a 10% rent increase is not hard to justify based on human factors research. To offset this premium, Schwer indicated that his firm only had to achieve one of the two target improvements – in either productivity or retention. He noted that this was a feasible target for the board to get behind.
- Hold for 10 years: Ten years is a longer hold time than normal for developers, but having anchor tenants sign long leases helps support the investment. Also, in opportunity zones, of which there are hundreds in cities throughout the U.S., investors pay no capital gains tax if they keep their buildings for more than 10 years.
- Accept a nominal 10% (8.3%) internal rate of return (IRR): Typical IRRs are ~12%, so investors must accept a slightly lower return on their capital. PAE’s building investors’ IRR was 8.3%. Since a building’s sales price is driven by its income stream, the 15-year anchor tenant lease supports guaranteed cash flow for a period longer than the opportunity zone capital gains exemption, reducing risk.
PAE has written a book describing its experiences in this project and shares its full financial analysis.
How to Transform the Market?
A full 10-point blueprint for action to address all the barriers identified is available in FTI’s research paper. To overcome barriers related to developer ROI and those interlinked, the following are most relevant:
- Create tools and programs that improve the ability to communicate the overall economic value of high-performance façades to owners and the general market. Credible tools that output validated data on the non-energy benefits of comfortable, well-daylit, resilient environments and those that estimate the reduction in HVAC system cost could significantly impact the financial calculus.
- Make windows the next “marble countertop” – a must-have for owners and tenants alike. The report asserted that we must “make people value window performance as much as their phones!” Understanding the reasons why commercial tenants drive higher performance in San Francisco Bay and other similar cities will be important. Looking at other technologies with a lot of awareness, like heat pumps, we conclude windows and façades have a marketing problem. An effective marketing program on why windows and façades matter could be transformative.
Can we imagine creating an advertising campaign for high-performance fenestration or façades as effective as the “Got Milk?” campaign? According to one source, the “Got Milk?” campaign not only achieved its goal of increasing milk consumption but also shifted consumer perception of its importance and “elevated a common household item to a cultural phenomenon.” Can we do the same for windows?
- Deploy energy code changes that increase the focus envelope, change code structure and drive state adoption. This would increase the performance of the business-as-usual baseline, reducing the added investment for high performance.
- Create façade-related incentive programs that reduce the upfront investment cost for high-performance façades.
Next month, we will review two more barriers related to perceived risks, project delivery methods that maintain the low-cost status quo, and how to address them.