The Commercial Building Market Structure:
An Act with Five Players
Peter W. Turnbull
Principal Strategic Planner
Pacific Gas and Electric
Company
AIA Quality Assurance
Learning Objectives
1. Define key segments of the commercial real estate market
2. Describe energy efficiency marketing strategies for addressing
the key segments; provide examples and lessons learned from
the field
3. Outline approaches for defining the financial case to the key
segments in order to support effective decision making on
energy efficiency projects
DR1
Slide 2
DR1
Overall Learning objectives - we only need one set. This is a very rough draft that we will need to refine. Just wanted to get it in
quickly as a placeholder. Lets discuss...
Daniel Reese, 4/21/2009
The $10 Billion Question
Must we sell energy efficiency
building by building in the large
commercial office sector or
is there a better way?
MARIN
SAN JOAQUIN
C ONTRA C OSTA
SAN FRANC ISC O
ALAMEDA
STA
SAN MATEO
33 Properties
Owner A
10,460,796 Square Feet
MARIN
SAN JOAQUIN
C ONTRA C OSTA
SAN FRANC ISC O
ALAMEDA
STA
Owner A
SAN MATEO
46 Properties
15,062,067 Square Feet
Owner B
MARIN
SAN JOAQUIN
C ONTRA C OSTA
SAN FRANC ISC O
ALAMEDA
STA
Owner A
SAN MATEO
75 Properties
30,856,067 Square Feet
Owner B
Owner C
MARIN
SAN JOAQUIN
C ONTRA C OSTA
SAN FRANC ISC O
ALAMEDA
STA
Owner A
Owner B
SAN MATEO
Owner C
Owner D
82 Properties
35,620,318 Square Feet
MARIN
SAN JOAQUIN
C ONTRA C OSTA
SAN FRANC ISC O
ALAMEDA
STA
SAN MATEO
~140,000,000 Square Feet!
Owner A
Owner B
Owner C
Owner D
Owner E
373 Properties
140,000,000
Square Feet
MARIN
SAN JOAQUIN
C ONTRA C OSTA
SAN FRANC ISC O
ALAMEDA
~2,600 GWH
STA
SAN MATEO
~140,000,000 Square Feet!
Owner A
Owner B
Owner C
Owner D
Owner E
“An Act with Five Players”
With apologies to William Carlos Williams
and Charles DeMuth
“Act with Five Players”
• Sole owners (own and manage) — EOP; Legacy;
Sunset
• Owner/manager (REITs) — Hines; Boston Properties
• Fee based property managers — Jones Lang
LaSalle; CBRE
• Large institutional investors — TIAA CREF;
CALPERS; Prudential; Calster; Other retirement
funds
• Engineering service/construction firms — Able
Engineering; ABM
Fleet Cross-Over Among Player Types
Owner Fleet 1
Owner Fleet 2
Owner Fleet 3
Fee Manager Fleet 1
Fee Manager Fleet 2
Fee Manager Fleet 3
Fee Manager Fleet 4
Facilities Engineer Fleet 1
Facilities Engineer Fleet 2
Sole Owners
Own and manage
Customer of record
Diminishing numbers of this “player type” compared to 20-30 years
ago
The property is not necessarily “the business”
Business model - Buy and hold a quality stable of buildings with
good return - flip a few others
Management approach
• Portfolio rather than building
• Capital investment is assigned from the top
• Investment decisions range from those soley based on a financial
model to those based on a financial model with a large dollup of
owner value
Management structure - vertical
Owner/Manager(REITS)
Own buildings (small share) and manage
• Investors (large share)
• Majority investor ultimate decider
Customer of record
Business model – the building is the business!
• Best returns (equity/lease returns combination)
• Flip/own
Management approach
•
•
•
•
Holding company style
Each building has investment objective
Operating and capital budget for each building is sacrosanct
Expenditure limits
Management structure - horizontal (buildings managed as separate
assets)
Fee Based Property Management Firm
•Manage properties for a fee
•Business model – the “fee” is the business
o Provide and expand services to owners
o Provide high level of customer satisfaction
•Probably not the customer of record
•Services can range from tenant management to complete fee
manager control including recommendations to buy and sell
•Management approach
o
o
o
o
Portfolio and/or building
Owner involvement / oversight varies
Operating and capital budgets at building level
Expenditure limits
•Management structure - vertical and horizontal
Fee Based Property Management
• Senior property managers work closely with owners
• Multiple property managers may be assigned to owners with
multiple buildings
• Depending on the owner and the history with the owner, property
managers may have very narrow or very broad decision making
authority up to and including buying and selling buildings
• Senior property managers typically make recommendations about
improvements to owners based on necessity, their experience,
significant input from the facility engineer, and input from vendors
that may come direct or through the facility engineer
Large Institutional Investors
• Investors own the buildings but delegate operations to REITs or
fee management firms
• Business model - focus on return on real estate investment
portfolio (not building) - high yield “stable” investments
• Not the customer of record
• Management approach
• Maximize returns according to investment strategy
• “Actively” manage returns but not buildings
• Balanced portfolio
• Sensitive to social investing because of source of funds (better
buildings, carbon footprint, etc.)
• Management structure - day to day manager - investment
manager - board driven policy
Engineering Service Firms
• Manage engineering services for large owners/property
managers
• Business model – the operating contract is the business
• Provide and expand facility services to owners/ property managers
• Client Satisfaction
• Improve the asset value of the building
•
•
•
•
•
Not a customer of record
Services range part to full
Management approach - portfolio and / or building
Dual management structure - horizontal
Highly influential with owner’s senior management (de facto
decision makers for mechanical systems)
On site decision-making is just a piece of it
• The on-site staff can make few if any major
decisions affecting efficiency unilaterally
• The facilities engineer may have great influence
with a senior property manager who may
influence the owner
• The ultimate decision maker may make a gut
call or a highly reasoned model driven decision
“Fleets” not individual buildings
• A small handful of large national engineering service companies
run the chiller and building control systems in 60% of buildings
in San Francisco
• A fairly small group of fee-based property management firms are
intimately engaged with leasing arrangements for a high
percentage of buildings
• Large REITs control huge amounts of square footage from an
ownership perspective
• Individual owner/operators routinely use fee-based property
managers and engineering service companies to manage and
operate their buildings
• There is substantial cross over of fleets
Uncommon interests around efficiency
Tenant - wants a custom lighting design that is
functional, aesthetic, and status enhancing
Leasing agent - concerned about negotiating an
expense stop for tenant improvements to maintain
customer’s interest in the space and speed of move
Lighting services company - wants to provide standard
layouts to minimize the costs of design and keep
costs low
Facility engineer - wants good equipment, good
systems and low operational cost
Is anyone looking after energy?
Several different players types in each major building
Each has a different business model with a different perspective on
energy
• Fee based manager sees an “expense stop”
• Engineering service provide sees an operating contract
• Tenant sees a utility bill
Most favor energy efficiency conceptually (who isn’t green these
days?)
However, the dis-integration of business models and values may
make it difficult to address efficiency
The “Tri-fecta” of Energy Efficiency Benefits
Fee
Facility
manager engineer
Owner
Efficient buildings work
better (better for their
intended function)
Fewer
complaints
*Fewer
complaints*
Less
maintenance
Reduced
health and
safety risks
Efficient buildings cost
less to operate
*Perception
as a good
manager*
*Engineer as More profit
hero reducing
costs*
Efficient buildings are
worth more
Perception
as an asset
builder
Status among
peers
*Increased
asset
value*
What you need to know
• Who the major players are in each category in your
market
• The major players’ decision-making hierarchies (who,
where)
• The major players’ business drivers (keyed to correct
messaging)
• The points of influence or leverage a utility and its
program might actually have with each player type
How to influence individual buildings
• Influence the company that runs the chiller system
• Influence the company that controls the leasing
agreements
• Influence the company that owns the buildings
• Influence the investors that “own” the owners
• Influence the tenants
Use aggregation techniques appropriate for
each player type with each player type
“More than a Million”: A different kind of program
• Treat each player type as an opportunity to
aggregate services
• Provide comprehensive planning
• Benchmarking – promote at portfolio level
• Establishing a set of priorities across and within
buildings
• Dedicated support team
• Education and marketing messages
• Tools attuned to the needs of different decisionmakers
Findings
• In the large commercial office sector there is a complex mosaic
of interacting firms that have significant differences in business
models
• Investment decisions are made at the highest levels within firms
• Reaching these firms at corporate level requires understanding
differences and developing multiple strategies, multiple
channels, and multiple messages
• Many of the largest firms are national rather than regional or
local - Utilities may have to work with other utilities, EPA, DOE
or other organizations to reach decision makers
Thank you! . . . Questions?
The Great Figure
Among the rain
and lights
I saw the figure 5
in gold
on a red
firetruck
moving
tense
unheeded
to gong clangs
siren howls
and wheels rumbling
through the dark city.
--William Carlos Williams
AIA Quality Assurance
Portland Energy Conservation, Inc is a registered provider with The
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This program is registered with the AIA/CES for continuing
professional education. As such, it does not include content that may
be deemed or construed to be an approval or endorsement by the AIA
of any material of construction or any method or manner of handling,
using, distributing, or dealing in any material or product. Questions
related to specific materials, methods, and services will be addressed
at the conclusion of this presentation.
Thanks!
Peter Turnbull
[email protected]