Enhancing the Bottom Line with Improved Energy Performance.

With commercial real estate acquisitions and development on a tight rein, Southern California commercial real estate landlords have gone back to the drawing board to source new revenues and lower expenses. The result has been an evolving array of technology initiatives, new tenant services, creative leasing strategies and lowered costs through outsourcing expertise. On the plus side, the business environment is energized, streamlined and highly creative right now. Innovation abounds and for the most part, companies are shedding their old ways, thanks to technology, and embracing "New Economy" thinking. The next year or so will highlight the best of the "new value" areas currently under development by commercial landlords.

Many companies, however, still depend too much on external solutions and miss the opportunities within to harness energy consumption and dramatically improve financial performance. The Environmental Protection Energy [EPA] offers some compelling facts: If all commercial and industrial building owners implemented the EPA's energy management system alone, they would "shrink their cumulative energy bill by $130 billion by 2010 and reduce greenhouse emissions by more than 350 million metric tons of carbon equivalent". That equals the emissions produced by approximately 20 to 30 million cars.

Utility costs make up nearly 30 percent of a typical office building's operating expenses -- a larger share than repairs and maintenance, janitorial, administration and security. As the single largest operating expense for office building, improving energy performance can achieve significant benefits, including overall lower operating costs, increased NOI, increased funds from operations [FFO] and ultimately, enhanced shareholder and asset value.

Some case studies to date show specific and impressive results. At Arden, we performed complete lighting retrofits at over 100 of our commercial office buildings and saved an average of $.30 per rentable square feet solely on that initiative. Other upgrades on select buildings include the installation of Variable Frequency Drives (VFD) on major equipment, including a 700-ton centrifugal chiller at one of our Beverly Hills buildings. We also installed over 30 energy management systems (EMS) and, conservatively, realized a more than $.20 savings per square foot basis.

Other success stories that involved specific properties include Qwest Tower in Denver and the Lausche Building in Cleveland. For Quest, owner Mile High Properties generated a cumulative savings of approximately $1.8 million through initial energy correction an control systems and still has potential savings with a new retrofit matrix that is nearing completion. Similarly, the Ohio Building Authority targeted the Lausche Building and was able to reduce electricity usage by 42.4%, killowatt demand by 38.3 percent and general energy usage by 32.1 percent. The overall cost reduction pencils out to $338,500 per year, offering a simple payback of approximately 5.3 years. While these examples are not the only success stories, there remains tremendous potential within commercial real estate to raise the bar for all industries across the country. America possesses more than 750,000 office buildings, which account for more than 12.3 billion square feet of office space. In addition to supporting the environment with fe wer hydrocarbons in the atmosphere, commercial real state owners can lower their cost structure and in turn, lower passthrough costs to tenants.

Typically, energy upgrades have a 20 to 30 percent rate of return and are low risk. According to the EPA, energy efficiency upgrades can result in savings of up to $1 to $1.50 per square foot of floor space. While Arden has found that those savings will vary based on the extent of the energy-enhancing initiatives, there are, clearly, major opportunities for all commercial landlords to add improved energy performance to their business strategies. With more focus and expertise applied to this area, we can all have a significant impact on the environment and on our bottom line.

Randy J. Noblitt is Senior Vice-President of Property Operations for Arden Really Inc. Earlier this year, the EPA named Arden the Commercial Real Estate Owner with the most energy-efficient buildings in one portfolio in the United States.