The Pitfalls of Energy Retrofitting in New York City

In a way we are fortunate to have a high level of support in the city providing for energy upgrades to buildings, with the aid of a series of local laws that have incrementally tightened up on energy efficiency in buildings. Recently the size of buildings requiring energy audits was reduced from 50,000 square feet to 25,000 square feet. And as of 2020, Local Law 33 mandates that building must display their energy efficiency grate, ranging from A to F conspicuously at the entrance. All of which helps.

The pitfall is that by focusing on forcing building owners to meet some kind of minimum standard, what often ensues is waves of compliance type fixes where owners try to meet those minimum hurdles for the least amount possible, rather than evaluating all opportunities for energy retrofits. To a degree, this may be challenging in the city, but it is still highly desirable, for in general, the efficiency retrofits have paybacks typically in the 1-5 year range, whereas generating resources and other means toward deep retrofits typically hover in the 7-12 year payback range, with window replacements permanently bringing up the rear with 15-20 year paybacks.

The secret to economically worthwhile retrofits is to combine a series of efficiency upgrades with short paybacks with deep retrofit options, if they exist, because you then end up averaging down the paybacks, and making financing of these deep retrofits possible. If instead the efficiency retrofits are done first, the deep retrofits never get done. In short these types of programs ensure that there is some progress at a snail’s pace, but the deep retrofits often end up getting put off forever. In short, the smart owners who understand this trap, will use this type of an opportunity to evaluate their options for realistic long term value-added retrofits, instead of wasting their powder on doing efficiency upgrades only. Needless to say, the owners who see this issue and make use of the opportunity are usually few and far between, but that is where the money is, certainly in a real estate market that is starting to plateau, if not decline.

An institutional pitfall in many real estate operations is that energy decisions is often relegated to O&M management, and not investigated first as the intra-marginal investment opportunity it really is, and in larger portfolios very likely many opportunities can be found where deep retrofits offer superior returns and should be prioritized if proper capital allocation were practiced.

In a dense city like New York owners often may not have many other options besides efficiency measures, but too often the most valuable options are overlooked. It remains an ongoing learning process but for the foreseeable future energy retrofitting can add more value to real estate port folios than the next building. So owners own it to themselves to leave not stone un-turned.