A Case for Building Component Asset Management

Commercial Real Estate: Differentiation through Building Asset Management
The economy of the United States and the world has been embroiled in a deep recession since December of 2007. The repercussions of this recession have been felt in virtually every vertical market in business as well as by most social classes. The commercial real estate market has been significantly impacted by this prolonged recession as indicated by escalating rates of vacancy in the United States for Class A office space and industrial tenant space. As a result of this increased level of inventory in Class A office space and other types of real estate, renters can be more discriminating and demanding in their selection process of where they establish their businesses and how much they pay for leasing those spaces. Building owners and leasing agents are looking for a way to differentiate their buildings in the marketplace. There are programs that exist to certify new buildings as green structures. The commercial and industrial real estate market is beginning to realize the demand for programs that recognize the efforts of building owners and property managers to effectively manage their building assets in a sustainable manner with minimal impact on the environment and provide building tenants with a quality environment to operate their businesses.
Effective building asset management and differentiation based upon sustainability begins with the process of benchmarking. Building owners and managers use the process of benchmarking to establish a baseline for the performance of their building assets. Many organizations including BOMA International (Building Owners and Managers Association) as USGBC (United States Green Building Council) have data which helps building owners establish benchmarks to compare their building assets to. These organizations have established certification programs based in part on benchmarking buildings against an acceptable standard of performance.
Benchmarking assets allows building owners and managers to assess the performance of their building assets against what is considered to be the acceptable range of performance for the asset being analyzed. By analyzing the performance of their asset both across a short-term as well as a long-term period the asset manager can determine how the asset is performing and then make the necessary adjustments in the treatment of the asset in order to affect performance. In addition, the trends of the asset can be analyzed to project future asset performance in a predictive method. By doing this initial study, the manager can make necessary adjustments to the treatment of the asset in order to extend the remaining estimated use life (REUL) of the asset. In turn the asset manager has kept the demand for new assets to a minimum and thereby has reduced the impact of the building on the environment and the net operating income of the building.
Various building components have different degrees of impact on the surrounding environment. These building components or assets impact the environment through such areas as site impact, indoor air quality (IAQ) or the interior work environment, and the disposal of a completely depreciated asset at the time of its replacement. More attention now is paid to the impact that new buildings and the design of those buildings has on the environment at the actual construction site as well as on a macro scale of its impact on the nation as well as the world.
The USGBC has been a long-standing proponent of addressing the environmental impact of new buildings. As a result, they have established the LEED program. LEED is an acronym for Leadership in Energy and Environmental Design. The LEED program initially focused on evaluating new buildings in various areas including site impact, IAQ, energy efficiency and other areas by assigning points for levels achieved. Buildings are assigned certain ratings including Gold and Platinum according to the aggregate total of their points earned. While this program benefited the owners of new structures by differentiating their new buildings from other new buildings, the program did little to recognize the efforts of owners and operators of existing structures.
Prior to the current economic recession and throughout the past 20 years many building owners did little to effectively manage their assets to extend their estimated use life. There was little recognition of the impact that poorly designed structures would have on the cost of operation for most buildings. The relatively low cost of energy and building components allowed building owners to grow complacent with their buildings. Many years of consistent net operating income (NOI) supported their complacency. Not until the rapid economic expansion in the Pacific Rim countries along with substantial increases in the cost of energy were the net operating incomes of most commercial structures severely impacted. With reduced net operating incomes and increased inventory in the commercial real estate market, asset managers began looking for opportunities that both increases the appeal of their portfolios to potential tenants in the general market place as well as a way to control operating costs and positively affect the net operating income of their properties.
As a result of the economic demand for a system of recognizing building asset managers’ efforts to manage their portfolios with consideration for the environment organizations began to respond with programs that give recognition for meeting certain standards. The USGBC has modified its LEED program to include programs that address certain market segments within the commercial, industrial and residential building markets. One of these programs that specifically address existing structures and their operations is LEED Existing Buildings: Operations and Maintenance. This program allows building owners to benchmark the operations and maintenance of their buildings against a national standard. By participating in this program with the USGBC, asset managers can achieve certain levels of ratings which can then in turn be used by the leasing agents to differentiate the building structure in the marketplace and attract potential tenants to the property.
As an alternate offering, BOMA International has developed BOMA 360. BOMA 360 is a self-audit and assessment of the operations of commercial and industrial buildings. The BOMA program differs from the LEED program in its goals and administration. While the LEED program focuses on continual improvement of commercial real estate assets, the BOMA 360 program focuses on establishing consistent operations that support a high-performance commercial building environment. In addition to the consistent operations standards, asset managers must also establish a preventative maintenance program for various building components and assets. There is also opportunity for asset managers to achieve their ratings goals through the improvement of building assets such as roofing systems or appliances by using EPA Energy Star rated components.
By implementing an effective asset management program and in turn achieving one or both of these ratings for their buildings, asset managers and leasing agents are able to offer green leases to the public. Green leases are lease arrangements that place requirements on both the leaser and the lessee to operate and maintain the tenant space and the structure in a manner which is congruent with the demands that are specifically laid out on the lease. These requirements may include green purchasing requirements, green building products being incorporated into tenant fit-outs and various other requirements impacting the daily operations of the tenant space. By having a structure of tenant space that meets the requirements of either a BOMA 360 or LEED program, the building owner or manager has greater opportunities to lease out their asset.
The implementation of a strong asset management program has inherent benefits for both the building owner as well as the community in which the building asset is located. The benefits for the building owner include the potential increase in lease-out rates for their portfolio and a decrease in the cost of ownership and operations expenses for the asset. The community in which the building is located benefits by having a viable structure that contributes to the property values of the community as well as minimizes the impact of the building on the local environment.
Building owners who receive financial incentives in order to justify the expenses of implementing an asset management program are more likely to implement such a program. By allowing building owners and managers to achieve the status of green and sustainable for their building portfolios, the incentive will be present for building owners to continue to implement programs that will sustain assets and in turn will limit the impact that those assets have on the community, the nation and the world.