Changes to Portfolio Manager lower scores for thousands of commercial properties.
IMAGINE YOU wake up one morning, get ready for work and head out the door. As you’re about to hop into your car, you get an email that says your five-star crash-rated vehicle is now rated three stars based on a recent survey of automobile manufacturers.
Nothing had changed since the survey was conducted. The brakes, air bags and seat belts are the same ones that helped the car earn its top safety rating when you bought it just a few years ago. Yet your vehicle is now less desirable to buyers, and its resale value plunges as a result.
Property owners across the country are facing a similar scenario after the Environmental Protection Agency (EPA) updated its Energy Star scoring models for Portfolio Manager.
What is Portfolio Manager?
Energy Star is a program administered by the EPA that promotes energy efficiency in buildings and across a range of consumer products. Two decades ago, the agency created Portfolio Manager, an online tool that allows property professionals to measure and track energy use and water consumption, as well as greenhouse gas emissions, in buildings.
A building whose energy usage is benchmarked using Portfolio Manager is assigned an Energy Star score on a scale of 1-100. The score compares the building’s performance with all similar property types (office, hotel, etc.) regardless of age in the United States; a score of 80, for example, indicates that a building performs better than 80 percent of its peers. A score of 75 or higher designates a “top performer,” eligible for Energy Star certification.
Rather than trying to collect consumption data from every single building in the country, EPA relies on the Commercial Buildings Energy Consumption Survey (CBECS), which is conducted roughly every four years by the U.S. Energy Information Administration (EIA). Much like a poll, the survey takes a small representative sample, which the EPA uses to establish a baseline of energy usage in buildings nationwide. The EPA then compares the real-time Portfolio Manager data to this baseline to determine how buildings participating in the Energy Star program stack up.
While EPA says it strives to regularly update its baseline data set with the latest figures, it hasn’t always been possible. In 2007, there were so many design flaws and other errors in the CBECS survey that EIA decided not to publish the results that year. Because of that, the EPA reverted to the 2003 CBECS numbers for its calculations.
The latest data comes from the 2012 CBECS, which was used as the baseline for the updated 2018 scores. In practical terms, this means that the EPA’s baseline sample for Portfolio Manager is using data on building energy consumption that hasn’t been updated in several years.
Lower Scores All Around
When the updates went into effect in August 2018, average scores for most building types went down. This is reasonable. Better technology, stricter building codes, and evolving tenant and owner preferences are making buildings more efficient every year. And because a property’s Energy Star score is a comparison with the national building stock, it stands to reason that existing scores would go down in response to the new data.
That said, the extent to which existing scores plummeted was dramatic. Overnight, a building that performed better than 85 percent of its peers was suddenly at risk of losing its Energy Star certification, even if its actual energy usage remained unchanged. Office properties were especially affected with a decrease of 12 points on average.
There are more than 34,000 Energy Star-certified properties across the country. For NAIOP members who own, operate or manage these buildings, the score changes could have significant consequences.
Energy Star certification is correlated with higher property values, as these buildings are more attractive to tenants as well as investors. They tend to command higher rental rates, are more marketable and have lower operating costs. By contrast, a building that is downgraded and loses its certification could experience a loss of interest among potential tenants and a corresponding decrease in its value, particularly in markets that place a premium on energy efficiency.
Certification is also required by the Government Services Administration (GSA), which leases around 200 million square feet of private building space. Properties that lose certification could lose government tenants when it comes time to renew leases. That could leave taxpayers on the hook for unnecessary — and costly — relocation expenses.
While the federal government says Portfolio Manager is a voluntary program, the scores have been incorporated into nearly 40 state and local ordinances. California, for example, passed a law in 2015 that seeks a 20-percent reduction in energy usage in buildings by 2030, and Portfolio Manager is mandated to benchmark and track progress. St. Louis, Chicago, Orlando and other cities have disclosure rules that require property owners to publicly reveal a building’s Portfolio Manager score. Furthermore, some third-party certification programs such as LEED require a baseline score for eligibility. In short, the Energy Star program is woven into the fabric of regulations that affect the real estate industry.
EPA to Review Program
To its credit, EPA understands the significance of these changes. It announced in September that it is reviewing its models. Pending an outcome, the agency has temporarily suspended all new Energy Star building certifications. According to the EPA’s website, the review period will help “ensure that the models are working as intended to deliver energy performance metrics that empower you to make the business case for owning and operating energy-efficient buildings,” and the agency says it’s open to adjusting the scoring models.
It’s unclear how long the review process will take or what changes will come out of it. As the process unfolds, NAIOP is soliciting feedback from members and working with allies in the real estate community to encourage an outcome that rewards the increased upfront investment required to develop an energy-efficient built environment.
How Energy Star Scores are Calculated
According to the EPA, this is how the Energy Star Portfolio Manager score for an individual property is determined:
• A building’s energy and water consumption data is entered into Portfolio Manager
• The actual source energy use intensity (a measure of the total amount of raw fuel that is required to operate a building, including delivery, transmission and production losses) is computed
• The predicted source energy use intensity is computed
• An efficiency ratio comparing the actual use with the predicted use is computed
• A score is assigned based on how the ratio compares with the national distribution
Alex Ford is director of federal affairs with NAIOP.