Real Estate Retrofits: A Blueprint for Lowering Emissions
Decarbonizing real estate is essential to meeting the US’s 2030 and 2050 climate goals. Building operations alone account for ~28% of carbon emissions — more than any other economic sector.
Ensuring net new real estate is built more sustainably is obviously critical, and we’re seeing solid progress here ranging from sustainable material development to energy efficient building design — shoutout to Deco portfolio company Tangible Materials tackling this subsector. However, retrofitting the 6M, 50+ year old existing commercial buildings in the US is equally, if not more important. (For the purposes of this discussion I focus on mulit-family and commercial retrofits, versus residential).
Framing the Problem: Unraveling Building Retrofits Complexities
Building owners have historically been largely in control when, if, and what to retrofit. However, this is rapidly changing as local and national governments’ climate goals are predicated on the real estate sector’s compliance. Local Law 97, which I’ve written more about here, is a new, aggressive NYC regulation that imposes strict carbon emissions caps, and associated financial penalties, for all buildings above 25,000 gross square feet starting in 2024. Over 50,000 properties are affected by this law, and it’s estimated that 76%+ will exceed the 2030 limits.
Building owners are also facing pressure to retrofit from corporate tenants with their own climate goals. Microsoft, for instance, announced it will be carbon negative by 2030, including real estate it owns and leases.
Building owners know they need to act fast, especially as adjusting physical real estate is time intensive. But that’s easier said than done for several key reasons:
1) Retrofit analyses are complex and bespoke. Every building is different and so prior analyses are not easily transferable to determine optimal retrofits. For context, the initial retrofit assessment process generally includes examining a building’s existing systems (e.g. an onsite equipment inspection) and an assessment of utility bills and historical energy consumption data. Building owners frequently need to procure energy data from utility corporations, which is complex and often delivered in formats requiring substantial manipulation. Findings are ultimately benchmarked against similar building and industry standards to identity opportunities for improvement. Each retrofit suggestion from an assessment is subject to a cost-benefit analysis (e.g weighing upfront costs against potential energy savings). Building owners aim to select measures with a favorable ROI and reasonable payback periods, but doing so with certainty and confidence is challenging (especially when you are dealing with invasive, large-scale retrofits in an industry known for being late and over budget).
2) Upfront capital requirements to retrofit can be extremely prohibitive. Many building owners face competing financial priorities and operate on tight margins, making it difficult to allocate funds to energy retrofits. While loans and traditional financing methods are available, repayment terms need to be carefully evaluated. There are also increasingly a number of government incentives for executing retrofits, but they’re difficult to navigate, rarely cover large retrofits in full, and have strict use parameters.
3) Navigating tenant disruptions. Implementing retrofits leads to inconveniences like noise, restricted access, utility disruptions, and altered daily routines. By involving tenants in the process and emphasizing the long-term benefits of retrofits, building stakeholders can ideally foster understanding and cooperation. However, if tenants are renters, the extent to which they reap the benefits of retrofits may be limited (e.g. versus tenants that own, who may benefit from increased home prices).
4) Finding and managing labor to execute retrofits. Finding skilled contractors and installers who are knowledgeable about the latest energy-efficient systems and practices can be incredibly challenging. Many installers are not up to date on the latest equipment and require retraining.
5) Complexities around ongoing maintenance, monitoring, and proving ROI of retrofits. Retrofits are a huge capital and time investment, and building owners want to be certain they’ll not only reap the promised benefits, but also be able to monitor, control, and continually optimize new systems. Today, many retrofit technologies offer “point solutions” but don’t talk to each other in a holistic, connected way.
Looking Forward: Entrepreneurial Opportunities in the Retrofit Market
Informed by these challenges and complexities, below are several key ways to leverage technology to improve building retrofit processes. Importantly, many of these suggestions likely work best as components of a larger product, as opposed to isolated point solutions (e.g. a retrofit assessment platforms with embedded financing options).
1) Improved retrofit assessment products, especially for owners with large portfolios that need to prioritize retrofits across numerous buildings. These products should enable building owners to clearly evaluate options based on capital requirements and associated emission reductions, also taking regulations and feasibility into consideration. Importantly, post retrofit, equipment needs to be smart, connected, and provide building owners with ongoing optimization and reporting capabilities.
Example Companies:
- Optimal — building decarbonization planning technology
- Cadence One Five — building decarbonization planning technology, focused on New York market
- Runwise — wireless sensor technology to improve heating systems
- Ento — AI monitoring and analysis for sustainable building improvements
2) New and “multiplayer” financing mechanisms. Large scale retrofits require massive capital outlays. A 500 square foot building retrofit, on average, can cost anywhere from $12.5 to $75M. Owners need both new financing options, and better mechanisms for finding and unlocking available funding. New financing structures (e.g. subscriptions, buy now pay later, incentivizing tenant contributions or participation, etc. could also help create new financing avenues for owners).
Example Companies:
- Fram — payment and incentive sharing for tenants and owners
- Kelvin — a full stack retrofit platform for legacy buildings, but moving into the battery/storage space so energy can be sold back to the grid (generating a new revenue stream and alleviating concerns around upfront investments)
3) Increasing skilled labor and/or making labor more efficient. While the current labor force can and should become more efficient via adopting workflow and productivity tools, we also need to increase the number of people (or machines) with retrofit and specifically HVAC installation abilities.
Example Companies:
- Upsmith — HVAC training and management tool
- Interplay Learnings — 3D and VR training for skilled trades
- BlocPower — full stack (assessment, financing, etc.) building retrofit platform. The company owns and operates its own labor training program.
If you’re building in this space, I’d love to connect with you! Shoot me a note: julia@flybridge.com.
