NEW YORK (Reuters) - The Empire State Building has long been a signature feature of Manhattan’s skyline. But owners of the iconic edifice, planning a $1 billion initial public offering, hope to convince investors and tenants that it’s what’s on the inside that really counts.
The 81-year-old New York tower has undergone a massive, 3-year makeover designed to cut energy use, modernize office suites, and attract tenants willing to shoulder higher rents. Building owners and key suppliers on Monday will detail the energy savings they’ve achieved so far.
While the new One World Trade Center has claimed the title of New York’s tallest from the Empire State, the 102-floor Art Deco building towers over many others when it comes to the world of building retrofits.
The Empire State is the highest-profile project in a growing collection of renovations that are becoming big business for industrial conglomerates and electrical service firms.
As America’s towers show their age, especially in the Big Apple, where nearly half of office space was built before 1945, companies like Honeywell International Inc, Johnson Controls Inc, Siemens AG and United Technologies Corp are eyeing a retrofit market predicted to generate $16 billion in annual revenue by 2020, up from about $5 billion last year.
Johnson Controls, a building efficiency systems supplier based in Milwaukee whose contract for the Empire State is worth about $20 million, estimates six jobs are created for every million dollars spent. By that measure, the retrofit industry will provide almost 100,000 jobs, a meaningful number for a U.S. construction industry in which unemployment remains high after the housing bust and financial crisis.
To be sure, not everyone can afford the tens of millions of dollars needed for a sizable retrofit. Financing is scarce and investments can take years to pay off.
But for those who can pull off the upfront payment, a renovation can boost rents, lead to longer leases, lower vacancy rates and attract larger, higher quality tenants.
The U.S. Department of Energy has estimated the return on investment of the Empire State Building’s renovations at 4 percent, but other less famous buildings have returns in the triple digits.
Seeds for the Empire State project date back to the 2006 launch of the Clinton Foundation’s Climate Initiative. Anthony Malkin, president of the Malkin Group that controls the Empire State Building, was at a cocktail party at the just-completed “green” Hearst Tower when he offered another building he owned at 35th Street and Broadway as a retrofit test case.
But the Clinton Foundation was keen for something more iconic and pushed for the Empire State Building.
In 2008, Malkin’s team started the project in secret, initially unsure whether a retrofit could deliver double-digit energy savings. More than 60 possible fixes were considered before the team settled on eight with the best payoff. They weighed factors like carbon dioxide emissions, expected pay-back and whether the scheme could be marketed to tenants.
In fixing the building, there were two things that could not change: the landmark’s Art Deco exterior and the 86th-floor observation deck, a cash cow for the business. The deck and the building’s tenants were not disrupted, which forced much of the work to be done at night.
The retrofit was launched the following year as part of a more than $550 million capital investment plan. The upgrade promises a steady pay-back, as building owners expect to shave $4.4 million a year off energy costs. Johnson Controls expects the redo to deliver the promised 38 percent energy savings by next year.
And tenants are already paying more, especially as the 2.85 million-square-foot, 1,454-foot-tall building has replaced small renters with large organizations such as LF USA, part of Li & Fung Ltd, the Federal Deposit Insurance Corp and French cosmetics company Coty Inc.
“I get a competitive advantage when big tenants come in here,” Malkin said, adding that average office rents in August 2006 were $26.50 per square foot, compared to the high $40s to high $50s nowadays.
While the building is still leasing below comparable properties in Midtown, the gap has narrowed such that the Empire State’s average rent is now a third under market, compared with two-thirds below in 2006, according to data supplied by Studley, a real estate services firm representing tenants.
The way Americans work has changed and this forces offices to evolve. Many jobs that involved coming in and sitting at a desk in an enclosed space for eight hours can now be done from home. There is less need for hat racks, but more for open floor plans and collaborative spaces for talking face-to-face.
And mobile workers need electrical power, servers and high-speed networks - which means equipment to cool all the equipment. A high-tech tenant, or anyone concerned about image, is willing to pay a premium for space assigned a government Energy Star rating or the related, third-party LEED rating.
The updated Empire State Building ranks in the top 10 of all buildings in terms of efficiency and won a Gold LEED rating. It mixed quick-pay back measures, such as new lighting and new ventilation systems, with a host of longer-term fixes, such as replacing or modernizing boilers and chillers.
A retrofit of the basement chiller plant was initially budgeted at $22 million but ended up costing far less once the team realized the giant chillers, resembling submersibles, could be rebuilt rather than replaced.
Engineers took over one floor for a factory to upgrade the building’s 6,500 windows. These were remanufactured with suspended coated film and gas fill to boost insulation, then reinstalled. The windows and radiative barriers account for a hefty chunk of expected energy savings.
On many floors, engineers removed dropped ceilings that had been installed in various stages over the years, which blocked out part of the light.
“It felt stuffy,” said Johnson Controls project engineer Paul Rode. He is currently overseeing 10 retrofits, up from the one or two in a typical year.
Tenants can go online to access information on their energy use thanks to 25,000 sensors that dot the walls and feed data into a central management system. Like an eco-friendly big brother, the system knows when someone is in the room and when to adjust the temperature.
“PROGENITOR” FOR JOBS
The Empire State Building is hardly alone in the world of Manhattan retrofits. Google Inc’s recent takeover of a sprawling art deco Port Authority facility in Chelsea is another. Near Central Park, Sir Norman Foster’s celebrated Hearst Tower rose atop a 1928 Art Deco building, whose insides were gutted. JP Morgan renovated its 1960s Park Avenue tower with such amenities as an 11th floor herb garden.
“For the next 50 years, the majority of architects’ work will be on projects that are already built,” said Bill Worthen, who directs sustainability efforts at The American Institute of Architects.
Johnson Controls estimates the current market for retrofits of public sector buildings, such as schools and courthouses, alone is around $5 billion to $6 billion a year.
“The opportunity on the commercial side is probably double that,” said Dave Myers, head of the company’s building efficiency segment, who noted that the Empire State Building’s experience is now discussed on every project.
Nevertheless, hurdles remain to wider adoption of retrofits. Financing is difficult as few lenders have ventured into loans for capital-intensive commercial projects. And even if capital can be raised, building owners are often skeptical about a pay-back that can take years.
Malkin plans to publish an unfiltered diary of costs and savings for others to emulate, saying he wants to be a “progenitor” for jobs created by the energy efficiency movement.
Other buildings may take ideas from the project’s performance contracting, in which a service provider guarantees certain energy savings, as by Johnson Controls did for the Empire State. This method has been mainly visible in the municipal, university, schools and hospitals, or “MUSH”, market.
Some owners are put off by a long planning process, or by the split incentive between building owners, who bear the cost of investment, and tenants, who benefit from lower operating costs.
Johnson Controls’ engineer Rode is frustrated when he sees retrofit projects stall for no good reason, but he subscribes to the notion of a tipping point in the industry.
“If we figure it out here, we can do it anywhere,” Rode said, chuckling at his own riff on Frank Sinatra’s “New York, New York,” a song as iconic as the Empire State Building.
Additional reporting by Ilaina Jonas and Lynn Adler in New York, and Scott Malone in Boston