Tenant demand, along with newer building codes, are energizing this construction trend.
Alongside Highway 101, which curves along San Francisco Bay, the soft lights of 300 Kansas Street will illuminate its 4,500-square-foot rooftop garden. The greenery belies the engineering-oriented advanced research and development space that sits below. Electricity will power the rooftop lights, and indeed, the entire 150,000-square-foot, six-story building. As one of the first all-electric, zero-carbon, core-and-shell buildings in the city, 300 Kansas will pursue cutting-edge technology, like the innovative tenants it hopes to attract. Even though many jurisdictions now require electrification for new construction, technology and price parity have evolved, suggesting that environmental goals justify investment.
Legislation and Sustainability Decisions
From Seattle to New York City, jurisdictions have enacted laws and building codes that encourage — and in many cases require — electrification rather than the use of fossil fuels. San Francisco, for instance, has an ordinance that specifies that “all new buildings, both residential and non-residential … must be all-electric” for indoor and outdoor space, including water heating, cooking and clothes-drying systems."
While the decision to make 300 Kansas Street all-electric preceded such legislation, it appears ownership made a prescient choice. Ethan McCall, vice president at Spear Street Capital, says its decision was predicated on “a culmination of input across stakeholders — from tenants and their sustainability goals to lenders and investors and their increasing attention to ESG matters.”
In addition, being zero-carbon was a market differentiator. McCall referenced another Spear Street Capital building in Seattle, one whose sustainable attributes garnered an increase in allowable floor area ratio from local authorities. Upon the building’s sale to a foreign investor, the press release highlighted the sustainable qualities of the property, rather than its location or tenant roster. That experience, according to McCall, illustrated the types of buildings many investors want to own.
Despite potential future sale profits, McCall estimates that the all-electric features of 300 Kansas did not pose any significant construction premium. Even if it did, McCall claims that “the reality is that the cost attributed to sustainable building is outweighed by the benefits of delivering the type of building our tenants want.” In fact, for the talent-hungry technology and biomedical firms that drive growth in the region, McCall believes that “rent is of lesser importance when these companies think about employee recruitment or retention.” Further, McCall notes that the ability to “speak cogently about sustainability goals” aids in employee recruitment.
“the reality is that the cost attributed to sustainable building is outweighed by the benefits of delivering the type of building our tenants want.” - Ethan McCall, Spear Street Capital
All-Electric Technology
For commercial buildings, electrification pertains mostly to heating, venting and air conditioning systems. Heat pumps are the typical replacement for old-school natural gas boilers. Electrified heat pumps have dual capacity — they can expel heat from a building’s interior or pull it indoors, offering both heating and cooling options from the same equipment. For all-electric new construction, developers also forgo expenses such as natural gas lines and meters.
While heat pump equipment is more expensive than a traditional boiler, its operational costs are lower over time and reduce emissions. The key is proper equipment sizing, advises Stet Sanborn of SMITHGROUP, who conducts education classes for local energy provider Pacific Gas & Electric (PG&E). In order to “buy as little heat pump as needed,” Sanborn recommends choosing for building size, climate, temperature distribution and load profile. The heat pumps at 300 Kansas, in conjunction with a variable refrigerant flow system, are designed to use 23% less energy than industry standard, according to engineer Stephen Scaife of PAE.
In addition to this modern air circulation system, 300 Kansas has other features that allow for efficient energy consumption. Architects faced the glass curtainwall to the cooler north and specified a rainscreen for the other building exposures. The building’s sawtooth window line feature, reminiscent of industrial corrugated iron, is less exposed to the exterior. Underground, a garage will have more than 20 electric charging stations. For those who don't use cars, bike racks and showers will be available. Finally, the building will offer electrical capacity of up to 20 watts per square foot for tenant power needs. That capacity allows engineers to create medical devices, robotics or autonomous machinery.
Renewable Energy Sources
Of course, conversion from fossil-fueled equipment to electrical is sustainable only to the extent of its energy source. 300 Kansas will purchase electricity from a renewable-energy “community choice aggregate” program. In partnership with PG&E, an array of providers will guarantee that purchased energy can be completely derived from solar or wind. PG&E then delivers the clean energy via its transmission and distribution system. The price premium for such renewable power is $0.005 per kilowatt hour, according to CleanPowerSF, the program entity for San Francisco.
All states, however, are not created equal. Energy can come from nuclear power, wind, solar, natural gas, coal and hydroelectric. In sunny California, approximately 38% of the state’s power is derived from solar, according to non-profit tracker Choose Energy’s mid-2022 report, which uses data from the U.S. Energy Information Administration. The state of Kansas, for instance, derives 40% of its power from wind, while its neighbor Missouri gets only 7% from wind, according to the same report. Smaller states such as Delaware and Rhode Island obtain 88% of their energy from natural gas. And Texas — the nation’s largest energy producer — generates significant energy from both wind and natural gas. As buildings convert to all-electric systems, the decision regarding energy source becomes as important as its systems.
California derives 38% of its power from solar according to Choose Energy's 2022 report
Renewable and clean energy sources have achieved near parity relative to gas and coal prices. The world’s largest investment bank, Lazard, recently published a study showing that “the cost of renewable technologies continues to decline globally, albeit at a slowing pace, reflecting reductions in capital costs, increased competition as the sector continues to mature and continued improvements in scale and technology.” Specifically, wind and solar options provide the most cost-competitive alternatives to gas when it comes to installation. While landlords may bear the capital expense of building or retrofitting a building to all-electric, tenants often bear the ongoing utility expense in the form of triple-net leases. Thus, the cost of electrical supply remains meaningful to both owners and occupants of real property.
Reason for Concern?
One could argue that an all-electric building might create reliability issues or price vulnerability. For the arid West, wildfires and spiking temperatures can strain the power grid. In summer 2022, a heatwave so burdened the electricity infrastructure that the California Governor’s Office of Emergency Services sent an emergency text message to all state residents with a cellphone: “Conserve energy now to protect public health and safety. Extreme heat is straining the state energy grid.” Even properties that power themselves — such as Stanford University with its solar-powered 1,100-acre campus — are reliant on the state power grid for electrical distribution.
To prepare for potential blackouts, 300 Kansas will rely on diesel generators for short-term emergency back-up power. Owners note that all-electric buildings face the same vulnerability as other structures in blackouts, simply because so much of a commercial building is reliant on power, all-electric or not.
So, what about possible soaring electrical prices? No energy source is immune to price spikes. In fact, sustainability advocates such as the International Energy Agency, whose members include 38 countries, argue that emergency measures in the face of such rising prices “should be implemented in such a way that they do not worsen the investment environment for low-carbon energy sources and technologies.” In some ways, all-electric buildings act as a hedge against soaring energy prices that are derived from a reliance on natural gas or coal rather than from renewable and on-site electric sources.
Reprinted from my publication in NAIOP's Development magazine
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