Empire State Realty Trust, Inc. (NYSE: ESRT) blew past its previous commitment to sustainability at the beginning of 2021 when it made a massive purchase of renewable wind electricity to power 100% of the more than 10.1 million square feet across its entire portfolio.
"Renewable energy is the future, and we found an effective economic business case to make it happen in the present," says Anthony Malkin, chairman, president, and CEO of Empire State Realty Trust.
"To be the largest 100% user of green power in real estate, and to get there first, confirms our leadership in sustainability and adds to our portfolio of energy efficiency, indoor environmental quality, and healthy buildings," Malkin says.
Empire State Realty Trust's decision to convert its entire portfolio to wind power sets an example for other office owners but it is not a surprising move for the REIT, which has stood out for its commitment to sustainability for more than a decade, says Marta Schantz, senior vice president of the Greenprint Center for Building Performance at the Urban Land Institute.
"The landmark overhaul of the Empire State Building a decade ago was a stark example that deep energy-efficient renovations can be done and that they can be cost-effective," she says.
The Empire State Building, the crown jewel of the REIT's portfolio, has run entirely on renewable energy since 2011, so the decision to buy wind power for the rest of the portfolio caps off years of energy-efficient investments by the REIT.
"First, our goal was to reduce energy use as much as possible, including a continuous innovative effort to reposition the Empire State Building, a prewar trophy building, into one with modern infrastructure," says Dana Schneider, senior vice president and director of energy, sustainability and ESG at Empire State Realty Trust.
"We were able to cut carbon emissions in the Empire State Building by about 40% and now we will offset the remaining carbon emissions with our purchase of renewable energy," Schneider says. The built environment is the biggest source of carbon emissions and accounts for 75% of emissions in New York City, she adds.
"Our purchase of renewable energy is an opportunity to address this issue while delivering shareholder value to our investors, a healthy building for our tenants, and to aggressively demonstrate our commitment to be carbon neutral," Schneider says.
The impact of the three-year contracts to purchase wind power from Green Mountain Energy for its New York State assets, and with Direct Energy for its Connecticut properties, means Empire State Realty Trust will avoid the production of 450 million pounds of carbon dioxide, which is the equivalent of every household in New York State turning off all their lights for one month, according to the REIT.
Benefits Beyond the Environment
Opting for renewable energy is as much a business decision as an environmental decision, says Schneider.
"We can't talk about the costs directly, but we're saving money in the long term because of the structure of our three-year contracts," Schneider says.
Schneider explains that the contracts will help Empire State Realty Trust meet its goal for the Empire State Building to be carbon neutral by 2030 and for the entire portfolio to meet that goal by 2035.
"Empire State Realty Trust didn't disclose the actual costs for this contract, but the net savings during the first year is estimated at around $800,000," says Daniel Ismail, a senior analyst with Green Street.
Cost analysis of the benefits of buying renewable energy depends in part on traditional utility costs, which vary widely by location, says Schantz.
"Companies typically want to lock in rates for renewable energy for a longer period to avoid the risk of the standard utility rate increasing," she says. "There's a real benefit to having certainty over utility bills."
Additional benefits to the contracts include attracting tenants and investors.
"REITs can use their purchase of renewable energy to differentiate themselves from other companies to attract tenants, lease up faster, and drive rents higher," Schantz says. "Tenants look first at other things such as location, but some want to be in LEED-certified buildings or buildings with green energy, especially companies that have major sustainability goals of their own."
Tenants in Empire State Realty Trust's buildings often request ESG data from the REIT and can leverage the fact that their power comes from 100% renewable energy to achieve their own ESG targets, Schneider says.
Investors, too, are increasingly interested in the financial and environmental consequences of Empire State Realty Trust's commitment to renewable energy, Schneider says.
In 2020, the REIT earned the highest possible GRESB 5 Star Rating and Green Star recognition, a globally acknowledged achievement for its sustainability efforts that Schneider says investors appreciate.
"Investors are asking real estate funds about whether they are setting and meeting renewable energy goals and using that information to decide whether to invest," Schantz says.
Ismail says that most investors review the details of the ESG reports provided by office REITS to evaluate them and their adaptability to environmental requirements.
"Companies that are better set up overall to reduce their carbon emissions may outperform in the future," Ismail says.
Addressing Multiple Needs
While Empire State Realty Trust is well-known for its aggressive focus on reducing carbon emissions and serving as an example for sustainability, New York City's Local Law 97 is also a big motivator for the wind power deal, according to Ismail.
Local Law 97 requires that most buildings that are 25,000 square feet or larger must reduce their carbon emissions 40% by 2030 and 80% by 2050. The city's Local Law 97 addresses New York State's Climate Leadership and Community Protection Act (Climate Act), which set statewide sustainability goals, such as 70% of power coming from renewable energy by 2030 and an 85% reduction in greenhouse gas emissions by 2050. "The indirect benefits of Empire State Realty Trust's wind power deal are that it's meeting their tenant's ESG requirements and the ESG requirements of the city and state," Ismail says. He predicts that renewable energy contracts will become commonplace among REITs and other property owners because it is a relatively simple way to achieve carbon neutral status.
The commitment of the Biden administration to addressing climate change and the regulatory framework around greenhouse gas emissions by states and local jurisdictions will provide more incentives for the purchase of renewable energy, Ismail adds.
"The real estate industry is incredibly competitive, so now other companies are more likely to think about how they can do what Empire State Realty Trust did," Schantz says. As for Empire State, "we will continue to communicate our leadership as part of our value proposition to companies, investors, tenants, and capital to differentiate ourselves from the competition.