Commercial real estate may be one of the most complex industries there is; it certainly is one of the most inefficient. There are so many aspects to consider and track when operating real estate that it can sometimes be overwhelming. There is demand, interest rates, management, attracting tenants in the market, lease negotiations, as well so many others that it is easy for some things to fall through the cracks. Oftentimes some that are overlooked can result in very expensive consequences. One such event recently occurred. At the beginning of July 2015, new IECC and ASHRAE 90.1 standards were released. These codes deal with energy efficiency standards that are mandatory for residential and commercial owners to follow. One aspect of the code changes that could have unforeseen consequences for both tenants and owners of commercial space is new mandates associated with lighting fixtures and switches.
Under the new standards, if an improvement to a space requires 10 percent or more of the lighting fixtures to be changed, then all the fixtures within the space may need to be replaced. More importantly, three-lamp T8 fixtures are no longer acceptable. Therefore, more energy efficient fixtures are required to meet the new watts-per-square-foot requirements. Some of these options include LED, T5 and potentially T8F25 with Energy Star ballasts fixtures. Multi-level switching and occupancy sensors are required in all areas, except in spaces with only one fixture. These areas must be equipped with occupancy sensors that can be set in vacancy mode. All spaces within 15 feet of windows must be equipped with daylight sensors with dimming or multi-level controls.
Whether altering their space in the middle of a lease or building out space with a tenant improvement allowance, tenants need to be aware that the existing light fixtures and switches may need to be replaced. Failure to do so could result in cost overruns or could reduce how far tenant improvement dollars go toward covering the cost of construction.
Landlords also need to be aware of these changes, especially if they are building out tenant space on a turnkey basis. Without amortizing the cost of new fixtures and switches into the rents, they may find themselves having to spend extra money that was not budgeted. Additionally, changes to base-building, common areas, exteriors and parking decks could require similar changes.
While each case is different, it is estimated that the new codes will result in a 20 to 25 percent increase in construction cost. Items that impact how much needs to be spent on fixtures and switches include:
- fixtures already in place
- whether LED lighting will be used or some lower cost alternative
- distance required for electrical runs.
It is not yet clear what market implications will result from the code changes. Tenant improvement dollars will rise to cover the cost of new fixtures and switches, but how much of the expense will be amortized into the rent, and how much of the improvement dollars can be used to cover the new costs are still to be determined. Tenants and landlords should at a bare minimum consult an engineer to assess exactly what is needed to meet the code requirements. Tenants should also retain a project manager or general contractor who receives volume-based discounts from vendors and who will research local rebates and incentives on fixtures and switches offered by both municipalities and states. This will ensure costs are minimized and construction dollars are used to their maximum benefit. Additionally, the selection of a qualified project manager or general contractor will help ensure these changes are factored in properly and costly change orders are avoided.
Robert is Director of Research for Colliers International in the Greater Washington D.C. area, where his team tracks and reports on marketing conditions relevant to both users and owner of commercial real estate. He is Americas Researcher of the Year for 2015. You can contact Rob by email or on Twitter.