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POSITIVE ENERGY

Landlords nurture newer, greener power sources as fuel prices rise

By Steve McLinden

North Americans can expect to feel the chilling bite of rising energy prices this winter, but some shopping center landlords are demonstrating that there is much that can be done to help keep those costs under control. Canadian landlord Ivanhoe Cambridge, for example, is relying on wind power to reduce energy expenses at six of its malls in Calgary. Energy provided by windmills will supply one-quarter of the properties’ power, says Kim McInnes, Ivanhoe Cambridge’s executive vice president and COO.

This, the largest wind-power purchase in the North American shopping center industry, saved C$1.6 million ($1.3 million) in energy costs last year, the program’s first in operation, and is part of a deal with Calgary-based energy supplier Enmax that includes two of Ivanhoe Cambridge’s office towers.

Elsewhere, a major U.S. supermarket chain is powering all its fuel pumps through wind power. Other retailers and their landlords are helping to cut costs by employing energy-efficient materials, calling in utility-auditing firms and installing better climate-control equipment.

“America has made it through other crises like the dot-com crash and 9/11, and there’s a lot of opportunity for the strong retailers and strong landlords to do a good job of managing this situation,” said Jeffrey Hart, CEO of Cincinnati-based Cadence Network, which provides utility-management services to chain stores and retail-facility owners.

But that is not to underestimate the challenge. In a year that brought Americans gas at $3 per gallon, a succession of major hurricanes and the fear of an economic slowdown, the news that the cost of heating will rise meteorically this winter has only added to landlords’ concerns. Natural-gas bills are expected to spike 46 percent on average this winter, while fuel oil bills are projected to rise 32 percent, according to the U.S. Energy Information Administration.

Although most triple-net retail tenants foot their own energy bills in shopping properties, some center owners fear a chilling residual effect that could be felt long after the winter snows have melted. Higher energy prices translate to lower tenant profits, and this may make some retailers more resistant to rent hikes and less willing to expand in the new year, observers say.

“Center owners are wondering how they’re going to pass those costs along, given that retailers are already suffering from a very competitive market,” says Hart. “They want to know how to reduce their bills and what they’re going to do to their earnings. They don’t want to be caught in a reactionary mode.”

The colder geographical areas will be more affected, but regional retailers in the Midwest and East Coast will get hit by higher operating costs that will decrease profits, says Alan Clifton, director of acquisitions at Passco, a Los Angeles-based owner and developer of West Coast and Midwest retail properties. “You will definitely see impact on fourth-quarter earnings.”

National retailers with a strong presence in warmer climates will feel a little less pain, but overall, the rising costs “will really impact some of the borderline players,” Clifton said. “The higher energy costs could make the difference between them succeeding or not succeeding. And obviously, retailers operating in more-modern buildings with more-energy-efficient heating systems and lighting will do a little better.”

Grocers, who already have heavy cooling requirements, are likely to take an even bigger hit from the rising energy costs. “And that is not going to help a sector that has already been having its problems,” Clifton said.

Retail architect Don Rataj, CEO of St. Louis-based Rataj Krueger Architects, has seen a slow rise in energy consciousness in the past few years, driven by costs. “The thought process 20 years ago was, ‘Build us a big box and make it work.’ Now [owners and retailers] are starting to take the path of, ‘What is it going to cost us to operate this thing if we build it?’ ”

For Dura-Last Cool Zone, a Saginaw, Mich.-based reflective-roofing manufacturer, inquiries from shopping centers and other commercial operations have more than doubled this year, says Drew Ballensky, general manager of the company’s Iowa plant. “We’ve seen this concern about rising energy costs growing all year long,” he said. “I have personally done 120 energy analyses this year, compared to 50 last year.”

Hart says centers and retailers “really need to start managing their energy systems like never before. They have to shift their model from just paying bills to finding ways to create savings for themselves and their tenants. Everybody is fighting for occupancy, and everybody wants to make sure they have the most-favorable costs.”

Hart estimates that 10 percent to 15 percent of the energy bills that arrive at a typical facility manager’s office are in error. “If managers aren’t clear about exactly what they’re paying for and what they should be paying for and where the opportunities for savings exist, they are wasting hundreds of thousands of dollars and don’t even realize it,” said Hart, whose firm monitors rate changes among energy providers across the country. “Their concerns are what their budgets are going to look like, how they’re going to get their hands on the rates and how they’re going to manage those going forward.”

Starting in 2006 retail building owners will have at least a two-year window to take advantage of energy incentives passed last summer through the Energy Policy Act of 2005. The act, which may be extended an additional two years, establishes a deduction of up to $1.80 per square foot for money invested in new commercial buildings that are designed to save at least 50 percent of annual energy expenditures, weighed against standard construction, says Harry Misuriello, director of building and utility programs at the Alliance to Save Energy, Washington, D.C. The deduction applies to a building’s envelope, interior lighting, and heating, cooling, ventilation and hot-water systems. “This can present a big savings and is well worth looking into if you’re going to build,” said Misuriello. The site, www.nema.org, contains details.

Doron Valero, president and COO of Equity One, a retail REIT with a nearly 20 million-square-foot portfolio, says heating oil and natural-gas prices are likely to affect his firm’s ability to raise rents in the near term. Approximately 20 percent of the nation’s electricity is generated by burning natural gas.

On the consumer side, Equity One’s properties will probably not take a direct sales hit during the winter holidays because about two-thirds of its 191 properties are supermarket- and drugstore-anchored centers considered to be more needs-based. “Even with the high gas prices,” Valero said, “service-oriented centers are more likely to weather this type of thing because people will still do grocery shopping, get their hair cut and have their nails done, regardless. Gift stores will have the most problems.”

Still, he said, “energy touches everything, and at the end of the day, the surge in prices will affect everyone. The consumer is going to have less money to spend.”

Even with the rising utility rates, building developers and owners are still largely reluctant to invest in optimally efficient buildings, because they often don’t directly incur the expenses, says Rataj. “The reality is, very few people want to spend money now on what’s going to save them money down the road,” he said. Usually, new energy-efficiency regulations and ordinances must take effect before most owners will significantly upgrade building standards, Rataj says.

Besides Ivanhoe Cambridge, a handful of developers and retailers are toying with wind- and solar-powered facilities. Mall developer Robert Congel is planning to build an 800-acre, multibillion-dollar shopping and entertainment complex on a brownfield site in Syracuse, N.Y., for a full clean-energy mall, DestiNY USA, which he says will be powered by solar panels, wind turbines, fuel cells and biofuels. The DestiNY team has secured tax incentives at city, county, state and federal levels, but the project’s ground-breaking plans have been pushed back several times, and at press time construction had not started.

In September grocery chain Safeway announced that it had struck a deal with a wind-energy provider to purchase renewable energy for its 270 fuel stations across the United States, located predominantly in Alaska, Idaho, Montana and Washington. Safeway is the only retailer to purchase enough renewable energy to power all of its U.S. fuel stations, according to Renewable Energy Access, a trade publication.

Internationally, sustainable energy has been in use much longer. Solar panels were installed at Fushimi Shopping Mall, in Kyoto, Japan, about a decade ago and have since been used in the construction or renovation of several other Japanese retail centers.

But don’t expect much energy relief in the U.S. next year, says Hart. “There is speculation across the industry that there’s going to be an 18-to-24-month spike in energy costs,” he said. “The U.S. has been spoiled by energy costs and is now just catching up with the rest of the world. We all just have to start looking forward and quit looking down.”

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