A portfolio-wide energy conservation program instituted by the Healthcare of Ontario Pension Plan (HOOPP) has paid off in terms of energy savings and bragging rights for the healthcare pension plan.
HOOPP recently announced 10 buildings out of its portfolio of 95 properties as winners of its inaugural LEAP awards, which stands for Leadership in Environmental Advancement Program.
HOOPP said its top 10 office properties consume about 40% less energy than the national average for commercial buildings, or save about $4 million annually. While most of HOOPP’s top 10 “green” buildings owe their winning ways to hard work and retrofits, the building with the lowest energy consumption, 25 York St. in Toronto, had a somewhat unfair advantage.
The 30-storey tower south of Union Station and the eastern home base to Telus Corp. is almost new (opening in 2010) and already incorporates some of the latest, state of the art energy-saving features befitting its status as a LEED Gold building. The tower, which HOOPP owns 90-10 with Menkes, is also hooked into the city’s deep water cooling system which makes it even more energy efficient as it uses high-efficiency heat exchangers rather than energy-hungry chillers.
So 25 York’s number one status was no surprise, said Michael Catford, the pension plan’s Vice-President of Real Estate. He was more surprised by the top 10 ranking of Oakville Corporate Centre’s towers II and III.
“These are frankly pretty old buildings, I mean they were built in the Seventies,” he said. “They were pretty old and tired and Morguard, who are both our asset and property managers on that particular complex of three buildings, have done a terrific job of doing the retrofits that had to be done – replacing single glazing and doing all the things that you have to do.”
Catford said the success of the top 10 buildings ranged from the good (or Gold) genes of 25 York to significant capital investments such as swapping out old, inefficient chillers for more efficient equipment to installing high-tech energy monitoring systems that allow the building operators to automatically and precisely control lighting, heating and cooling to reduce energy usage.
Will HOOPP LEAP Again?
Catford expects the pension plan operator will regularly recognize it greenest buildings although it hasn’t decided whether it will be an annual event as yet. “We will see how it goes. You don’t want to be in the position of doing awards for the sake of doing it.”
The LEAP program should have some staying power given that HOOPP intends to broaden the environmental measures to include the likes of greenhouse gas emissions, carbon reduction, water consumption, and waste diversion.
The existence of the program should also spark some healthy competition among building managers across HOOPP’s portfolio. “Obviously as you put in these energy efficient lighting and systems and so on, you are able to bring [energy consumption] down quite quickly to begin with but then you get to a floor below which it is pretty hard to go,” he said. “So I wouldn’t expect to see the same degree of improvement on these buildings that we have in the past,” which should mean some new towers on the top 10 list.
“Other buildings that are not presently in the top 10 will make it there,” he said. To illustrate his point, Catford noted that HOOPP’s partly owned Exchange Tower in Toronto was recently granted LEED Gold status. “I wouldn’t be surprised to see that in the next go-around with the work they put in there that it will be fairly high up the list.”
A Twin For 25 York
The status of 25 York as HOOPP’s most energy-efficient building may prove short lived. The pension company and its partner Menkes have purchased 1 York St. and have a planning application in the works to build a same-sized office tower on the western part of the site. “We will be using the same deep water cooling system, the same energy efficiency and maybe our consultants can find ways of doing it better than 25 York even.”
It was the success of 25 York, at the corner of York and Bremner Boulevard, that convinced HOOPP and Menkes to purchase the former site of the OPP headquarters building. “Not only is [25 York] hugely efficient, our tenants love it and not to be too crass about it, it has been a huge financial success which is fundamentally what we are in business for.”
The 1 York St. proposal is for a mixed use complex with residential on the east side of the site that will be done by Menkes and another partner (HOOPP is prohibited from taking part in that sort as a pension plan). As well, the complex will house a large retail podium on the lower floors and an 800,000 square foot office tower on top (virtually the same size as 25 York). HOOPP plans to own 90% of the commercial property.
New hoops for HOOPP
Heightened competition for existing commercial properties from the likes of REITs (and other institutional investors) has made it tougher for pension plans like HOOPP to identify and buy buildings that make financial sense. “There is a huge amount of equity and debt capital available for investing in real estate and the REITs particularly, I think they raised $3 billion in equity or equity-related capital in the first six months of this year,” he said. “The REITs play a spread investing game so if they invest at 5.5% or whatever and they can borrow at 3.25(%) or 3.5% where they make a positive spread, that generally speaking works for them in terms of its impact on funds from operations.”
Pension funds are finding that their cost of capital is higher than REITs in the current low-interest rate environment, making it difficult to compete, said Catford. That has turned HOOPP from a buyer to a builder. “We have said, ‘If we can’t buy it on terms that we think make economic sense we will go buy land and we will create it ourselves and create better returns in the process.’”
As well as its plans for the bottom of York St., HOOPP has industrial development projects under way in Halifax, Ottawa, Calgary, Edmonton and Vancouver.
“We are using that to create our own new assets, which have generally speaking been more profitable for us than buying existing stuff when prices get too aggressive.”
HOOPP’s top 10 properties and their managers ranked one through 10:
• Menkes, 25 York St., Toronto ON
• Triovest, ATCO building, 10035 105th St., Edmonton AB
• Morguard, 99 Metcalfe St., Ottawa ON
• Eastport, 120 Eileen Stubbs Ave., Dartmouth NS
• Morguard, 200 Kent St., Ottawa ON
• Morguard, Oakville (ON) Corporate Centre III
• Triovest, Willingdon I, Burnaby BC
• Triovest, Sussex Place, 1001 Douglas St., Victoria
• Morguard, Oakville (ON) Corporate Centre II
• Triovest, 200 Graham Ave., Winnipeg