Snapshot

WeWork's Opportunity to Stimulate Environmentally Sustainable Market Transformation in Office Property Markets

By: Stuart Brodsky

November 01, 2018

When a company such as WeWork holds a dominant positon among its supply chain and stakeholders, it has the potential to be an effective and innovative advocate for change in both practice and performance metrics — priorities that improve the corporate bottom line and demonstrate corporate citizenship. Known as market transformation, such a process should result in changes to the negotiated content and outcomes of transactions between stakeholders. To be truly market transformative, the achieved change should become standard practice, rather than a one-off result.

In the world of New York City office real estate, WeWork holds a unique position, and, therefore, opportunity, among private sector lessees to stimulate the office property market's transformation to a more sustainable paradigm. This is particularly so in regard to transactions related to the leasing of class A office space. According to The Real Deal (TRD), WeWork is the largest lessee of office space in New York City. Leases held by WeWork represent over six million square feet of office space. What's more, as indicated by TRD, WeWork shows no sign of slowing down its expansion in the NYC market. With such a large and growing presence, WeWork could stimulate, encourage, and pursue sustainable market transformation in ways that no organization has done previously.

In addition to its scale, other factors contribute to understanding WeWork's potential as a transformative agent. Consider the innovative nature of the company and its product line. The company is recognized in the real estate industry as something new in the office property market. This recognition is evidence that WeWork has the sophistication, vision, and experience to move the office property market. As well, there is reason to believe that WeWork has interest and incentives to advance sustainability in the real estate marketplace since

1. WeWork's leaders are self-proclaimed environmentalists
2. WeWork's clients include Gen X and Gen Y populations noted for their alignment with climate priorities
3. New York City's own climate change mandates and public policies are among the most advanced in the country—which makes for a relatively advanced baseline upon which further market transformation could apply more harmoniously than elsewhere
4. nearly 70% of New York City's global-warming-causing greenhouse gas emissions come from the energy consumption used in the operation of real estate

Were this only the case; but it is not. In fairness, the company has recently hired a director of sustainability. The director, Lindsay Baker, has indicated an unwillingness to describe programs and policies at this time because the company is "just launching our programs internally."

Let us hope that WeWork makes haste in the development of sustainability practices, and let us hope that these practices are neither limited to internal programs, nor slow to stimulate broad market transformation toward sustainability in the operations and management of class A office space. Let us hope that WeWork's innovative efforts would be driven by its mandate for corporate social responsibility as well as profit margins. Let us hope, as well, that the company will raise the bar in pursuing benefits that are financial and environmental, both internally and across the company's supply chain. As used in this context, the company's supply chain would include, but is not be limited to, the commercial property owners from which WeWork rents office space. Sustainability initiatives should also include the WeWork members who could benefit from the greater comfort and productivity that environmentally sustainable office space is said to provide.

A Path Forward

To start, and in keeping with this century's most urgent environmental priority, WeWork should integrate an energy efficiency and carbon performance requirement for the operation of the properties that the company considers leasing. However, unlike the typical practice of pursuing leases in buildings that have already achieved a green standard — such as the ENERGY STAR Label — WeWork should pursue site selection criteria based on landlords' demonstrated success at improving energy efficiency across their entire portfolios. This practice would be in contrast to the standard practice of site selection that is focused on identifying individual buildings that have already achieved standards of top performance.

By launching such a screening practice, WeWork would be putting its heft where market transformation is most needed. This new practice would stimulate investment in low capital cost improvements — which are higher in carbon reductions per dollar investment — through superior management practices in all buildings, rather than capital intensive upgrades of rarely replaced equipment in a select few buildings. This new practice would reward property companies that are stimulated to pursue and achieve ongoing improvement in energy and carbon performance across all properties, rather than pursue a focus on top tier properties only.

WeWork is well-positioned to adopt this practice. As demonstrated by cross-referencing the company's leasing history in NYC (as reported in multiple TRD articles) to energy performance disclosure data made available through NYC Local Law 84, WeWork pursues space in a broad range of types and ages of office buildings. It also appears that WeWork does not currently stipulate any demonstration of energy efficiency or carbon performance in its site selection practices.

For purposes of writing this article, I conducted a short, unpublished analysis, identifying locations mentioned in TRD articles and studied the energy performance disclosure data made available to the public through NYC LL 84. It captured data on roughly 20% of the locations in which WeWork space in NYC is available to its members. The analysis reveals that one third of the properties are in excess of 300,000 square feet, while WeWork also occupies space in buildings of less than 50,000 square feet. Among these properties, the average ENERGY STAR rating is 66. Across all analyzed properties, the ENERGY STAR ratings range from 18 (an indication of abysmal carbon performance) to 88 (an indication of nearly exception carbon performance). Also notable is the fact that the average age of a WeWork occupied building in this analysis is 89 (yes, 89) years. The highest ENERGY STAR rated building leased by WW WeWork is 87 years old and the lowest ENERGY STAR rated building is 103 years of age. Of course all of these buildings have received significant upgrades over the decades. Nevertheless, this data supports the findings of multiple previously published studies showing that an asset's age is a poor indicator of energy performance.

This apparent lack of linkage between asset age and energy/carbon performance makes the case for market transformative policy that would more effectively address the climate crisis. The vast majority of properties in any given market are less motivated. The vast majority of properties in any given market a not incentivized to become more energy efficient because they don't have larger, demanding, and potentially repeat-tenants with comprehensive environmental strategies. These properties are also under-incentivized for energy efficiency by current practices of corporate or government tenants or by public policies. By adopting site selection practices that stimulate improved performance across all assets, WeWork would incentivize a market for energy efficiency where there is currently 1) a dearth of stimulus, and 2) large untapped opportunities for inexpensive emissions reductions.

Beyond Energy Efficiency

An innovative and affirmative policy that focuses on carbon performance through energy efficiency is not the only innovative market-transformative path available to WeWork. In deregulated utility markets like New York's, for instance, WeWork could adopt a policy of purchasing green power. To the extent that NYC landlords already have executives in charge of utility purchasing contracts, these landlords are well-positioned to offer additional sustainability services. The landlords who do not have in-house expertise in utility purchasing or installation of on-site renewables will be stimulated to do so, or hire outside consultants. I reiterate here that NYC is one of the most matured sustainability markets for commercial buildings in the country. In responding to stimulus from WeWork, office property owners will find a wealth of supply chain members and advisors to help design, implement, and execute renewable-energy purchasing contracts and install on-site renewables.

WeWork can and should prioritize carbon emissions from building operations as the inaugural centerpiece of its sustainability policy. This effort would be the most effective and value-enhancing focus of a WeWork's sustainability program. The potential for such a private sector actor to stimulate cost-effective market transformation is unrivaled in New York, and presumably elsewhere. WeWork should do more than nibble around the edges of sustainability, which it has done by implementing such policies as refusing to reimburse corporate travelers for the meat-based meals. Given WeWork's purchase and planned renovation of the Lord and Taylor building, the company should create a landmark to energy efficiency and carbon performance. More broadly, WeWork should have a bigger appetite to be an effective market transformation agent through a multitude of touch points. As a matter of strategy, WeWork would do well to pursue subsequent foci that transform the market in other ways, such as non-toxicity, sustainable, or life-cycle-analyzed office furnishings and fit outs. But at its outset, WeWork should be focused and cognizant of our carbon priorities.

WhoIs:

Stuart Brodsky is a Clinical Assistant Professor at NYU School of Professional Studies Schack Institute of Real Estate. As Director of the Center for the Sustainable Built Environment, Professor Brodsky overseas, among other things, the

• development of curriculum for undergraduate and graduate studies in sustainable real estate development
• integration of sustainability into traditional course work for the MSRE, and
• coordinates and manages public programs for sustainability students and the community at large.