The Economic Benefits of Building Commissioning

Dan Winters
As today’s buildings become more technology-driven, commissioning plays a vital role in achieving the economic returns sought by all property owners.

Building commissioning is a quality assurance process used in the real estate industry that has proven effective to improving the long-term economic performance of a building’s operating systems and equipment.  It’s so effective that to secure a LEED rating at any level, owners are required to commission a new building’s energy-related systems.  The US General Services Administration also mandates commissioning for federal government building projects, and has interwoven the commissioning process into the project delivery practice for the GSA’s 375 million square foot owned and leased portfolio.

The term ‘commissioning’ has deep business roots dating back hundreds of years to the shipbuilding industry. Back in the day, financiers and insurers like Lloyds of London required a complete and thorough testing of a ship’s seaworthiness and navigation systems before accepting delivery from the shipyard and underwriting its precious cargo.  Today, this final testing phase for naval vessels is known as a ‘sea trial’

Industry Best Practice

Over 21,000 LEED certified projects have enhanced their economic value and risk profile given the fundamental commissioning prerequisite required to secure a LEED rating.  This “best practice” is designed to drive higher economic performance at the asset level and within the worldwide building stock.  Commissioning enables higher performance by engaging a systematic, rigorous process to ensure the building systems are designed, installed, tested, and verified in accordance with designer intent, owner’s requirements, and operational needs.

“Effective commissioning can lead to major reductions in operating costs associated with energy, water and waste, better indoor air quality, and reduced incidence of common occupant problems…”

The financial benefits of commissioning are well understood by institutional investors and asset managers, considered as both a revenue generating opportunity and risk mitigation technique. Effective commissioning can lead to major reductions in operating costs associated with energy, water and waste, better indoor air quality, and reduced incidence of common occupant problems [i.e. too hot/cold] which is a drain on both maintenance staff time and occupant satisfaction.

Commissioning and LEED

A LEED certified building signals to the market that the asset has undertaken at least one of two commissioning opportunities:

1. Basic Quality Assurance – Fundamental commissioning of a new building’s energy-related systems is valuable quality assurance, and important to supporting the economics underlying any lease negotiation or sales transaction.  LEED certification provides that economic signal.

2. Comprehensive Project Review – Building on LEED’s fundamental commissioning requirements, new buildings can earn two additional points for achieving Eac3 – Enhanced Commissioning.  This optional LEED credit requires a detailed review of design intent, contractor submittals, and final construction, along with a post-occupancy evaluation and a complete set of operating documents including warrantee information.

Lawrence Berkeley National Laboratory report found the typical simple investment payback in commissioning averages 1.8 years, with a range of 0.5 – 3.5 years.  Investors find those ROI’s highly compelling.

Market Uptake

The market clearly values commissioning as shown on multiple GBIG charts.  Each LEED rating system shows an upward trend in the market’s adoption of the enhanced commissioning credit, particularly at higher levels of LEED certification.  For specifics, please see the graph for each LEED rating system linked to the credit name in the Strategy column below.

Rating System Strategy Observations
NC v2.2 EAc3 Over 3,200 projects  /  6-year continuous upward trendline
NC v2009 EAc3 Nearly 1,300 projects – similar trendline as NCv2.2
CS v2.0 EAc3 Achievement rate:  LEED Gold >50%  /  LEED Platinum > 80%
CS v2009 EAc3 Achievement rate:  LEED Gold >50%  /  LEED Platinum > 80%
Schools v2007 EAc3 Strong adoption curve:  54% in 2010 jumped to 82% in 2013
EB v2008 EAc2.1 EAc2.2 EAc2.3 Over 1,000 LEED EB certified buildings achieved EAc2.1  Of these projects, 89% also achieved LEED-EB EAc2.2 credit.
EB:OM v2009 EAc2.1 EAc2.2 EAc2.3 Nearly 100% of LEED Platinum projects achieve both EAc1 and EAc2, with over 50% of those projects committing to ongoing commissioning via EAc3.


Value-Add Investing

Building commissioning plays out in multiple ways within the real estate marketplace. As example, commissioning is an important economic factor to implementing an institutional investor’s value-add acquisition strategy.

In late 2012, Harbor Group International acquired One South Wacker in Chicago’s West Loop from TIAA-CREF for $221 million [$185/SF].  As part of a $10 million pre-acquisition capital plan, Harbor Group’s market analysis showed LEED Gold as the prevailing asset rating for competitive projects in Chicago.

One South Wacker achieved its target of LEED Gold in March 2014, scoring in the top third of all US buildings in the LEED EB:OM rating system, and the top sixth in Illinois.  Avison Young was recently appointed as exclusive leasing agent with the opportunity to showcase this great asset to Chicago tenants looking for a premier showcase building in a top location.

The LEED Gold designation provides strong market differentiation for assets engaged in best industry practices.  Achieving a LEED certification bumps the asset up in CoStar’s listings, drives overall market interest, and leads to increased leasing traffic and tenant broker interest.  A recent LEED certification signals to tenants that the building owner is serious about maximizing energy and water savings, thus lowering a tenant’s overall occupancy cost over the duration of the lease.

Ultimately, the success of a value-add investment strategy is predicated on investing additional marginal capital specifically targeted to increasing occupancy and eliminating deferred maintenance. LEED certification provides a multi-level framework to achieve these financial-driven objectives.

Strategic Positioning

Building owners with well-commissioned assets maintain a far better operational understanding of the intricate systems found in today’s buildings.  The direct economic payback from commissioning is relatively quick, and is realized during key activities including:

  • Operational break-in
  • Internal space reallocation and/or tenant turnover
  • Due diligence for debt financing
  • Sale, co-investment, or other ownership change

Commissioning also leads to improved integration with operational and monitoring technologies, resulting in more informed ongoing business decisions while improving both the asset’s economic risk/reward equation and its insurance risk profile.

From an investment strategy perspective, well run buildings command attention as tenants seek new locations and investors look to put capital to work.  Lenders look favorably on the presence of a thorough commissioning report during underwriting due diligence.

“Leading asset owners recognize commissioning as a valuable service that provides strong economic returns on investment, and choose LEED as their guide when seeking to attain superior outcomes.”

Unfortunately, some real estate industry novices unfamiliar with the robust body of economic knowledge perceive commissioning as a series of added costs and/or bureaucratic hoops to jump through.  Leading asset owners recognize commissioning as a valuable service that provides strong economic returns on investment, and choose LEED as their guide when seeking to attain superior outcomes.

In the competitive real estate market, achieving LEED certification and the mandatory commissioning that underlies the LEED rating is an important signal, highly valuable at critical moments in financial transactions.

See the resources linked below for additional information on building commissioning:

Study:  Cost Effectiveness of Commissioning

IFMA Foundation

Lawrence Berkeley National Labratory

International Energy Agency

Commissioning Definitions 

Whole Building Design Guide:  Commissioning 

State of California:  Existing Building Commissioning Guide

Report:  Retro-Commissioning Guide For Building Owners

US Department of Energy:  Retro-Commissioning Guide for State and Local Governments

Natural Resources Canada:  Retro-Commissioning Guide

BuildingGreen:  Retro-Commissioning Guide

Report:  Continuous Commissioning

Research:  The Cost-Effectiveness of Continuing Commissioning

Early Research:  Oak Ridge National Laboratory

Dan Winters
Dan Winters is GRESB's Head of North America