In the late 1970s, a young real estate broker and developer named John Klein was running out of money. He’d built several speculative warehouse buildings adjacent to the Great Valley Corporate Center in suburban Philadelphia. He was trying to find tenants in a lean, Carter-era real estate market. That’s when inspiration struck. “When we finally got tenants for the building, it was almost impossible for them to pay their heating bills. That’s when I had an epiphany,” Klein says. “If you are not concerned about the operational costs in the buildings that your tenants occupy, you can’t keep them.”
John Klein, principal and co-founder of JDM Associates.
One of Klein’s early mentors was James Rouse, founder of The Rouse Company—a real estate developer credited with building the Harundale Mall in Glen Burnie, Maryland (the first enclosed shopping center east of the Mississippi River)—who planned residential communities such as the Village of Cross Keys in Baltimore and the entire city of Columbia, Maryland. From Rouse, Klein took another important lesson. “The most important thing I learned at a young age from Jim Rouse was always take care of your people, because your people will take care of your properties. Properties can’t take care of properties, your people can.”
So how did Klein take this advice to heart? In 1976, when he was developing a small office building in Paoli, Pennsylvania, his great interest in the space program resulted in the desire to place solar panels next to a fountain outside of the building as something to attract attention and hopefully tenants. It worked—after he was able to get his bank to agree to additional funding. A few years later when he was building the speculative warehouses, his funds ran low thanks to high interest rates and a difficult market. He needed to heat the uninsulated warehouses on his shoestring budget, so he installed the most inexpensive heat delivery mechanism possible: ceiling-mounted propane heaters. Unfortunately his tenants struggled to pay their heating bills during a brutal winter, and as a result, Klein lowered the rent. “That’s when I had the epiphany, which was, ‘build buildings that are different in a positive way, but at the same time, always care about the operational costs of the tenants,’” he says. “It’s a win-win because the solar panels taught me differentiation was wonderful, and while later lowering those rents wasn’t fun, I learned that if you don’t think about what it costs tenants to operate in your space, you reduce their ability to pay rent and you reduce the attractiveness of your space.”
Fast forward four decades, and Klein is now principal and co-founder of JDM Associates, a consulting company founded in 2005, that advises many of the world’s largest 
institutional investors and developers of real estate—including TIAA-CREF, Principal Real Estate Investors, Prudential Real Estate Investors, JPMorgan Chase, UDR, and CalPERS—on the financial, energy, and environmental performance of their real estate assets. The firm has offices in Falls Church, Virginia and the US Virgin Islands, and staff located throughout the United States. Klein’s fellow principal and co-founder is Deb Cloutier, a commercial real estate and energy management expert who has been providing consulting services in commercial real estate, energy management, and environmental sustainability for more than twenty years. “I’m the kite and she’s the string,” Klein jokes.
Together, they comprise a formidable team. Klein and Cloutier helped to develop and launch the US Environmental Protection Agency’s (EPA’s) ENERGY STAR program for commercial real estate by leveraging his network of CEOs and CFOs from leading real estate organizations. He was awarded two US patents as a result of developing technology for geothermal heat pumps and fire protection systems with on-site water storage and distribution. Cloutier, for her part, began her career at the American Institute of Architects (AIA) supporting the Committee on the Environment, where she served as liaison to architects and the general public regarding environmentally preferred building materials and environmentally friendly design; she also supported the Greening of the White House under the Clinton Administration. The clients contracted by JDM have achieved energy savings of almost $200 million since 2006, and received industry and federal recognition for their leadership in sustainability and energy efficiency.
The advice JDM Associates gives clients, while uncommon, isn’t necessarily revolutionary. The consulting firm reminds businesses of helpful tips that the CEOs and CFOs of these companies probably already know, like, for example, the importance of turning the lights off when no one is working. But little things such as modifying hours of operations, making small tweaks to energy management systems, or recalibrating light and thermal sensors can greatly improve building performance.
Depending on the building, and the operational and market circumstances for each real estate asset, JDM recommends green building improvements to help recover costs. That could involve, for instance, lighting technology upgrades, better HVAC equipment, or new insulation. However, most firms can identify those big-ticket, obvious items. What differentiates JDM, Klein contends, is the company’s ability to find the unobvious behavioral, operational, and maintenance solutions that don’t require a lot of capital to implement, but yield high-value, fast returns.
“I’ll give you a specific example,” Klein says. “We often see issues with managing a building’s outside air-intake and pressurization. When and how you bring in fresh air to a building, condition it, and distribute it has a tremendous impact on its energy consumption and tenant comfort. Too often, we see buildings need to reduce air-leakage or mitigate “stack-effect”—air rushing through a building—leading to inefficient operations and uncomfortable tenants. Many other firms look first to finding a capital-intensive, equipment-replacement solution. Our deep experience has proven that you can often improve the situation through simple operational fixes and greater awareness by building operators and owners.”
Deb Cloutier present at the launch of the Better Buildings Initiative in 2011 with Presidents Obama and Clinton.
The interesting thing is that when applied consistently across a range of properties, small energy efficiency measures can pay major dividends, not only lowering a company’s operating costs, but also improving their net operating income and enhancing the value of their real estate assets. “We encourage our clients and everyone else to do all of the things that should have been done for a long time. These are not new concepts; they are a return to a fundamental approach to profitability and proving that you are more green, while adding green to the bottom line,” Klein says. “We work with our clients to identify and prioritize cost-effective, high-return investments that enhance their bottom line, asset value, and sustainability—all in conjunction with the investment strategy of the property or the fund, the hold-period, or other financial considerations.”
685 Third Avenue, one of the many real estate holdings of TIAA-CREF, has benefited from the services of JDM and recently completed a variety of capital improvements including a new entrance, lobby, elevators, and a new one-of-a-kind pocket park.
One of the clients that has witnessed a direct benefit from JDM’s consultation services is TIAA-CREF, a $620 billion global asset manager—the vision of philanthropist Andrew Carnegie—that provides retirement plans, life insurance, after-tax annuities, mutual funds, and other financial services to non-profit employees. In 2001 when Klein was recruiting and training partners to join the EPA’s online benchmarking system, ENERGY STAR Portfolio Manager, he approached TIAA-CREF and enticed them to join. Later, in 2007, TIAA-CREF launched its Global Real Estate Sustainability Initiative, and Nicholas Stolatis, senior director of Global Sustainability and Enterprise Initiatives at TIAA-CREF, impressed with the results of the ENERGY STAR program, sought out JDM for guidance and support.
Broadly speaking, JDM’s services are broken out into three key phases, no matter the size of the building, property, or portfolio. First is benchmarking, or assessing baseline performance levels. Next, JDM outlines a strategy to reduce the environmental footprint of that property’s operations. In this phase —what is called a Property Assessment — a JDM team visits the property and does a walk-through, spending time with the property team, inventorying technologies in place, reviewing operational practices, and seeking ways to run the building more efficiently. Lastly, acting as both cheerleader and coach, JDM provides technical assistance and guidance to property teams as they implement the recommended measures. “Our engineering team is the best in the United States at identifying no-and low-cost opportunities to reduce operating costs, and typically we find 10 to 30% or more in quick return utility and cost savings opportunities,” Klein says.
Those cost savings have played out for TIAA-CREF. Over an eight-year period, TIAA-CREF has seen a 19.3% improvement in the energy efficiency of its real estate 
holdings, which include 31 million square feet of office space, 4 million square feet of retail space, and 15,000 units of high quality multi-family housing. That translates to a reduction of 122 million kilowatt hours of energy consumption and $14 million in annual energy savings. “JDM has been a huge support to help us make and verify these calculations. It all starts with the ENERGY STAR data. We’re fortunate to have worked with both principals who have a deep knowledge and familiarity with this tool that forms the basis of all our metrics and EPA analysis,” says Stolatis.
The Portfolio Manager software, which both Klein and Cloutier helped the EPA develop, also allows building owners and property managers to enter data about their building’s energy consumption, hours of operation, number of occupants, and location. Real estate owners can compare the performance of similar buildings across the country and gain insight into how well buildings are designed, maintained, and operated. Additionally, for the benefit of their clients, JDM developed and uses a proprietary software called BenchSMART. This innovative platform facilitates more in-depth monitoring of energy, water and operational performance in buildings.
Most of the savings, Stolatis readily admits, are the result of basic operational tweaks—turning the lights off, setting back the temperatures, checking air filters, decreasing a building’s hours of operation— which are applied on a portfolio-wide basis. TIAA-CREF asset managers and third-party property managers use the ENERGY STAR Portfolio Manager to track and input data monthly, with three principal objectives: improving building efficiency in energy and water consumption.
When it comes to capital investments, TIAA-CREF focuses on the low-hanging fruit, replacing inefficient fluorescent tube lighting with LED tubes, for instance, to cut costs and improve building energy efficiency, Stolatis says. Projected savings from capital projects are carefully tracked against actual performance to ensure they are worthwhile investments. In some cases, simple facilities upgrades such as installing low-flow aerators in sink faucets can lead to substantial savings. Other times, savings are captured through close resource monitoring and reporting: installing a meter to measure the amount of water a property is allocating for landscaping purposes, as opposed to drinking waste water.
Applied across a company’s real estate holdings, these energy savings quickly add up. According to JDM’s website, “JDM has helped TIAA-CREF to save more than $92 million in energy and water costs, enhanced the incremental asset value since the baseline by $231 million (using a 6.5% capitalization rate), certified over 18 million square feet of office space as ENERGY STAR, assisted TIAA-CREF in obtaining four of the first ever multifamily ENERGY STAR Certifications, reduced portfolio-wide energy consumption by over 19.3%, and avoided over 427,000 MtCO2e.”
“We’re helping make the business case for our clients to the community and investors that sustainability is a proxy for overall management quality.” Deb Cloutier, JDM Associates principal and co-founder
Based on these efforts, TIAA-CREF earned the prestigious 2008 and 2009 ENERGY STAR Partner of the Year Awards for energy management, as well as the 2010, 2011, 2012, 2013, and 2014 ENERGY STAR Sustained Excellence Award. “This is not lip service or a casual effort. We have clearly identified this partnership as an opportunity for best practices, and it is showing an environmental and economic benefit, attributable to a focus on the ENERGY STAR tool for benchmarking resources, JDM’s expertise, and a dedicated asset management team that is supportive of energy efficiency,” Stolatis says. “All of this contributes to EPA’s goals and demonstrates our leadership in the space.”
TIAA-CREF is not the only client to look to JDM for guidance in capturing value for the energy efficiency of their real estate assets. At the same time investment firms like Metlife, Principal Real Estate Investors, GID, and others are looking to JDM for assistance in streamlining their portfolios by cutting energy and water costs and diverting waste. Sustainability’s value is being recognized in the global real estate market, both in the price of energy efficient buildings and, more broadly, in the portfolios of investment firms and fund managers.
Cloutier says investment is especially strong abroad, where the Dutch Pension Fund and Japanese Pension Fund are leading the charge of an increasing number of financial firms who recognize sustainability performance as a proxy for overall management quality and a key part of a company’s value proposition. In fact, a new measure of a company’s self-reported sustainability policy, management, and implementation, the Global Real Estate Sustainability Benchmark (GRESB) is now being recognized by investors as a key determinant of a company’s likelihood for growth and success, Cloutier says.
Along with the newfound engagement of the brokerage community, decade-old government policies and growing demand for energy efficiency in buildings among residential tenants are driving swelling interest in sustainable construction—in some cities making it a de facto requirement before a shovel enters the ground. “Class A office space is now defined as including sustainable office space,” Cloutier says. “No building is going up in Manhattan, or in any of the top 15-20 major markets, that isn’t LEED certified. To build in those areas at all, you have to be LEED certified and you have to have ENERGY STAR.”
Moreover, Cloutier points to an EPA report titled, “Summary of The Financial Benefits of ENERGY STAR Labeled Buildings,” which suggests that a business’s 
ability to demonstrate sustainable practices is more likely to show strong management capabilities in other business areas, such as corporate governance, hiring, and leasing. The EPA report further documents that “ENERGY STAR labeled office buildings are one-third more efficient than average US office buildings, and have annual energy bills that are, on average, at least $0.50 per square foot lower per year, or 35% lower than the average building.” It describes a number of other benefits of ENERGY STAR labeled office buildings, such as direct energy savings, the persistence of energy performance and savings over time, a higher occupancy rate reported by managers of real estate investment trusts with large ENERGY STAR portfolios, and higher building valuation. “We’re helping make the business case for our clients to the community and investors that sustainability is a proxy for overall management quality,” Cloutier says.
And, indeed, JDM prides itself on the assistance it provides to firms to help them “tell their story.” Key to this, Klein says, is establishing an internal reporting methodology, with demonstrable metrics and data showing energy and water savings, greenhouse gas emission reductions, and cost savings. This information helps clients draft project bids, marketing materials, website copy, tenant engagement letters, investor relations reports, conference presentations, and white papers. Clients are encouraged to apply for and get recognized by industry programs like ENERGY STAR Partner of the Year, the GRESB, or the United Nations Principles of Responsible Investing (UN PRI).
Yet many firms, Klein says, are inexperienced with such communication tools and could be missing out on important themes they could be emphasizing to market the value of their green assets. While first-order value—saving energy and water—is a direct way to save dollars, there are other more indirect ways in which sustainability benefits the bottom line. Consistent cost savings boost net operating income, which is a key metric in the asset value of a building. Depending on the capitalization rate, those cost savings get multiplied into an increase in the value of a real estate investment. Klein draws an interesting hypothetical: a property owner saves $100,000 per year on a multi-family building due to cost savings from more efficient and reduced energy and water use. Based on a 5% capitalization rate, for the owner that translates to a $2 million increase in incremental asset value. This is a second-order level of value.
But, increasingly, the value of sustainable buildings is being examined through other aspects of the financial model of a building, Klein says. “Tenant demand for green buildings, faster absorption, reduced risks to regulatory pressures, investor interest, improved competitive positioning, greater tenant retention, and reduced turnover costs are all ways that sustainability increases the value of a property. These ‘third-order’ effects are sometimes the most compelling, and drive a lot of decision making in the industry,” Klein says.
Stolatis also lauds the financial and environmental benefits of the so-called “triple bottom line,” but views these perks in light of their service to a firm’s social mission. “When you consider the triple bottom line—‘people, planet, and profit’— saving millions of dollars in energy costs, eliminating greenhouse gas emissions, making properties attractive to tenants, achieving all these things that socially conscious investors are looking for, energy efficiency is absolutely an essential component of an organization that views itself as socially responsible.”
