Predicting Costs Associated With Uncomfortable Tenants

Understanding How The Indoor Environment Affects Productivity

Communication White Paper by: Craig Gann
Systems Marketing Manager, Commercial Unitary Systems
Carrier Corporation, Syracuse, NY

• Introduction
• Measuring Productivity
• Measuring Fixed Costs
• Cost of Employees
• Preventing Losses in Productivity
• Pay Now or Pay Later
• Upgrading the HVAC System
• Return on Investment (ROI)
• So What, Who Cares, I'm The Building Owner and I Don't Pay the Utility Bills, My Tenants Do!
• So You're the Tenant, How Much Will It Cost You To Move?
• NEMI Study
• Other Considerations
• A High-Quality HVAC System Is A Good Investment
• Summary
• References

Introduction

This paper will enlighten the reader as to some of the various studies and procedures that have been undertaken to measure the impacts of human productivity and how changes in indoor environmental conditions may affect human productivity. Losses in productivity in the work environment results in billions of dollars of losses each year, therefore it is important to attempt to quantify these effects.

Measuring Productivity

Classical studies such as the "Hawthorne Effect" have been made since the early 1920's that have shown quantitative effects on worker output when environmental conditions were changed. Specifically, lighting levels in a manufacturing facility were increased and this was followed by an increase in worker productivity. Lighting levels were then increased further with another corresponding increase in productivity. When lighting levels were increased a third time productivity dropped. Researchers concluded that worker productivity rises anytime management shows concern for employees and drops when management shows disregard for employee complaints and concerns. Actually many researchers concluded that there is no simple relationship between a single environmental element and complex human behavior.

A common measure that corporations use today to measure productivity is to divide output by input, i.e. output in number of units of production or sales; input being either number of employees or payroll amount. The fallacy of this method is that you can show temporary increases in productivity, without increasing output, by reducing the number of employees since this decrease in the denominator of the equation causes the resultant value to increase.

Measuring productivity of agricultural facilities is rather straightforward; e.g. number of eggs harvested per day, bushels of grain per acre, etc., however measuring human productivity is much more difficult. Inherently we all know that changes to the indoor environment have a direct effect on productivity, however being able to quantify this effect is the challenge.

Various attempts have been made to measure human productivity in office environments. Many factors such as thermal comfort, indoor air quality, lighting levels and acoustics all affect how a worker performs his or her duties. In 1988, BOMA (Building Owners and Managers Association) conducted a telephone survey of 400 executives involved with space planning and use. The question was asked as to what was their worst operating, management or design problem. The number one problem, by a factor of 2:1, was the HVAC (heating, ventilating and air conditioning) system at 24.3% followed by elevators at 12.2%. The survey went on to ask what percent gain in productivity would you expect to see if these problems were eliminated. Respondents indicated an average productivity gain of 18% would be realized if the HVAC system problems were eliminated. Of course, this study was not very scientific and quite possibly could have been affected by emotions, however the results cannot be ignored.

Other studies have been performed, such as the one documented in 1986 by Rock Mountain Institute in Snowmass, Colorado. A Post Office in Reno, Nevada underwent energy-saving modifications involving changes to the lighting levels as well as architectural changes which made the temperature of the mail sorting area much more stable and controllable. After modifications, the number of pieces of mail sorted per hour increased by 6%, hence productivity increased at the same rate.

Studies have also been performed at various insurance companies to measure the number of claims processed before and after modifications to the building were made. In one case, in West Bend, Wisconsin, individual workstations were installed at each worker's location that allowed for individual control of temperature, air motion, background sound levels, and lighting. Researchers estimated that productivity of the workers increased approximately 2.8% after the individual controllable workstations were installed. The economic payback of the individual workstation control systems was estimated at less than two years.

According to some building managers and researchers, productivity gains from selectively improved workspace conditions may be in the range of 5% to 15%, however more research needs to be conducted in this area to further substantiate claims.

Measuring Fixed Costs

Unlike productivity, measuring fixed operating costs is very easy to perform in the working environment. Costs such as rent, utilities, taxes and payroll are easy to quantify and may be obtained from the accounting department of most companies.

According to 1995 Energy User News statistics, annual average building operating costs for downtown facilities for various cities throughout the U.S. is shown in Table 1 below.

Table 1. Building Operating Costs

According to 1991 data from BOMA and EPRI (Electric Power Research Institute) and the Statistical Abstract of the United States, gross annual mean rent is $21/ft² for urban commercial office space. Total energy costs were calculated to be $1.80/ft². If we add another $2.00/ft² for taxes and another $1.50 for maintenance that brings us to a total annual building operating cost of $26.30/ft² as follows:

These numbers are well within the range indicated in Table 1 above.

Cost of Employees

According to ASHRAE (American Society of Heating, Refrigerating and Air Conditioning Engineers), the average occupancy density for commercial office buildings varies between a maximum of 75 ft²/person for general purpose areas to a minimum of 200 ft²/person for private offices.

Let's assume an average value of 150 ft²/person for a typical office space. Let's also assume that the average white-collar office worker receives a salary of $15/hr. including benefits. For the typical 2000 hr. work year (8 hr./day X 40 hr./wk.) that equates to an annual salary of $30,000/yr. If we divide the average salary by the average occupancy density we get:

Now perhaps you begin to see where this exercise is taking us. Remember, our average building operating cost was around $26/ft². That means that the ratio of employee cost to building operating cost is 7.6 to 1 ($200/$26.30). It also tells us that the ratio of employee cost to the utility cost is 111 to 1 ($200/$1.80)!

So what if we save 30% on utilities by implementing a new energy-saving device into the building! In our case that would mean only a savings of $0.54/ft². Compared to the employee cost of $200/ft² it's nearly insignificant! Not to say that energy saving modifications are not worth their investment, many times they are, however once you begin to understand the magnitude of the costs incurred by the employer for having employees on the payroll do you begin to see why productivity costs are so important. Perhaps this is one reason that so many companies downsize employees as one of the first ways to reduce overhead costs.

While we're making assumptions let's assume that productivity in an office declines by 5% due to poor indoor environment (temperature, humidity, indoor air quality, etc.). This loss could result in either increased absenteeism, increased health care claims or simply cause workers discomfort while they work. What is the cost to the employer for this 5% drop in productivity?

5% of $200/ft² is $10.00/ft²/yr.

Or over 5 times the cost of utilities! For a 50,000/ft² building this equates to a net loss of $500,000/yr. So, to form some general rules of thumb, for office spaces:

Rent costs 10 times as much as utilities!

People cost 10 times as much as rent!

(or)

People cost 100 times as much as utilities!

We could also make the broad statement that:

"Energy saving modifications to the building at the expense of employee productivity is a losing proposition!"

Preventing Losses in Productivity

It has been shown that people are more comfortable in areas that allow them to adjust their individual space comfort. The popularity of multiple-zoning systems such as Carrier's VVT (Variable-Volume-Variable-Temperature) System is proof that this is true. All major manufacturers now offer some type of zoning system to meet this increasing demand for individualized zone control. More comfortable employees are more productive employees.

There are many ways to provide better indoor environmental control in a building. Among the options are:

• Multiple Units (1 unit per zone)
  
• Variable Air Volume (VAV) Systems
  
• Zoning Damper Systems
  
• Proper Air Distribution
  
• Adequate Air Changes & Filtration
  
• Adequate Ventilation & Room Air Motion
  

Let's discuss each of these options briefly.

Multiple Units - probably the most expensive option from both an installed cost and a maintenance cost. This also increases the amount of ductwork, electrical and piping required. Unless redundancy is required, multiple units are probably not the best alternative.

Variable-Air-Volume (VAV) Systems First introduced by Carrier in the 1960's, VAV systems have proven to be the most energy-efficient method of providing variable steps of capacity as the cooling and heating loads change throughout the year. The equipment is generally designed such that it will provide multiple stages of capacity while the fan modulates it's speed to match the load that exists in the space. The main disadvantage of VAV systems is their higher initial cost as compared to constant volume (CV) systems.

Zoning Damper Systems - These systems usually utilize a single-zone, constant-volume (CV) packaged unit with duct-mounted, modulating dampers that vary the amount of cooling, heating or ventilation air that enters the space. These zone dampers are controlled by a thermostat in each room that indicates the amount of cooling or heating required to satisfy that room's requirements. For instance, in the cooling mode, if one room needs more cooling than the other, it's associated zone damper opens further to allow more cool air to enter the space. Zone dampers serving rooms that need less cooling, because their thermostat is satisfied, modulate closed. This ensures that air is delivered only where it is needed with less over-conditioning occurring.

These type systems are very popular for retrofit projects since it is very easy to install the controls in the existing duct system with little or no modification to the HVAC unit required.
Zoning systems are probably one of the least expensive options from both a first cost as well as an operating and maintenance cost standpoint. These systems allow for remote monitoring of the building through telephone lines and a computer modem. This allows a service or operating person the ability to troubleshoot or adjust the controls from a single location without having to physically go to each thermostat and adjust it.

Carrier introduced the original VVT System in 1981 and it has proven to be the industry standard to which all other zoning systems are compared.

Proper Air Distribution, Adequate Air Changes, Filtration, Ventilation & Room Air Motion - regardless of the system type or controls installed, air that is not adequately conditioned and distributed into the space properly results in a poor-quality, not to mention unsatisfactory, installation. As a matter of fact, new building codes are being driven by issues such as IAQ, Sick Building Syndrome and Building Related Illness. New design standards are now in effect such as ASHRAE's Standard 62 which requires designers and operators of buildings to supply adequate amounts of fresh air into the building and properly distribute that air to dilute or eliminate known indoor contaminants. Therefore, options 4-6 are really not options, they are requirements that must be provided regardless of the type of system used.

Pay Now or Pay Later

As the old saying goes, skimping on costs during system selection or installation may cost the owner or tenant of a building many more times the amount saved on first cost in operating costs later. Numerous studies have shown that over the useful life of most HVAC equipment installations, (15-20 yrs.), over 90% of the total owning and operating costs incurred during that period is attributed to energy costs to run the equipment rather than the first cost to purchase and install.

Upgrading the HVAC System

How much additional money would we need to spend up-front during the equipment design or installation phase to ensure a high-quality HVAC system, a system that allows each occupant the ability to adjust his or her individual space conditions? Calculations have shown that a maximum of 50% additional expenditure is required up-front to get a high-quality HVAC system over a system that is marginally adequate. Let's put the pencil to it and stop talking generalities here.

According to 1996 Means® Mechanical Cost Data, the installed cost of the HVAC system is approximately 10% of the total building construction cost. A typical general purpose commercial building might cost $80.00/ft² to build, meaning an average HVAC system might cost $8.00/ft². If we spent an additional 50% ($4.00/ft²), for a total of $12.00/ft², up-front on the HVAC system to achieve much better zone control and could prevent that 5% loss in productivity from occurring, what would be the return on our investment?

Return on Investment (ROI)

Since we are calculating the ROI (return on our investment) we have to first determine what our return is. Our return is the benefit we receive by not having the 5% drop in productivity occur due to poor indoor environmental conditions. For the 50,000 ft² building in our previous example, the return amount is:

Now let's calculate our investment amount. Is our investment $12/ft² ? No, we know we have to install some kind of system in the building anyway which is going to cost us at least $8.00/ft². Our investment is the amount over-and-above our initial investment, that is the 50% ($4.00/ft²) additional amount. For our example building the total additional investment required is:

Therefore the return on the investment may now be calculated as follows:

250%! Where else can you earn that type of return, certainly not with the stock market or bonds? Especially when you consider the risk involved with speculative investments.

Let's calculate the Simple Payback Period as follows:

So What, Who Cares, I'm The Building Owner and I Don't Pay the Utility Bills, My Tenants Do!

True, the above example assumes that the tenant (employer) pays the utility bills and the building owner pays for the upgrade costs for the HVAC system. In reality most builders construct buildings for speculative purposes, either to lease-out to other tenants or to sell to another owner. Therefore, minimizing the first cost of the building is generally the main priority.

However, building owners have an important stake in the success of the building, that is how many tenants move-in (occupancy rate) and perhaps just as important, how long tenants stay in the building. With the overabundance of vacant office space in today's commercial real estate market, tenants have the clear advantage over building owners. They can shop for nicer facilities and often get a better location for less money. It's truly a buyers market right now.
According to BOMA, the number one reason tenants move-out of a building is due to poor quality HVAC systems. If a tenant moves out of a building there are many costs that the building owner will incur, such as:

• Lost Rent
  
• Renovation & Refurbishment Costs
  
• Re-letting Costs (classified ad, real estate commissions)
  
• Utilities (must keep turned-on to show prospective clients and prevent freezing)
  
• Concessions (free months rent, reduced rent or other modification)
  

Let's assume that if the building owner spent the additional $4.00/ft² and this resulted in a higher-quality building that would retain tenants longer. In other words, if the building owner could avoid the costs shown above, what would be the ROI on this investment? Let's make some assumptions regarding today's commercial office space:

Let's do the calculations as follows:

Classified Ad : $1,000

Utilities : (50,000 ft²) * ($1.80) * (4/12) * (1/2) = $15,000

Remodeling Cost : 50,000 ft² X $1.00/ft² = $50,000

Reduced rent for 6 mos .: 50,000 ft² X $21/ft² X 6/12 X 1/2 = $262,500


Total Cost to Building Owner = $678,500

So You're the Tenant, How Much Will It Cost You To Move?

Just like the building owner, when tenants move from one building to the next there are associated costs incurred such as:

• Lost work (productivity) due to employees packing and unpacking items as well as disruption to daily business activities
• Let's assume 2 days to move from old facility and 3 days to move into new facility. This is one week of essentially no output while salary costs are continued to be paid.
• Cost to physically move furnishings. Let's assume $1.00/ft² for a moving company to physically move furniture, files, etc.

Calculations as follows:

Lost Employee Productivity:

Now we can calculate the ROI as follows:

Let's suppose you are a tenant leasing an existing facility without zone-by-zone control of the HVAC system. As can be seen from the

100% ROI, it is financially advantageous to upgrade your system to one with much better control.

NEMI Study

According to a NEMI (National Energy Management Institute) prediction, productivity in the U.S. could rise by $54.5 billion/year if all commercial buildings upgraded their HVAC systems to comply with the new ASHRAE Ventilation Standard 62. For office buildings the ventilation requirement is 20 CFM/person (cubic ft./min./person) of outdoor air. NEMI went on to estimate that productivity gains alone would recoup all necessary renovation and upgrade costs within a 2-year payback period.

Other Considerations

This same productivity analogy may be applied to other types of facilities besides office buildings.

Let's look at a school classroom scenario. What are the overall ramifications if the students are uncomfortable, drowsy because of lack of proper ventilation or cannot hear the teacher due to a inexpensive HVAC system that produces excessive, unwanted noise? What if the teacher is uncomfortable? How much would her or his productivity decrease? And how do you measure the effects of productivity losses to school students? Maybe their grades will suffer, maybe they will not get that scholarship to Harvard, and not get that CEO position at General Motors! It's difficult to measure these effects quantitatively, however most people can certainly grasp the concept here.

Here's one way to look at it. According to the 1994 Statistical Abstract of the United States, per capita spending for public schools was $5,574/student. If we assume a school classroom contains 30 students, and productivity drops 5% due to poor indoor environmental conditions or absenteeism what is the resulting cost to the taxpayers per classroom?

If the average classroom is 40'x30' = 1,200 ft² and it costs $80/ft² to build a school classroom that equates to $96,000. If we spent an extra $4.00/ft² to get the better HVAC system and this created a comfortable learning environment preventing this 5% drop in productivity from occurring what is the ROI?

A High-Quality HVAC System Is A Good Investment

Spending the extra money up-front for a high-quality HVAC system is a good investment. As a matter of fact, each 1% drop in productivity that we can prevent from occurring will justify an additional $2.00 /ft² at the initial construction or renovation stage. Returns on investment (ROIs) in excess of 100% are not uncommon, especially when you consider that the benefits of the better system last for the life of the equipment, which is often in excess of 15 years.

Advantages For Building Owner:

• Less tenant turnover
  
• Higher-quality building is more prestigious in the community and may command higher rent than other facilities
  

Advantages for Tenants

• Increases employee productivity
  
• Saves operating costs
  

Advantages for Our Industry

• Improves profitability (fees and gross margins)
  
• Helps retain customers
  

Summary

We looked at the financial effects of losses in productivity for an office building and a school classroom. Hopefully this exercise has given you a better understanding of how the costs related to people are indisputably the highest costs incurred when operating buildings.

In the past, most activities aimed at reducing costs have focused on energy consumption. Energy consumption is very important and should be analyzed appropriately in the proper context of overall cost reduction and efficiency. However, reducing people costs (by increasing productivity) offers a 100 to 1 advantage in payback over simply reducing energy costs alone.

Use your own imagination when dealing with productivity issues. Continual research is being conducted to try to more closely document the effects of productivity caused by the indoor environment.

REFERENCES

Abdou, O.A., and H.G. Lorsch, 1994. The impact of the indoor environment on occupant productivity - Part 1: Recent Studies, Measures and Costs . ASHRAE Transactions 100(2).

Abdou, O.A., and H.G. Lorsch, 1994. The impact of the indoor environment on occupant productivity - Part 2: Effects of Temperature . ASHRAE Transactions 100(2).

Abdou, O.A., and H.G. Lorsch, 1994. The impact of the indoor environment on occupant productivity - Part 3: Effects of Indoor Air Quality . ASHRAE Transactions 100(2).

ASHRAE Technical Data Bulletin, Vol. 10, No. 4. Impact of Indoor Environment on Productivity, 1994. American Society of Heating, Refrigerating and Air-Conditioning Engineers, Inc.; Atlanta, GA

ASHRAE Handbook, 1995: HVAC Applications. Office Buildings Load Characteristics, p. 3.6. American Society of Heating, Refrigerating and Air-Conditioning Engineers, Inc.; Atlanta, GA

BOMA. 1988. Office tenant moves and changes . Washington, DC: Building Owners and Managers Association International

Browning, William D., 1995. Greening The Building and The Bottom Line: Increasing Profits and Productivity Through Environmentally Responsive Design . Rocky Mountain Institute, Snowmass, CO. Excerpts from presentation at the Global Engineering Conference, Vancouver, BC; May 3-5, 1995.

Mean's Mechanical Cost Data - 19th Annual Edition, Copyright 1995, R.S. Means Co., Inc., Kingston, MA

U.S. Department of Commerce - Statistical Abstract of the United States 1994. 114th Edition; p. 168

Office Building Index; Energy User News, Vol. 20, Nos. 3, 4, 5, 7, 8, p. 4. Chilton Company, Radnor, PA