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“Real estate companies are not going to go bankrupt because they're inefficient. It's actually just a blip on the bottom line compared to much bigger drivers. Those business drivers are the keys to tackling climate change..."
—Carlos Flores
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Episode 81 is a conversation with Carlos Flores, director of the National Australian Built Environment Rating System (or NABERS for short).
We talked about the 15 year history of NABERS in Australia and how it has literally transformed the real estate industry by giving each stakeholder a core business reason why they should care about sustainability.
Then we talked about how other countries can learn from this case study and what the future holds. This was fascinating, and I had a smile on my face almost the whole time.
Without further ado, please enjoy the Nexus podcast with Carlos Flores.
You can find Carlos on LinkedIn.
Enjoy!
Music credit: Dream Big by Audiobinger—licensed under an Attribution-NonCommercial-ShareAlike License.
Note: transcript was created using an imperfect machine learning tool and lightly edited by a human (so you can get the gist). Please forgive errors!
James Dice: hello friends, welcome to the nexus podcast. I'm your host James dice each week. I fire questions that the leaders of the smart buildings industry to try to figure out where we're headed and how we can get there faster without all the marketing fluff. I'm pushing my learning to the limit. And I'm so glad to have you here following along.
James Dice: This episode is a conversation with Carlos Flores, director of the national Australian built environment rating system. Or neighbors for short. We talked about the 15 year history of neighbors and Australia. And how it has literally transformed the real estate industry by giving each stakeholder a core business reason why they should care about sustainability. Then we talked about how other countries can learn from this case study and what the future holds or rating systems like this. This was a [00:01:00] fascinating conversation. And I had a smile on my face almost the whole time. Without further ado, please enjoy the nexus podcast with Carlos Flores.
Hello, Carlos, welcome to the show. Can you introduce yourself please?
Carlos Flores: Thanks, James. So my name is Carlos Flores. I'm the director of a program called the national Australian built environment rating system or neighbors. Um, I'm just really excited to be here.
James Dice: I'm really excited to have you. So we've met a couple of weeks ago and I'm very grateful whenever I get an then nice introduction like this.
So it was like to thank the person that introduced us. So thanks Dan. Dan's out there somewhere. Uh, Avid listener. Um, So how'd you get into the buildings industry, Carlos.
Carlos Flores: I got into this industry by accident actually uh, I was born and raised in, in, in Chile, in south America I did mechanical engineering because I was really interested in energy and climate change. This is in the late nineties, early two thousands a little bit after the Kyoto protocol. So climate change was a big topic, nowhere near as big as it is today. It felt really [00:02:00] big at the time. And I got into energy policy first, so I was working on energy efficiency.
But I wasn't thinking so much about building serious, a lot about industry and energy generation. And how do we supply reliable energy to industry? So it was along those, those lines. And this was back in Chile where I was born and raised. And later when I migrated to Australia, this is going back into 2000 and.
I actually, it became, I was looking for work. I was just got there. I say recently immigrated professional. I got a job with neighbors for three weeks. It shows a contract with neighbors and that's how it landed in buildings.
So I just, I was wanting to work in renewables at the beginning. I got this job for three weeks that turned into six months, turned into a decade, working in buildings and, and a few months into it. I was just really enamored with the building sector. I just realized how big it is in terms of sustainability.
That is the biggest user of energy, the biggest emitter of carbon, the biggest user of water on, on cities. The biggest emitter [00:03:00] of waste across all sectors. So if you want to make a difference in sustainability that's where you want to go. You want to go into buildings and, and drive make a difference across many, many sectors of the economy that operate within four walls.
James Dice: That's brilliantly put, I love that. I totally agree. That's how I stumbled into it too. I was like, I'm vaguely interested in sustainability and I. I have no idea how the economy works, but building seem really cool. And then you start like peeling back the layers of the onion and you're like, oh, this is, this is massive.
So I love how you put that. What's it like being a Chilean in Australia that seems
Carlos Flores: Rare it is, it is rare. It's actually a, you know, this, the Chilean community in Sydney. So it's not, it's not inexistent. But is it's, it's a really interesting place to be a south American in general because historically Australia has had a lot of migration, is that you say country of migraines.
I think there, I was reading a stat recently that in Sydney, which is the largest cities, about 5 million people where I live about [00:04:00] 50% of people who live in Sydney today were not born in Australia. And that kind of tells you just the volume of migration to Australia is, is it's very, it's very big.
And, but that migration hasn't been from, from Latin America, for the most part, it's been from the UK, from China, from Southeast Asia. And so, you, if you're a Latin American in here at this, you do are, you are subject to like just some really interesting stereotypes, but almost all of them are very positive.
So people expect you to play guitar and they expect you to dance and they expect you to play soccer. And fortunately, all those three things I think that I do do it's part of my upbringing. So, I, I find that in general, it's been really great and because it's a country of migraines, there is a lot of tolerance for my accent.
And for people are used to experiencing lots of different cultures. And would you have issues? Like, like all countries and it's not like racism does not exist in Australia, it does exist. But there is a very, very significant percentage of the population that are. [00:05:00] Very understanding of migration in, in, in great part because they're migrants themselves or maybe their parents were, maybe they grandparents were, but, but many, many people can trace you know, part of their life or their heritage to recent migration from, from somewhere.
And that makes it quite a great place to really, to be, to be a migrant.
James Dice: Awesome. And before we unpack neighbors and get into the real topics of this podcast, we must get to my curiosity. Who's your favorite soccer?
Carlos Flores: I think I said really difficult question. I'm going to be on the record for this as well.
So back home, it's the easiest way for me to answer. This is a team called Kohler Kohler, which is the biggest Chilean club. And that's my team and overseas and internationally, it's really a, something that changes over time. I've always been a fan of Barcelona from when I was little in the late nineties with the, with the FIGO and they wrote the original veranda days.
So I'm going to go with Barcelona for now, even though this is not the greatest time to be a Barcelona fan and you won't be for a few years, but yeah, that's, [00:06:00] that's, that's my team. Awesome.
James Dice: All right. Let's jump into neighbors. And I have to give another shout out here. So Tyson suitor, who's Australian and is now gone around the world.
Doesn't live in Australia anymore. He told me, I don't know, probably like a year and a half ago. Dude, you have to look into neighbors and, and dig into what that's doing in Australia. So thanks to him as well. First. Like what what his neighbors let's start there.
Carlos Flores: Yeah, it's a neighbor sees a, it's a city fee.
It's a rating tool. It's a rating scheme for four buildings in sustainability. And we study five buildings on basically four areas, energy or energy efficiency and carbon water waste performance, a waste and recycling and indoor environment quality. And I think about neighbors who studies, it's a star rating.
So from zero to six stars, if you're a three stars, it means that you're using an average amount of energy. If you're doing the neighbors energy rating, an average amount of energy compared to, you know, a [00:07:00] similar office, if you have an office building in the same climate zone operating for the same hours.
So three stars means you're an average performer average compared to your peers and very similar buildings. If you're doing eh, If you're one-star, it means to you using about 75 or maybe 80% more energy consumption. So quite a bit more you can also be zero stars because as you may know, there is no limit to how bad the building can be and something that's going to be very bad.
But also they can be very good. So six stars in neighbors means you need to use about 80% less energy consumption than, than a, the average building in your market to get into six stars. It's not straightforward. It actually requires great technology, great management and a team that really wants it.
So often it takes years to actually get all the way there.
James Dice: The reference point then is all the other buildings in the country or the reference point. Some baseline
Carlos Flores: historical baseline. Their reference point is all the buildings in the country. So when we create a new neighbors [00:08:00] rating tool and we are at the moment, by the way, so we are expanding neighbors into the industrial building sectors.
So things like warehouses and cold stores and they, they, they call change basically. We actually gathered a ton of data before we created the rating to create benchmarks. So if we think, and you know, what is the what is the average amount of energy use for a cold storage facility that is located in the north of Australia, which is.
Just a tropical zone. So it's very hard. And how does that change if we move that to Tasmania, which it's actually quite cold, it's like the Northern United States. So what is the impact of climate for cold, cold storage facilities? Well, the answer is let's go and collect a lot of data and see is that 1% difference?
Or you say 25% difference. We, we just let the data tell us.
James Dice: Interesting. Okay. And then how does water. And waste work. It, does it boil all up into one star rating or are there separate star ratings for the water and the way [00:09:00]
Carlos Flores: that's a good question. We actually have separate star ratings for all of them.
So water works pretty much in the same way. You, you measure 12 months of water consumption. And then we use that to, to place the building on the, on the scale, depending on, you know, how much they using against similar buildings. And there's a, and it's the same for waste. I think that the thing interesting to reflect on that is that that's not the norm in sustainability.
Yeah, a lot of the ones that work across more than just energy and carbon, they aggregate everything into a single result. And this lots of schemes like that. There's a leading the U S and bring them in, in the UK and Europe and in green, sorry, in Australia. And I think those schemes are great. We work very closely with green star, which is the Australian version off of those sort of aggregator sustainability ratings.
But I think there's something to be said for actually having separate indicators. And when do you, and, and, you know, if, if you're, if let's just talk about like energy and water, just to, to keep the comparable simple, but there are things that you can do that will help you reduce energy and. But you will [00:10:00] use more water consumption and they base example of that is is what cooling towers, right?
So you're, you're saving energy by actively using a water input in the water in the atmosphere. And so that's, that's great if you're trying to reduce carbon, but it's not so great if you actually have water issues and like in a place like California in the U S or almost everywhere in Australia. And on the other hand, you could use, you know, dry cooling towers, which means they use no water, which is great for water efficiency, but actually it means that you're using a little more energy.
So I think our approach to that. Instead of aggregating them into a single indicator, let's actually show that there is attention between those two things. If we want to be very good at energy efficiency and water efficiency at the same time, then, you know, regardless of what cooling towers you choose, you might need to look for other areas in your building to compensate for the fact that you're using more water.
Can we use less water elsewhere then if we still want to be water efficient. So we're trying to make that more transparent [00:11:00] by having different steroids.
James Dice: Fascinating. All right. So when did this start and why did it, why did whoever created it?
Carlos Flores: Yeah, so this is um, way back in time. James nevus started around 1997 which is 24 years ago.
I was in high school, so I was not the creator of neighbors as you can imagine. And it started by it started really as a very small program back in the night. What happened over time is that over the first year, three years, the key principles that we still use today, we kind of define, and I think maybe the most important of them is that somebody back 22, 23 years ago made the great decision that neighbors needed to be not based on features, which is how most rating tools work even today.
So we didn't set a fire built in based on, you know, what kind of windows do you have single glaze in double glazing or is the frame made of aluminum or S or more insulating material, or do you have, how many millimeters of insulation do you have? How many life fittings [00:12:00] do you have? Do you have solar panels or not?
We didn't do any of that. We actually go straight into the meter. Are you using more or less energy than comparable buildings? And that would, that means that that design decision is that the only way to get a better neighbors ratings using less. Or using less water or producing less waste. There's no other way.
So it actually encourages everyone not to create a lot of features just to get a better rating. If you're going to install the feature then it needs to work. Otherwise you're not going to get any recognition, but it also meant that a lot of people have looked for a lot of other ones. To reduce energy and water and becoming more sustainable that it's not about to in big retrofits.
So we're doing a lot of small things on a daily basis, turning things off when no one needs it. Like a lot of those things do get a lot of recognition in neighbors because if they save you 20% energy consumption, you're going to get to the next start writing. And to me that, that was that very late in the United it's a lot of foresight.
It was about the same time that the, the U S which is the only country really, that has a [00:13:00] scheme that is about this long or study in 1997. So I always wonder if we were talking to each other back in the nineties but the U S the energy star program in buildings is also based on, on real energy consumption for 12 months.
It doesn't communicate in types of stars. But in many other ways is a, is a sister program to neighbors, maybe the closest program that we have in, in the world. And we actually meet with them every month just because we have so many things in common and so many things to, to, to learn from each other.
So maybe going back to that branch, there's this beautiful side branch James, which you probably see a lot in this in this interview, but is that when, once we made that decision, A lot of things became very clear that we needed to make design changes to neighbor. So we should build around the fact that it's based on metering.
So it meant that we needed a standard really high-quality standard that was publicly available. And then people could follow, you know, what's including neighbors and how do I account for it and how do I say target? So we created a standard around that. And then a year or two [00:14:00] later, we realized that the self-reported standard gives you very mixed results when it comes to quality.
So a couple of years later we realized we actually need train assessors that know how to use this methodology and we need auditing. So every building that is certified in the Navy, it's actually audited by somebody in, and this is part of the things that we do as a team. And those bare-bones, all of which were set in the late night is, are still the core of how nevus works 21, 22 years later.
James Dice: Fascinating. I'm perceiving there to be a difference between neighbors and energy star though. So the way I understand it and totally correct me if I'm wrong and someone will, if you don't trust me um, energy star, their reference point is see Beck's data, which is commercial building energy consumption survey.
And it only happens every couple years and some of the results only come out every several years. And so you could be like right now, for [00:15:00] instance, if you were to go and then energy start, your reference building would probably be based on the 2013 survey. So it's like nine year 10 and whatever that is eight years old at this point.
Right? So you're not actually being compared to your peers. It's a big myth. I think people assume they're being compared to their peers, but you're not you're being compared to your peers. That responded to that survey eight years ago. Right. So is that, is there a difference in,
Carlos Flores: I think there's a, there's a, quite a significant difference, but we do to begin with, we would love to have a survey, like sea bags in Australia.
So I think having that, it's just it's just brilliant. Yeah. And, and because we don't have that, we have to design everything. We do, we have to work around the fact that we don't have that database. That's. I think that's a really great thing too, for you to have um, I think the neighbors works a bit differently in the sense that we actually do not change our scale once.
The scale, we don't update what the average is every year or [00:16:00] every couple of years. And I, and that's by design. So they, what we're trying to do is to create something that buildings can set targets at the individual level or at the portfolio level, it target for this year and for next year, and for three years for now, 2025 and by 2030, and most of the big portfolios in Australia have that.
And so instead of changing the star rating, if we change the star rating all the time, people really struggled to be able to set targets. So you don't know what they're going to be in the future. So instead of doing that, we kind of change the meaning of the stars. So we, we call three stars average today.
But the reality is that when we released this bear star scale, it was 2.5 stars. And now we call that below average. And, and to be honest, the average is really moving now into 3.5 stars. So we might change the meaning of that again. But to me that there is very easy to get into late theoretical debates.
How star ratings should be changing. But the reality is that star ratings and programs like neighbors are a means to an end. And the end is not to have the best, most [00:17:00] perfect scale in the world. The end is to dry, deep energy consumption, carbon emissions and water reduction at scale across whole markets as fast as possible.
So if we're actually achieving that, then the scale is working well. To me, that's the most important KPI for scale. If people have major issues and they turn trust a scale that often translate into the market, not moving as fast. And then we'll definitely have to do something about that, but that approach of keeping the scale fix and allow the market to just move towards the upper bands of the scale is actually worked really well in the last ticket.
And probably we'll get into that in, in, in a few minutes.
James Dice: Yeah, the word market we're going to, we're going to dig into that word market real quick. Before we do that though. What types of buildings or verticals does neighbors rate
Carlos Flores: today? Right. So the answer is that we are extending to expand into all sectors, all the big buildings in, in, in the market.
We don't cover all of them [00:18:00] yet, but we have a roadmap to expand to one or two new sectors every year. Currently we work at with offices, shopping centers, data centers, hotels hospitals, and and, and a few other sectors. But we are also expanding to say senior care, I think is it's called in the U S in Australia.
It's called the residential aged care system. And we're also expanding to industrial buildings. Apparently. We are going to expand to schools and big box retail and a few other sectors as well. So I think there, by the end of 2024, neighbors really should cover the majority of the big sectors that make up maybe 80% of, or 90% of the built environment.
James Dice: With that context set. I really want to dig into this story that you told me about when we first met and then, you know, Tyson told me about a long time ago of what I would call market transformation because of the rating system. And it sounds like there's been market transformation.
That's happened specifically in offices and maybe [00:19:00] also in retail, but maybe it's happening in all the verticals that you just talked about. I call this, so when I teach the foundations course, I call this there, there, like there needs to be a non-energy business, like core business reason for people to care about technology, to care about sustainability.
And this is a perfect example of a non-energy core business, reason to care being created out of a sustainability rating. So let's start this off by just talking about like the way things were before Nabors was created, but 15 years ago, right before this transformation. Started, what was it like?
Carlos Flores: Yeah.
So by the way, I love the way you frame the, the need for non-energy drivers to drive sustainability and I could not agree anymore. And I think that that's stronger. My experience that if you think about this energy consumption is only 1%, sometimes less than 1%, [00:20:00] couple of sectors where it's a bit bigger than that.
But for the most part, a lot of billing companies are not going to go bankrupt because they're inefficient. It's not, it's actually just going to be a bleep on, on the bottom line compared to other much bigger drivers in this activists. So if you want to tackle climate change and you want to say societal change in energy efficiency, and a lot of the companies investing the time to realize them, the opportunities we've been talking about for four decades, but a lot of people that don't pursue if you want to see that kind of change, you need to tap into drivers that are stronger than Joe.
You know, reducing 10% of your, 1% of your cost. There needs to be a lot stronger than that. I think if we go back 50 years ago in. Most property companies did not have a sustainability team, I think is the most notable, noticeable thing that you say walking into the office, who is the sustainability manager.
There isn't one, there isn't a team. And there isn't a manager. There would have been an operations manager and that person's role energy efficiency. Would it be part of that, but it would have been [00:21:00] a beside. And much more importantly, it would have been um, you know, it is the same person that is in charge of the facilities need to work well in our clients need to be happy.
So, and that is obviously core business for an office company. So this would have been a, you know, a less important secondary KPI that you would have done on a part-time capacity. I think that's like very noticeable and that is that building owners create demand for services in the sector. So they don't have somebody or a team or the interest enough to actually drive is it means that the size of the energy efficiency sector was a lot smaller.
And it means that the facility management profession, they didn't have. Environmental KPIs for the most part, because the owners weren't asking for that. So it means that they at this, the number of professionals with a lot of experience in this space was just significantly smaller. It's not that it didn't exist.
It's been there for four decades, but it was very, very small compared to now. And to me that's like the most visible thing, 2005. Where is the, where is everybody? Where are [00:22:00] you? Sustainability sector? What happened to it? I think that's the first impression that you will get, especially if you're wearing the Australian market today, going back just like, where is everybody?
James Dice: And so I think it's fair to say that sustainability was not connected to the core business in any way
Carlos Flores: back then. Yeah, I think very, very fair to say, even in the leaders in sustainable. The wearing really leading in, in, in a very meaningful way back in 2005. Totally.
James Dice: All right. So let's talk about the ways in which neighbors has added drivers and sort of created that core business reason to care.
What was like the first step that happened.
Carlos Flores: Right. So NABERS has been by 2005. It's been around for, you know, six to seven years by this point, but it wasn't driving, you know, whole of sector transformation where we said, if I am the crown jewel of a, you know, a certain portfolio, the latest the [00:23:00] flashiest building.
And by the way, even though. Often got poor ratings because they thought he was really good. And then in practice, they were using twice as much energy, right? So that's, that's a playing field in 2005. And what happened is, and maybe going into like, how do we get drivers beyond just energy costs? Are they older things that we can tap into in this market?
And the governments of Australia. So Australia is a Federation speed, like the U S where you have the state eight states and, and the Australian government. They came together because we are the biggest employers of people in the country then, and now it's about 20% of the Australian population works for the government at some, at some level.
And because we're the biggest employer, we're also the biggest renter of office space. Bye. Bye bye lodge. If, just to give you a sense in cities like Sydney and Melbourne, big city is 5 million people. About 20 to 25% of all the floor space is actually rented by governments, and that is from premium to, to meet tier two, to, to the, you know, the lower quality.
Be great to see great buildings, the whole [00:24:00] market. We are a big player on every segment of the market. We basically came together and said, let's use our procurement power to reward organizations that are doing something for the environment and give motivation for a lot of the ones that are not investing in energy efficiency and reducing emissions to actually do so.
And we did it by basically putting in requirements from this point onwards, if you want to lease, if you want it to sign any, lease in a building going forward, you need to have a nevus rating. You must have that. Before we actually signed that lease, it needs to meet a minimum energy efficiency requirement.
And that back in the day, it was four stars and it's been growing over time, but it's the concept has been applied the same and what he meant in change visit amazing and almost overnight. Because because of what it means for a property company, this is tapping into a driver is very deep rooted into the psychology of CFOs in, in an office portfolio.
What are you doing in office portfolio? You rent space. How do you lose a lot of money in property by having vacant [00:25:00] space as as we've seen in a lot of conversations around COVID-19 right. So you don't want to have vacancies and that's something that everybody in office companies really understand that that is that's a problem.
And what this policy meant was if we're unwilling to invest on energy efficiency or reducing our emissions, we're going to miss out on 20% of the market going for. Forever, like from this point forward. And it means that our portfolio might actually have 10, 15, 20% vacancies in the future. If we actually don't do something about that.
So the risk is is, is huge for a property company. But also the reward is really big. So we sell a lot of them coming forward and saying, well, if we actually do invest in energy efficient, We're going to put this asset that is going to be, you know, it tendons going to move in 18 months. We're going to put that asset into a smaller portion of the market that is going to get 100% of that business from the government.
And the business from the government is actually really, really great. They're very, very long lease as much longer than most of the companies. It's very secure because [00:26:00] obviously if the government goes bankrupt and we have much bigger problems than just that lease. And so they, it was a really big. I am in a really big stick at the same time.
And we sell within about a year, the majority of the big portfolios in Australia, certifying older buildings overnight, not just the good ones, but also the ones they're not so good ones, the ones that were getting zero stars, one star, the whole portfolio. And then we've seen that group of buildings, just reacting and improving very fast and never stopping.
It's been 15 years of that within two years, almost every company had a sustainability manager. Some of them had a sustainability team of multiple people. They had targets by certain years and a lot of that, the origin was a policy that really put energy efficiency on the map as a, you know, big reward, big opportunity, big risk for the business, not just for the cost of energy use.
Fascinating.
James Dice: So big lover tenants that are government. [00:27:00] Yeah. Government. Fascinating. Okay. So that was phase one. What was, what was the next phase?
Carlos Flores: Phase two was a, what we call in Australia, mandatory disclosure or, or just disclosure. It came in 2010 and, and just to see the context, by the time we got 2010, like five years after this government policy, we had about maybe 40, maybe even 50% of buildings participating in neighbors already on a voluntary capacity.
So nobody was obliged to get an A-plus rating, but they were doing so because of that policy and the fact that by this point they had their own motivations. A lot of them were really talking the sustainability talk by this point in 2010. And what happened then is that the, the Australian government mandated the use of neighbors for the disclosure of neighbors for financial transactions in offices.
So if you want to, if you want to sell an office building, or if you want to. It's space inside of an SBS building. Obviously renting is the most common of the two. If you want to do either of those, you must have enabled trading before that. [00:28:00] Otherwise you can not do their financial transaction. You must have that and you must make it public everywhere.
You need to put it outside of your building when you're advertising it, you need to put it on any website with the space has been advertised. You need to put it on the lease with tenants. So it meant that you could not transact in the office market without actually disclosing and providing transparency on am I doing better for the environment than other buildings in this.
And obviously what happened is that in any market, you will have some buildings that are leading and they're doing very well in that. We're very happy that they results were being publicly used and they were looking pretty good. But the reality is that a lot of buildings had not done any work in sustainability or energy efficiency for decades.
And a lot of them came into neighbors and there were zero stars, one star, this had a very, very poor score. And now it wasn't just something that they knew. A lot of them didn't know that by the way. So it was a shock to them. First of all. Oh, wow. We're using a little more energy than almost anyone else.
A lot of people just don't know that even today in local markets. But also the fact that they clients were going to [00:29:00] know, and then we're going to know before they were clients. So your, your, your presentation card for a client in the office market was they had this building is beautiful. It's premium, great location and terribly unsustainable.
And that. It's enough to drive a portion of the market that really cares about that off. There's a lot of companies imagine today, every company had to walk in into, into a work environment. And it, you knew, and every employee knew that the building is very unsustainable. What percentage of your own employees will be unhappy with that?
I, I I'm, I believe what if you, and we've seen that in Australia as well. So that shock of actually having to show everyone that you, your performance is terrible and you're using two, maybe three times more energy than other buildings really draw the entire market into action. So we've seen that was in 20.
And those group of buildings have been reducing that decade between then and now 2021. They've reduced energy consumption by about 30%. That is the entirety of the office market in Australia. It's not the leaders is [00:30:00] every single building, reducing energy consumption. And what's like likely to be the fastest reduction of energy use and carbon emissions in any building sector, in any country that was last decade in the office market.
And that policy was also the first of its kind in the world, like the first haul of disclosure across a whole market, using a performance rating where the only way to get better is using less. And that. That was another driver and the driver is like the naming and shaming driver as well as if I'm doing really well, everyone will know that I'm doing really well.
And I can attract tenants that are actually looking for sustainability as part of the core ethos as a company as well. So that's been, that's, that's faced you. And the great thing about that by the way, is that it produces so much data. We, I think Australia is probably the only country where we have 11 or 12 years of data of pretty much any building in that market for, for those 12 years.
And a lot of that data, by the way, it's publicly available on our website. So if this a load of data geeks like me out there, and you really want to [00:31:00] analyze a lot of trends and, and a lot of that data you can download from the Navy's website.
James Dice: Fascinating. All right. What's phase three
Carlos Flores: then. Well, phase three is not a driver that we orchestrated.
So unlike the other two, there were policies that the government was working on. Phase three is a global trend, which is invest. And that's been going on also for, from, for the past decade. But it is been very strong in the last five years. And what it means is that there are a lot of investors that are actively looking into the energy performance of portfolios.
And this is by the way, particularly true for companies that are exposed to. So if you're, if you're a private portfolio with one owner, you're not very exposed to, to to invest the drivers. But if you're a company that is listed on the Australian stock exchange you're, you, anyone can invest in your company, you can invest in that company.
Right. And it means that the price of your stock is really important. And the price of your stock is a [00:32:00] function of how many people are willing to buy that stock. So we have seen a lot of interest from investors and not just interest, but real pressure for better sustainability indicators.
And because they receive say certification system of your carbon footprint and your energy consumption, you get compare against all the buildings in the market. It's got all the things that a lot of investors want to know. I want them to be simple, to understand, are you one star or five stars? Almost anyone can engage in that kind of level of conversation.
And number two it allows them to track while you're doing better than that. This last year, you have four stars. Why is your rating 3.5 stars now? And we have seen anecdotally, and this is the great thing as well about working at scale with all the buildings in this market is that we get all the hard data.
So we have a lot of trends, but we also get a lot of the stories that go along with it. And that's a little more anecdotal, but I have heard a lot of people saying, you know, we had an issue with the controls in this building for two months. Any meant that it was just enough to drop us to the next, the next star rating.
[00:33:00] Cause we use 4% more energy than last year. We dropped to 3.5 stars and I got phone calls from a fund manager in Amsterdam about what are you doing? I'm investing in this portfolio. And you're meant to get better in doing more about the fight against climate change, not less. And I think that that kind of pressure is actually really healthy pressure because he really drives a lot of people to think about.
The energy performance of your buildings. These are big machines with lots of parts. If you want to become more sustainable, it's not just about doing a deep retrofit. Once every 50 years, that's not the way we actually win against climate change. It is about looking at this every day. It's about smart buildings, about good management.
It's about doing the, the little things it's I get it. It's like I see it as becoming an Olympian. You don't get you don't, you don't win a gold medal at the Olympics by buying the most expensive shoes and shorts and t-shirts that you can and then you think that's going to make you a gold medalist.
That might be good. Shoes might be an important part. [00:34:00] But the most important part is that this is about doing the little things every day and working really hard. And the buildings that we see getting to six stars in, in neighbors, but all of them have in common is that they have good. Synology not always the latest technology by the way, but good technology and really good systems.
Couple. Excellent management. And those things always have to go together because you don't get to use 80% less energy use than most buildings in your market. By doing nothing, you get to do it by doing the unsexy things. There's people who do nightmare. And the night audit is exactly what it sounds like you say, at least sexiest thing you can do in sustainability.
Somebody goes into a building on Tuesday at two in the morning and they go, why is 25% of the building load operating? And what's on. And literally go one by one, these six things we need to change the controls. Can we do that tomorrow? And they do that. And then they go again, the next season in the winter.
And what is on, on Wednesday or on Saturday and three in the morning. Well, this [00:35:00] you'd be surprised. Lots of things are on, on Saturday. They shouldn't be, or, and those are the kinds of things that a lot of people are doing to get to those star ratings. And I think those things cause often almost nothing like that is much, much cheaper than doing a deep retrofit for the whole asset.
And to me, that's been one of the most valuable lessons in, in, in working in this, in a space where a star rating rewards, reducing energy instead of installing specific features is that people get really creative on. What can we do to actually reduce energy consumption has been a huge driver of analytics in the last few years, as you well know.
And a lot of that has been well-documented on your podcasts. And, and the interesting thing about that trend is that in Australia is very, very focused on how do we actually maintain or improve the star rating. So he's looking at a lot of those small opportunities every day. Some companies, what they do is they take you know, they, they look at data from last week, for example, and they go [00:36:00] last week, you actually used, you know, 13%, less than a normal week.
What did you do? Like literally just using data to get them to reflect. Did you do something last week? Maybe we could do on an ongoing basis. Like what go back, Tracy steps. Did you owe somebody when they're on, when all this mechanical contractor, when they're on Wednesday talk to them and let's see what, what they did.
And because of that, because you're looking at that and looking for those opportunities. So actively people can find, you know, 50, 60% reductions, not across one building, but across portfolios. And that is what a lot of the leaders in the Australia market look like today. If you look at companies like GBT, Lend-Lease, Texas sock liner, a lot of others.
If you look at their sustainability reports, going back 10 years, a lot of them have reduced energy use by 50% or 60%, which is almost unheard of in a single decade and is for the most. Looking at doing this more things, better management, better technology. And instead of them spending a billion dollars on upgrades, it's [00:37:00] not like that it's actually a lower, much, much lower cost when you can muster the the attention and the time.
And you have the motivation, the drivers to actually improve those buildings.
James Dice: That's awesome. Nice audits are one of my favorite things. So whenever I used to do hospital, I used to do a lot of hospital retrocommissioning and do yeah. Would do they'd be out of town, so you'd be staying in a hotel. So what we do is we would like, you know, spend all day at the hospital, do the normal stuff, do the audit, you know, that kind of thing, hanging out different mechanical rooms, installing data, loggers, those types of things.
Then we would go out to dinner, have a few drinks, you know, extend dinner until, until I got to like 10, 11:00 PM. Before we went back to the hotel, we would actually go back to the hospital and walk around and take different pictures. Right. Which, which departments. No. Everyone thinks a hospital runs 24 7 actually.
No. About [00:38:00] 30% of the hospital runs 24 7. And so you go around all the other places and night audits are an underused energy hack for
Carlos Flores: sure. A hundred percent. It's so fascinating. You've done. I didn't know that you've, that you've done that in the past. And I think that the fascinating things that we work with, a lot of people that do not know what is, and is.
If you're doing one, you get to see a place that is very familiar. The most people have seen, most people have been to an office or a hospital in the lives. Um, But in ways that no one has ever seen when you walk through an office at night is so different and it's so unusual if you work through your hospital, when there's no one, there it's massive sprawling hospitals that have been built through 10 extensions over our last 40 years.
And they have, you know, 16 different BMS is like slightly saturating, but some of them are just a very, disjoined really big disjointed sort of, beast and getting to see that at night, it's just such a fascinating concept. Is it teaches you a lot about how is really [00:39:00] operating practice and also a lot of the bad things that can happen in buildings.
You see them at night when they shouldn't be happening and they're happening. Yeah.
James Dice: Yeah. And all the reasons why the next morning conversation was always the best, because it was like, did you know that this runs 24 7 and no one knew and then unpacking the reason why that is and like getting to the reason, like the root cause of it, you, you uncover a million different reasons why things are running 24 7 anyway.
Yeah.
Carlos Flores: And you know, no, totally. And I think that the, the, that example about things running for a long time and people not knowing it's just so common. That is so common that I, I, I am happy to say this on record that I would say the majority of buildings, every. Have things that are running when they shouldn't at denied.
Like the great majority is significantly more than 50%, maybe even 80, maybe even 90%. That is just how common it is and how underutilized night audits are as a, [00:40:00] as a tool. And we've seen by the way, it's not just in energy. We've seen this in water. Water is even worse because water tends to be a little more inexpensive in a lot of places, not everywhere is very inexpensive in Australia.
And it means that people pay less attention to it. And we've had lots of people doing it, a water rating, like a neighbor's water rating for the first time. And then they get zero stars and they're really angry. And then they realized they had a leak going into that. Didn't go into the building, so it wasn't visible.
But it was in their meters are going straight into the ground. And they've probably had it for like three or four years. Uh, And often this is the one example I'm thinking about now is a really high profile building that was in Sydney. Built to be very sustainable at the time, they were trying to make it one of the most sustainable in the world a few years ago.
And there was a water leak that was invisible. And then you did a rating and then the questioning about why do zero stars. You're not even on the scale outside of the scale. Why is that? Oh, we're using two or three times more water than in the rest of our portfolio. Why is that? And then you [00:41:00] found each leak that those cases are just so common and such long low-hanging fruit to make a really big difference in, in climate changes, sensibility.
James Dice: Hey guys, just another quick note from our sponsor Nexus labs. And then we'll get back to the show. This episode is brought to you by nexus foundations, our introductory course on the smart buildings industry. If you're new to the industry, this course is for you. If you're an industry vet, but want to understand how technology is changing things.
This course is also for you. The alumni are raving about the content, which they say pulls it all together, and they also love getting to meet the other students on the weekly zoom calls and in the private chat room, you can find out more about the course@courses.nexus lab. Start online. All right, back to the interview
Fascinating. All right. So let's, let's kind of reflect on. Has happened then after those three phases have taken new counts, we talked about where we were 15 years ago. And what are like, what are the way things are today that, that don't [00:42:00] match the rest of the world. Right. And one of the things I'm thinking about here is you, you started talking about how this was affecting all these different stakeholders.
And it sounds like it's like at the contract level, right? If I'm a JLL or a CVRE managing a facility, or if I'm a contractor servicing a facility, it sounds like neighbors it's affecting all the core business of not just the landlord. It's affecting the core business of all the stakeholders that are serving that building.
Am I right about
Carlos Flores: right? Yes. And I think that's one of the really fascinating things about the kind of the Australian model in the last decade. I do think that it's not just neighbors. It's really about using neighbors to be a really big ecosystem with lots of drivers, but, but you're totally right.
It's actually gone way, way beyond just the sustainability team or even the operations team. And he's going to a lot like this really, really big bubble around those teams. And I think they're, they're the best way to look at. So let's go one by one. I think facility managers are [00:43:00] fascinating. The case because facility managers worked for an owner.
So a company like CVRE in JLL, they might want to do a lot of those things, but if the owner is not on board, they actually can't really do a lot in sustainability with zero budget. And a lot of them today actually have neighbors star rating KPIs, as saying, you're taking a new contract for this building that is been operating on 4.5 stars.
You need to maintain that that's part of your contract. So whoever is going to go into that asset energy, performance and carbon performance is going to be a core part of their job. It's not going to be just a little side thing. And often a lot of these contracts have bonuses if you improve your ratings or even KPIs to improve these writings, which means the management team also has this responsibility, not just to ran the asset as well as they can, but to improve it along the course of, of of that lace.
So the management profession's changed just deeply. And, and just to give you an idea of how deeply did. The CEO of the facility management association sits in, in, in a steering [00:44:00] committee, which is the, the board, the sort of governance our program. And he's a huge champion of neighbors. And he talks about you know, how influential neighbors has been in really helping the facility management profession to be a really major driver of sustainability in Australia, instead of being just a passive player that that is secondary to other players in the sector.
So that's that's facility managers. Obviously owners, we talked about them before they have lots and lots of KPIs, partly because of investment, partly because of tenant demand. And partly because these companies have over those 15 years, that become like real true leaders in sustainability. So if you look at things like grasp today, the global real estate sustainability.
I don't know if you might have noticed that in the countries, but we definitely noticed that in, in Australia that every year they'd launch, obviously they rank over 1000 property companies on, on, on their survey and, and you get a score, you know, how are you doing against your peers and your region, how you're doing against the [00:45:00] rest of the world?
Ingress in the office market it's been around for 10 years every year. The top companies being an Australian company 10 years in a row in Australia is actually a small countries, less than 1% of the respondents to the survey are Australians. But the number one sport is being an Australian company every year.
And that's already impressive on its own, but it could have been maybe one company with a very enlightened it board and the sustainability team. But reality is that hardly every in any year being the same company is a different company every year. So there's say six or seven Australian companies fighting every year for the number one.
And I think that tells you it, not a lot about those companies, which are great and we're really fortunate to work with them, but he tells me a lot about the Australian ecosystem or just how important sustainability has become, how many companies are really internalizing it and, and invest in the law to, you know, compete in.
We want to be more sustainable than any other company in this market, in any other company in the world. [00:46:00] And I think that is such a visible in, in, in simple example, especially cause that service not run in Australia. It's run from Europe, from Amsterdam and almost every major portfolio you can think of in almost every region discloses their their indicators in, in, in grasp as well.
By the way, it's the same situation in the Dow Jones, sustainability index. Often Australian companies are the number one in offices and retail as well. And, and again, I do think it's a sign of, of that. And James, I'm not going to talk about a lot of the other players, but at a high level, just to see how deep this goes.
It goes not only into investors owners and facility managers, it goes into a lot of mechanical contractors and HVAC companies and analytics, and the market for analytics in Australia is huge. There's this probably as a proportion for its size, maybe the largest in the world's really big given that Australia is a very small country is you know, not even half of California in size.
And we've seen a lot of lawyers really coming into this space or leasing profession has a lot of this neighbors closest [00:47:00] in green leases that are constantly evolving around you know, what's the best what's best in practice in, in, in in energy performance. When we're talking about sustainable finance Australia is perhaps the single country in the world with the most green bonds and sustainability to link bones in the world as a proportion for its size.
A lot of them are in, in the building sector because the building sector in Australia by far it's. The leading edge of sustainability across all sectors in the country. And so suddenly it's this like ecosystem of tens of thousands of people working around many different parts of sustainability in different parts of the equation.
But a lot of that is powered by the fact that we have one star rating that is very simple and where the only way to get better, it's using less energy. And I think going back to all the way to the beginning, that design feature from somebody in 1997, it's been so influential because it means that if you're using NABERS for anything, any drivers built around it, it means that what you're really creating [00:48:00] is a driver for using less.
And that I think has been one of the, you know, one of the pillars of a lot of that transformation we've been saying
James Dice: so fascinating. The one thing we didn't talk about in terms of like the way things are now, I want, I want to get to like the future of neighbors and like expansion to other regions.
The one thing we didn't talk about though, is like the, when I think about real estate, I think about the value of an asset. Right. And. I think maybe to summarize all the things we talked about, like buildings with higher neighbors ratings are worth more. It seems like then buildings with lower rate neighbors ratings.
And is there like statistics on that and
Carlos Flores: published data? Yeah, there is so much published data these days. So I'm going to tell you like four sources at a high level. If people want to look into them, but there's a company called real investment analytics that has been tracking neighbor's ratings against financial performance for a lot of property companies for a decade every quarter.
So it goes way back. You can [00:49:00] see lots of trends on that. In more recently we've seen Morgan Stanley JLL Knight, Frank, all of them releasing their own versions of matching neighbors with the financial performance data that they have in their database, which are very big because some of these companies are just really, really major players in the leasing space.
And what we have seen is a really clear trend. A lot of these things we talked about before those drivers. Government's using the procurement power. It, the shame on disclosure investors be more willing to invest in companies doing more. A lot of those things are translating into the financial stability in a really, really strong way and, and, and growing.
So it's been bigger and bigger in the last few years. Do you, if your examples bill, if you're in the office market, for example you you have, if you have a higher neighbors energy rating, you have significantly longer leases on average. So, and that's one of the key indicators you look in in office is, well, how long is our leases, right?
And if your leases expire on average very soon you could have a lot of vacancies and that's a [00:50:00] really big financial risk indicator. So longer leases is actually really important and. Eh, buildings with high neighbors ratings have longer leases, partly because the government is renting those and the rent for longer.
And partly because a lot of companies now are doing the same thing that the government's big banks, a lot of big portfolios are just saying, we are not going to go into buildings that are not sustainable anymore. So longer leases. We've also seen significantly lower vacancies in buildings with high neighbors ratings.
And again, it's the same, it's the same driver. If there are less people in the market that are willing to go into an unsustainable building, then you will see higher vacancies on average. And we do see those very strongly and all of those things. And by the way, this morning indicators, but they really aggregate into the value of the asset.
So if you're selling a building all else equal, you sail in a building with a high NABERS rating you can get anywhere between 8% to 18%. For that asset with a higher nevus rating, all else equal. And in say to 18%, because a lot of these studies have [00:51:00] different methodologies. So you, so it's sometimes a little bit hard to compare it, but a lot of them go around that figure between 10% plus in 10%, if you're selling a 300 million.
You know, building office asset in the heart of Sydney or Melbourne 300, 10% of $300 million is $30 million. It is a lot more money than bringing in that building into high performance is ever going to be. And he's such a powerful driver on its own. And because this these understandings of, Hey, higher sustainability performance is translating into things that are much, much bigger than the energy are ever going to be.
We actually seen that become a driver on its own. We've seen lots of companies now going, we're going to go and buy poor performer buildings in this market. Do they mop and improve them and all their costs of two to three years, and then we're going to sell them for 10% more a few years later. And we're going to make a 400% return on that investment.
This actually quite a few companies doing that now as well. It really is becoming this snowball of drivers that [00:52:00] reinforce each other in this mesh of lots of drivers. So many that it's actually really hard to track them all. So there's lots of drivers that are happening in the market right now that not even I know about them, because there's just so many and so desegregated that it's just really difficult to do to track them all.
Wow,
James Dice: this makes me so
Carlos Flores: excited. It is really exciting. You know what James said? I think that it, maybe just to add a caveat into a lot of this, so we have been able to do this in a few sectors at this scale, like driving this kind of change. And to me that is it's exciting because a lot of these changes happen, you know, last decade with last decades, technology and expertise and costs.
So we're actually much better place now to do it. You know, something like that, this decade across most building sectors in most countries. But the key really is about. Creating an indicator that rewards the right thing, which is reducing energy use and then creating a lot of these [00:53:00] drivers around it.
It doesn't happen on its own. It's not just a rating tool. They're there. The Lincoln of those indicators to the right tools is really important. And it's, it's why it's so important where at a point, for example, in, in, in spaces, like, like sustainable finance, where there's a lot of things going on, but a lot of the indicators are not quite there yet, or, or everyone chooses their own indicator.
So we have the drivers. But we haven't linked to very well to we want this driver to drive the right behavior, not just to drive greenwashing. And at the moment is you see a letter of green bonds that are very green and a lot of green bonds that are just marketing. And it's very different, too difficult to tell them apart.
And a lot of our RGO about say program and also with a lot of people in this space around the world is how do we channel that into the ride metrics? So we, you know, use that force as a force for good in climate change instead of as having, you know, a lot of a lot of media releases, but you know, we're not making the planet any [00:54:00] safer because we're not really reducing or accelerating are, are trying to use in producing less emissions.
I do, I'm really hopeful in that space. I do think that we have really great metrics in a lot of countries. It's not just neighbors. And in Australia, we are actually working on a SAML finance framework ourselves to be able to, you know, if you have neighbors ratings, how do you use them? It really credible ways to be able to you know, get all the recognition that you want when you do in a green loan, but also to help us really accelerate the, the trajectory of Australia, reducing its emissions in the built environment.
James Dice: Really cool. So that's like one of the next phases
Carlos Flores: here, the a hundred percent, it's definitely something we're working really actively on.
James Dice: Cool. How about expansion into other countries? So the one thing when I'm listening to you this whole time, and I'm like smiling ear to ear, for those of you that are listening on just audio.
But the one thing I'm thinking this whole time is like, why aren't other [00:55:00] countries doing this? And I know that our other countries are doing this, but like, not like this, I guess is how I would put it. And it obviously hasn't had the market transformation yet. Like if I think about the U S we've had lots and lots of great city programs get passed and several states have done so as well, but is the market transformed?
I don't think so at this point. Right. And so what I guess I want to hear from you broadly on expansion, like, how does this model. Get expanded into the rest of the world, because if we're honest with ourselves, we need this transformation to happen. Every building down to my new house I'm sitting in right now.
Right. I'll gladly participate in the city doing this to my home. Right. And then I want to hear about how neighbors, like is this actual program getting expanded to other people.
Carlos Flores: I think that the topic about how do you drive transformation across a whole [00:56:00] market? SISA is a, it's a tricky one, I think.
And I think the U S is a really great case of how different conditions on, on how the country structure or the size of the country, or, or sometimes politics can actually really influence what are the options that you have at hand? Then? One thing w we have been really fortunate is, and this is nothing to do with neighbors is that Australia is a relatively small country, 25 million people.
It's not that big. And because of that, and also we, biggest neighbors was so early, we were able to create something national way before the states were actually creating the. Separate sort of splinter initiatives. So we have this like unified country and governments working together using one scheme.
That is the same for every city and every country. If you are a property company in five different states is the same thing. You don't have to like work out different tools. And so that gives it, it means that the scheme is low cost, low, easier for people to know how it works, because it works everywhere in the [00:57:00] same way.
And that is something that we've been really. To have that is very difficult to do in a country like the United States, if, you know, let alone just, just because of population alone, that's very difficult to do so to be country. And obviously all the states are not in the same page in terms of action.
There is that there's significant disparities with some states like California leading the world in so many things. And, but also a lot of states you know, not willing or being able to move at the same speed. The difference in speeds in Australia. So lots of. So we always have estate or two that are leading it every few years on different topics, but they're never all that far ahead from the other states because the other states wanting to catch up relatively quickly.
And I think that that environment is really facilitates things like let's have one national disclosure scheme set a place everywhere, the same, all the companies get hit in the same way. All the markets received the same information and companies that are, you know, very, very [00:58:00] progressive sustainability, ambitious, inability manager that happens to work in, in Melbourne.
But it has a portfolio across four states that person can drive change across four states because it's the same framework across the market. And I think that's something that we don't talk enough and this is, you know, the non-sexy side of sustainability, it's things like governance and, and stability.
Nah, we get requests about you know, neighbors should change the star rating and bring the, the, the average to the middle of three stars. And every now and then we get a comment like that. And in theory, if you were, if your goal was just to create the most beautiful, most perfect rating tool, you probably do that you know, every year.
But what we're trying to do is to create a rating tool where people can look for. And just plan for a gray transformation over time. And to do that, we just realize we actually need to give them certainty. And so that is a lot of the things that we do in the program is over that, how do we create a really stable th the measurement being really [00:59:00] stable and, and so people can take the risk, not on the rating tool, take the risk on the building.
Like, how do we, I want to say 70% target reduction by 2030 of energy consumption, that's difficult. That's difficult enough. Let's forget all the risk on, on, on the improvement of buildings instead of just switching metrics, which really paralyzed us, everybody. And so when I look at the, a lot of the schemes that are, that are popping up in the United States in, at the city level, on the one hand, my, I think is great.
And if I was you know, the, the, the head of sustainability in one of those cities is probably exactly what I will do, because that is the, you have, because creating something national. Incredibly difficult in 2021. But if you can create things that I go beyond the city, you do get the benefits of stability long long-term decision-making and people who are making a difference in their city and portfolios, as you know, are not based on one city, hardly ever.
Most of them are in multiple places. And a lot of them are in multiple states in the, in the United [01:00:00] States. So you have the same policies, a really ambitious portfolio can make a difference in a lot of places. And what they're doing is creating, you know, the. For transformation, they're creating the services that a lot of other companies are going to need to improve.
They are training their mechanical contractors on how to you know, get buildings to six stars in neighbors, maybe, you know, 98 on, on the energy on the energy star scale you're helping create demand for the analytics products to get real-time information or more efficient chillers and boilers and heat pumps.
And so that to me is is just really important in climate change. The more stability we can create in the way we measure in the more territory or CDs and states that can apply I think is something that can make a huge difference. So I know that I'm going a little bit away from from request and James, you were really asking about how to how to drive a lot of these change beyond that.
I think it's the second component, which [01:01:00] is we really need to focus on not just creating rating tools, but on the drivers. And we came to that conclusion quite a few years ago and neighbors, but it's when I joined that's 12 years ago. And is. We need to spend allocate a lot of time to working with policymakers or integrating neighbors with grasp the, the GRESB survey or creating a sustainable finance framework for neighbors.
So if somebody is doing it alone, they can do use neighbors really easily and getting more credible loan. Can we make that easy? A lot of those linkages, you really see the accumulated effect over time and often in sustainability. And you see this in all countries. So much of the focus is on the rating tool.
We need to create a rating, so we need to improve the rating. So, and we think that all the change is going to happen magically from them. But a rating tool is just a rating tool. A rating tool doesn't drive any change. What drives change is the drivers that you can call. Because you have a really good rate until and I do think that that space needs could [01:02:00] use a little more work and lot more minds thinking about how do we create the next wave of incentives.
And I do think that that's maybe the space where we can we can contribute the most as a program is just on coming to podcasts like this one in sharing the, you know, how we're being able to create some of those drivers. A lot of them are not going to work in, in other countries and some of them will.
And I think just sharing those stories can really enable, you know, other people in other regions to, to be able to create their own version of the government leasing policy or their own version of of disclosure. And likewise, we're always looking for ideas from other countries because you know, we have 20, 30 years to address climate change and it means that we have to be willing to share.
As much as we can share very quickly and we need to be actively looking for good ideas from everywhere. Cause we don't, we don't have time to mess around. And if we need to move really fast, you need to just open your ears and your eyes, share everything and just take as many good ideas as you can and bring them back home.
James Dice: Cool. Is [01:03:00] there a place online where all of the rating systems nerds, congregate, like is there like one place where the news happens?
Carlos Flores: I don't think so. Would I love to, I think we should probably create that. But don't think that there might be a website out there if there is I'm not very familiar with it, but I can tell you that if you're really interesting and a lot of these data, a lot of the stories, the neighbor's website has lots of things, including we've invested a lot into how do we make?
Not just like you can download all this data, but you can also, we have a. It's search engine for green buildings, I think is maybe the best way to look at it where you can search for thousands of buildings. They are database where they're located. And he's actually the second most visited page on our website.
It's like thousands of people go there every month. And we've actually seen, this is a fascinating about sharing data that is easily communicated. That a lot of people can stand, not just, not just engineers. And making it public is that we've seen a lot of banks, for example, going in there and say, Hey, for started [01:04:00] us in Lucas.
Good. This look at all this for status here. I think that, you know, why can you aim for six stars this already three in your own street? And I think that is the kind of things that we can see a little more. So if you, if you're looking at this and you're really into data and visualization and just great stories about market transformation, this a lot of that on the neighbor's website.
And we actually have this annual report, James, that again, it's one of the most visited pages on our website, which is you never hear that about annual reports. Nobody wants to read annual reports, but our annual report is a 70% live dashboards about what happened last year. So a lot of people going there to know you know, waste my billion located against the market in, in a COVID here.
What happened in class? Buildings using less energy, more energy. Is that the same in offices and shopping centers? A lot of people go in there and go, oh, okay. Well, offices were very impacted on the tendency side, but not so impacted on the building owner side. And you know, shopping centers, a lot of them continue to operate because they have supermarkets.
So you can see a lot of that in the data. [01:05:00] And so if you're into a lot of that, our annual report is just a gold mine for information. And that.
James Dice: Very cool. Anything else? That's that's next for neighbors before
Carlos Flores: we wrap up? I think at a high level, we are working on two fronts. Number one is that we're expanding neighbors to old building sectors.
And I mentioned that a little while earlier, so we are expanding to a lot of the, for neighbors is not in just yet. And the goal really is to cover the majority of the economy that operates around buildings, right? That's, that's really what we're trying to do as a program. At the same time, we're also working on expanding the scope of neighbors.
And I think that the most salient part of that is is embodied carbon, which by the way, you had a great podcast on last week. So we are looking into creating an embodied carbon and certification framework within neighbors. And the reason why we want to do that is because we think that we can do what we have done in operation in, in buildings, do that in body carbon in the sense that we can [01:06:00] create a single national well running framework for embodied carbon.
As you may know, a lot of the issue sandboarding carbon is that everyone has around methodology is this lots and lots and lots of methods, ways of measuring and databases benchmarks. So comparing buildings in the market is really difficult. And if you can't do that, it's really difficult to grade a lot of drivers around creating a national framework that is consistently applied across the whole country and was really, really high quality benchmarks.
That's really the thing that we do best is collect a lot of data. It's great, really high quality benchmarks to compare buildings. And that's something we're working on right now. And the goal is to have a, you know, a release within the next 18 months. And that is going to keep us really, basically, because he said it is the same.
A lot of the same stakeholders will be working before, but he's a completely different area, a new area for us. And I see if anyone's listening to this podcast you see how complex it is. It's a complex space with a lot of moving parts. And so that's something we're working very actively on.
other area we're working on at the [01:07:00] moment is, is internationally. We're working with quite a few people overseas to help them create programs, initiatives like neighbors, and also for us to learn from the, the, a lot of the breakthroughs that they're being, having an themselves. And they, the two highest profile examples I have is that neighbors is already operating in New Zealand.
It's run by the New Zealand government. And it's a, it's going great guns in, in, in New Zealand. And we'll work with gloss with them enables resources to launch recently in, in the United Kingdom which is also also really exciting is that very early days I think that the scheme has only been open for certification for, you know, a few weeks.
And so we probably gonna see the first participants in, in the scheme coming in, in early in 2022. But again, to me, a lot of these initiatives are about you know, how do we, how do we help other people to, to create initiatives like this internationally? Yeah. How do we better connect the sustainability sustainability markets in different countries?
It's really stuck. And when you work across cultures or regions, you go [01:08:00] to another country, you realize, oh my God, this country, same, same sector is really leading on these three things and is really trailing on these three things. And nobody realizes unless you've actually travel and work in another country for long enough to go, oh wow.
We can just take these three products that have existed there for like five years. And we could really sell these three products to this market because they had this, not that many providers of that. I think. Can do a lot more to create a highways for building sustainability business and IP and opportunities to flow a lot more seemingly.
And I think creating schemes like neighbors really helps with that because if you have a technology or expertise that is going to help a building reduce energy consumption a lot then you know, you can really, you can use this initiative to say, well, I've brought five buildings to five stars in natives in Australia.
I can do that when you're in London or in Paris or in Washington. And I think that is something that we need to [01:09:00] do if we want to make all this this targets that we're having climate change, which are overwhelmingly difficult and challenging. And in short timeframe we need to actively look for opportunities.
So the companies that are doing great work and creating great IP can actually share that with other countries a little more easily. So part of the. Part of the reason why we're doing this is to, you know, this is one way in which we can create those opportunities, not the only one, but it certainly helps.
And we're actually seeing that in the UK already in Australia, we were because we're so close to each other. A lot of companies already work between Australia and New Zealand. And sometimes the headquarters are in Oakland, in New Zealand, and sometimes they're in Sydney and, but a lot of companies kind of very fluently work across the two markets.
It's not the same in the UK because it's literally in the other side of the world from Australia. But we have seen a lot of mixed teams working on neighbor's ratings now and working on building design as well, where they go. Yes, we're going to have the leading design team is going to be in the UK, but we're going to get a [01:10:00] designer from Australia and sometimes the same company to actually join the team and be part of that team.
So we can bring lessons from that market into this project or the other way around as well. And this project hasn't been on the ground for that long, and we're already seen lots and lots of cases of that, of mutual collaboration and participation, which is exactly the kind of things that we want it to drive.
So it's really exciting to see. That's so cool.
James Dice: That same thing is happening within the nexus community on such a smaller scale. And it's just so amazing to see it happen. Thank you internet and thank you.
All right. Ready to close out with a little two
Carlos Flores: truths and a lie. Oh yeah. Yep. I am excited about this. James. So, I got three for you. So number one I traveled to Europe for two months paying no accommodation, no transport assemble one. Um, Number two is um, I [01:11:00] studied in Sweden and I can speak medium level Swedish that's number two.
And number three is I got married in a performance arts theater made entirely by timber. Those are my three mature, I believe
two months, a year of we know money speak, medium level Swedish got married in the theater.
James Dice: I
Carlos Flores: say, Swedish Swedish is the lie. That's very good. Yeah. And to be honest, I did study in Sweden and I really wanted to learn sewage, but it's so hard to learn the local language in a country where everybody speaks English and really good. And everybody like there, a young girl in the street who seven speaks English.
They're an old lady working at a supermarket, speaks English, all of them. So I try for a few months and [01:12:00] then I sort of gave up. It was impossible.
James Dice: I don't know if that's why I guess that because my subconscious may have made that connection, but I just guessed. But yeah, I do have, we do have several pro members.
Nexus pro members that are from Sweden and they speak English. And then I see their LinkedIn posts and I'm like, what is that language when they read it that doesn't look easy to learn
Carlos Flores: at all? It is. It is it is not. I'll tell you what it is, beautiful country to visit it and to live in for the, of just just really kind people.
It's just really kind society. And I really love that. You know, being there for a little while, especially coming from south America in a developing country, I was there in a scholarship, which explains why I travel for two months by just hiking and couch surfing. But it's it's such a just kind society where a lot of people care about the environment has its own challenges like every country, but it's it's just a really good perspective in life.
And you go, you know, a [01:13:00] lot of these issues that we think are unresolvable socially they do have solutions and a lot of these issues around the environment and climate, actually, we can build societies where the majority of people really care about that and are acting on that. And I do think that a lot of the Scandinavian countries have been you know, leading in some areas in particularly on the environment and care for it.
And I do think that's very.
James Dice: That's a good, great place to end and our, our show here. So thanks so much, Carlos. This has been fascinating and it has made me happier. It's been my day better. So I appreciate
Carlos Flores: it. Thanks, James. I had a lot of fun and thanks for having me. It's seven in the morning and Sydney, I was like, I haven't even had any coffee yet.
And I just really appreciate, I love your podcast, I think is displaying. So two big important role in, in our space in that. And like I told you before, I really admire people who can find a way to communicate really clearly on a topic that can be really inaccessible for a lot of people. And I do think that you do that [01:14:00] great in a lot of people who you've been, who have been in, in your podcast, I've been just really inspiring to, to, to listen to.
So, you know, keep it up and thanks so much for your service.
James Dice: Well, thanks for, thanks for coming on and be in one of the people that is so good at communicating. So talk to you soon.
James Dice: All right friends, thanks for listening to this episode of the Nexus Podcast. For more episodes like this and to get the weekly Nexus Newsletter, which by the way, readers have said is the best way to stay up to date on the future of the smart building industry, please subscribe at nexuslabs.online. You can find the show notes for this conversation there as well. Have a great day.
“Real estate companies are not going to go bankrupt because they're inefficient. It's actually just a blip on the bottom line compared to much bigger drivers. Those business drivers are the keys to tackling climate change..."
—Carlos Flores
Welcome to Nexus, a newsletter and podcast for smart people applying smart building technology—hosted by James Dice. If you’re new to Nexus, you might want to start here.
The Nexus podcast (Apple | Spotify | YouTube | Other apps) is our chance to explore and learn with the brightest in our industry—together. The project is directly funded by listeners like you who have joined the Nexus Pro membership community.
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Episode 81 is a conversation with Carlos Flores, director of the National Australian Built Environment Rating System (or NABERS for short).
We talked about the 15 year history of NABERS in Australia and how it has literally transformed the real estate industry by giving each stakeholder a core business reason why they should care about sustainability.
Then we talked about how other countries can learn from this case study and what the future holds. This was fascinating, and I had a smile on my face almost the whole time.
Without further ado, please enjoy the Nexus podcast with Carlos Flores.
You can find Carlos on LinkedIn.
Enjoy!
Music credit: Dream Big by Audiobinger—licensed under an Attribution-NonCommercial-ShareAlike License.
Note: transcript was created using an imperfect machine learning tool and lightly edited by a human (so you can get the gist). Please forgive errors!
James Dice: hello friends, welcome to the nexus podcast. I'm your host James dice each week. I fire questions that the leaders of the smart buildings industry to try to figure out where we're headed and how we can get there faster without all the marketing fluff. I'm pushing my learning to the limit. And I'm so glad to have you here following along.
James Dice: This episode is a conversation with Carlos Flores, director of the national Australian built environment rating system. Or neighbors for short. We talked about the 15 year history of neighbors and Australia. And how it has literally transformed the real estate industry by giving each stakeholder a core business reason why they should care about sustainability. Then we talked about how other countries can learn from this case study and what the future holds or rating systems like this. This was a [00:01:00] fascinating conversation. And I had a smile on my face almost the whole time. Without further ado, please enjoy the nexus podcast with Carlos Flores.
Hello, Carlos, welcome to the show. Can you introduce yourself please?
Carlos Flores: Thanks, James. So my name is Carlos Flores. I'm the director of a program called the national Australian built environment rating system or neighbors. Um, I'm just really excited to be here.
James Dice: I'm really excited to have you. So we've met a couple of weeks ago and I'm very grateful whenever I get an then nice introduction like this.
So it was like to thank the person that introduced us. So thanks Dan. Dan's out there somewhere. Uh, Avid listener. Um, So how'd you get into the buildings industry, Carlos.
Carlos Flores: I got into this industry by accident actually uh, I was born and raised in, in, in Chile, in south America I did mechanical engineering because I was really interested in energy and climate change. This is in the late nineties, early two thousands a little bit after the Kyoto protocol. So climate change was a big topic, nowhere near as big as it is today. It felt really [00:02:00] big at the time. And I got into energy policy first, so I was working on energy efficiency.
But I wasn't thinking so much about building serious, a lot about industry and energy generation. And how do we supply reliable energy to industry? So it was along those, those lines. And this was back in Chile where I was born and raised. And later when I migrated to Australia, this is going back into 2000 and.
I actually, it became, I was looking for work. I was just got there. I say recently immigrated professional. I got a job with neighbors for three weeks. It shows a contract with neighbors and that's how it landed in buildings.
So I just, I was wanting to work in renewables at the beginning. I got this job for three weeks that turned into six months, turned into a decade, working in buildings and, and a few months into it. I was just really enamored with the building sector. I just realized how big it is in terms of sustainability.
That is the biggest user of energy, the biggest emitter of carbon, the biggest user of water on, on cities. The biggest emitter [00:03:00] of waste across all sectors. So if you want to make a difference in sustainability that's where you want to go. You want to go into buildings and, and drive make a difference across many, many sectors of the economy that operate within four walls.
James Dice: That's brilliantly put, I love that. I totally agree. That's how I stumbled into it too. I was like, I'm vaguely interested in sustainability and I. I have no idea how the economy works, but building seem really cool. And then you start like peeling back the layers of the onion and you're like, oh, this is, this is massive.
So I love how you put that. What's it like being a Chilean in Australia that seems
Carlos Flores: Rare it is, it is rare. It's actually a, you know, this, the Chilean community in Sydney. So it's not, it's not inexistent. But is it's, it's a really interesting place to be a south American in general because historically Australia has had a lot of migration, is that you say country of migraines.
I think there, I was reading a stat recently that in Sydney, which is the largest cities, about 5 million people where I live about [00:04:00] 50% of people who live in Sydney today were not born in Australia. And that kind of tells you just the volume of migration to Australia is, is it's very, it's very big.
And, but that migration hasn't been from, from Latin America, for the most part, it's been from the UK, from China, from Southeast Asia. And so, you, if you're a Latin American in here at this, you do are, you are subject to like just some really interesting stereotypes, but almost all of them are very positive.
So people expect you to play guitar and they expect you to dance and they expect you to play soccer. And fortunately, all those three things I think that I do do it's part of my upbringing. So, I, I find that in general, it's been really great and because it's a country of migraines, there is a lot of tolerance for my accent.
And for people are used to experiencing lots of different cultures. And would you have issues? Like, like all countries and it's not like racism does not exist in Australia, it does exist. But there is a very, very significant percentage of the population that are. [00:05:00] Very understanding of migration in, in, in great part because they're migrants themselves or maybe their parents were, maybe they grandparents were, but, but many, many people can trace you know, part of their life or their heritage to recent migration from, from somewhere.
And that makes it quite a great place to really, to be, to be a migrant.
James Dice: Awesome. And before we unpack neighbors and get into the real topics of this podcast, we must get to my curiosity. Who's your favorite soccer?
Carlos Flores: I think I said really difficult question. I'm going to be on the record for this as well.
So back home, it's the easiest way for me to answer. This is a team called Kohler Kohler, which is the biggest Chilean club. And that's my team and overseas and internationally, it's really a, something that changes over time. I've always been a fan of Barcelona from when I was little in the late nineties with the, with the FIGO and they wrote the original veranda days.
So I'm going to go with Barcelona for now, even though this is not the greatest time to be a Barcelona fan and you won't be for a few years, but yeah, that's, [00:06:00] that's, that's my team. Awesome.
James Dice: All right. Let's jump into neighbors. And I have to give another shout out here. So Tyson suitor, who's Australian and is now gone around the world.
Doesn't live in Australia anymore. He told me, I don't know, probably like a year and a half ago. Dude, you have to look into neighbors and, and dig into what that's doing in Australia. So thanks to him as well. First. Like what what his neighbors let's start there.
Carlos Flores: Yeah, it's a neighbor sees a, it's a city fee.
It's a rating tool. It's a rating scheme for four buildings in sustainability. And we study five buildings on basically four areas, energy or energy efficiency and carbon water waste performance, a waste and recycling and indoor environment quality. And I think about neighbors who studies, it's a star rating.
So from zero to six stars, if you're a three stars, it means that you're using an average amount of energy. If you're doing the neighbors energy rating, an average amount of energy compared to, you know, a [00:07:00] similar office, if you have an office building in the same climate zone operating for the same hours.
So three stars means you're an average performer average compared to your peers and very similar buildings. If you're doing eh, If you're one-star, it means to you using about 75 or maybe 80% more energy consumption. So quite a bit more you can also be zero stars because as you may know, there is no limit to how bad the building can be and something that's going to be very bad.
But also they can be very good. So six stars in neighbors means you need to use about 80% less energy consumption than, than a, the average building in your market to get into six stars. It's not straightforward. It actually requires great technology, great management and a team that really wants it.
So often it takes years to actually get all the way there.
James Dice: The reference point then is all the other buildings in the country or the reference point. Some baseline
Carlos Flores: historical baseline. Their reference point is all the buildings in the country. So when we create a new neighbors [00:08:00] rating tool and we are at the moment, by the way, so we are expanding neighbors into the industrial building sectors.
So things like warehouses and cold stores and they, they, they call change basically. We actually gathered a ton of data before we created the rating to create benchmarks. So if we think, and you know, what is the what is the average amount of energy use for a cold storage facility that is located in the north of Australia, which is.
Just a tropical zone. So it's very hard. And how does that change if we move that to Tasmania, which it's actually quite cold, it's like the Northern United States. So what is the impact of climate for cold, cold storage facilities? Well, the answer is let's go and collect a lot of data and see is that 1% difference?
Or you say 25% difference. We, we just let the data tell us.
James Dice: Interesting. Okay. And then how does water. And waste work. It, does it boil all up into one star rating or are there separate star ratings for the water and the way [00:09:00]
Carlos Flores: that's a good question. We actually have separate star ratings for all of them.
So water works pretty much in the same way. You, you measure 12 months of water consumption. And then we use that to, to place the building on the, on the scale, depending on, you know, how much they using against similar buildings. And there's a, and it's the same for waste. I think that the thing interesting to reflect on that is that that's not the norm in sustainability.
Yeah, a lot of the ones that work across more than just energy and carbon, they aggregate everything into a single result. And this lots of schemes like that. There's a leading the U S and bring them in, in the UK and Europe and in green, sorry, in Australia. And I think those schemes are great. We work very closely with green star, which is the Australian version off of those sort of aggregator sustainability ratings.
But I think there's something to be said for actually having separate indicators. And when do you, and, and, you know, if, if you're, if let's just talk about like energy and water, just to, to keep the comparable simple, but there are things that you can do that will help you reduce energy and. But you will [00:10:00] use more water consumption and they base example of that is is what cooling towers, right?
So you're, you're saving energy by actively using a water input in the water in the atmosphere. And so that's, that's great if you're trying to reduce carbon, but it's not so great if you actually have water issues and like in a place like California in the U S or almost everywhere in Australia. And on the other hand, you could use, you know, dry cooling towers, which means they use no water, which is great for water efficiency, but actually it means that you're using a little more energy.
So I think our approach to that. Instead of aggregating them into a single indicator, let's actually show that there is attention between those two things. If we want to be very good at energy efficiency and water efficiency at the same time, then, you know, regardless of what cooling towers you choose, you might need to look for other areas in your building to compensate for the fact that you're using more water.
Can we use less water elsewhere then if we still want to be water efficient. So we're trying to make that more transparent [00:11:00] by having different steroids.
James Dice: Fascinating. All right. So when did this start and why did it, why did whoever created it?
Carlos Flores: Yeah, so this is um, way back in time. James nevus started around 1997 which is 24 years ago.
I was in high school, so I was not the creator of neighbors as you can imagine. And it started by it started really as a very small program back in the night. What happened over time is that over the first year, three years, the key principles that we still use today, we kind of define, and I think maybe the most important of them is that somebody back 22, 23 years ago made the great decision that neighbors needed to be not based on features, which is how most rating tools work even today.
So we didn't set a fire built in based on, you know, what kind of windows do you have single glaze in double glazing or is the frame made of aluminum or S or more insulating material, or do you have, how many millimeters of insulation do you have? How many life fittings [00:12:00] do you have? Do you have solar panels or not?
We didn't do any of that. We actually go straight into the meter. Are you using more or less energy than comparable buildings? And that would, that means that that design decision is that the only way to get a better neighbors ratings using less. Or using less water or producing less waste. There's no other way.
So it actually encourages everyone not to create a lot of features just to get a better rating. If you're going to install the feature then it needs to work. Otherwise you're not going to get any recognition, but it also meant that a lot of people have looked for a lot of other ones. To reduce energy and water and becoming more sustainable that it's not about to in big retrofits.
So we're doing a lot of small things on a daily basis, turning things off when no one needs it. Like a lot of those things do get a lot of recognition in neighbors because if they save you 20% energy consumption, you're going to get to the next start writing. And to me that, that was that very late in the United it's a lot of foresight.
It was about the same time that the, the U S which is the only country really, that has a [00:13:00] scheme that is about this long or study in 1997. So I always wonder if we were talking to each other back in the nineties but the U S the energy star program in buildings is also based on, on real energy consumption for 12 months.
It doesn't communicate in types of stars. But in many other ways is a, is a sister program to neighbors, maybe the closest program that we have in, in the world. And we actually meet with them every month just because we have so many things in common and so many things to, to, to learn from each other.
So maybe going back to that branch, there's this beautiful side branch James, which you probably see a lot in this in this interview, but is that when, once we made that decision, A lot of things became very clear that we needed to make design changes to neighbor. So we should build around the fact that it's based on metering.
So it meant that we needed a standard really high-quality standard that was publicly available. And then people could follow, you know, what's including neighbors and how do I account for it and how do I say target? So we created a standard around that. And then a year or two [00:14:00] later, we realized that the self-reported standard gives you very mixed results when it comes to quality.
So a couple of years later we realized we actually need train assessors that know how to use this methodology and we need auditing. So every building that is certified in the Navy, it's actually audited by somebody in, and this is part of the things that we do as a team. And those bare-bones, all of which were set in the late night is, are still the core of how nevus works 21, 22 years later.
James Dice: Fascinating. I'm perceiving there to be a difference between neighbors and energy star though. So the way I understand it and totally correct me if I'm wrong and someone will, if you don't trust me um, energy star, their reference point is see Beck's data, which is commercial building energy consumption survey.
And it only happens every couple years and some of the results only come out every several years. And so you could be like right now, for [00:15:00] instance, if you were to go and then energy start, your reference building would probably be based on the 2013 survey. So it's like nine year 10 and whatever that is eight years old at this point.
Right? So you're not actually being compared to your peers. It's a big myth. I think people assume they're being compared to their peers, but you're not you're being compared to your peers. That responded to that survey eight years ago. Right. So is that, is there a difference in,
Carlos Flores: I think there's a, there's a, quite a significant difference, but we do to begin with, we would love to have a survey, like sea bags in Australia.
So I think having that, it's just it's just brilliant. Yeah. And, and because we don't have that, we have to design everything. We do, we have to work around the fact that we don't have that database. That's. I think that's a really great thing too, for you to have um, I think the neighbors works a bit differently in the sense that we actually do not change our scale once.
The scale, we don't update what the average is every year or [00:16:00] every couple of years. And I, and that's by design. So they, what we're trying to do is to create something that buildings can set targets at the individual level or at the portfolio level, it target for this year and for next year, and for three years for now, 2025 and by 2030, and most of the big portfolios in Australia have that.
And so instead of changing the star rating, if we change the star rating all the time, people really struggled to be able to set targets. So you don't know what they're going to be in the future. So instead of doing that, we kind of change the meaning of the stars. So we, we call three stars average today.
But the reality is that when we released this bear star scale, it was 2.5 stars. And now we call that below average. And, and to be honest, the average is really moving now into 3.5 stars. So we might change the meaning of that again. But to me that there is very easy to get into late theoretical debates.
How star ratings should be changing. But the reality is that star ratings and programs like neighbors are a means to an end. And the end is not to have the best, most [00:17:00] perfect scale in the world. The end is to dry, deep energy consumption, carbon emissions and water reduction at scale across whole markets as fast as possible.
So if we're actually achieving that, then the scale is working well. To me, that's the most important KPI for scale. If people have major issues and they turn trust a scale that often translate into the market, not moving as fast. And then we'll definitely have to do something about that, but that approach of keeping the scale fix and allow the market to just move towards the upper bands of the scale is actually worked really well in the last ticket.
And probably we'll get into that in, in, in a few minutes.
James Dice: Yeah, the word market we're going to, we're going to dig into that word market real quick. Before we do that though. What types of buildings or verticals does neighbors rate
Carlos Flores: today? Right. So the answer is that we are extending to expand into all sectors, all the big buildings in, in, in the market.
We don't cover all of them [00:18:00] yet, but we have a roadmap to expand to one or two new sectors every year. Currently we work at with offices, shopping centers, data centers, hotels hospitals, and and, and a few other sectors. But we are also expanding to say senior care, I think is it's called in the U S in Australia.
It's called the residential aged care system. And we're also expanding to industrial buildings. Apparently. We are going to expand to schools and big box retail and a few other sectors as well. So I think there, by the end of 2024, neighbors really should cover the majority of the big sectors that make up maybe 80% of, or 90% of the built environment.
James Dice: With that context set. I really want to dig into this story that you told me about when we first met and then, you know, Tyson told me about a long time ago of what I would call market transformation because of the rating system. And it sounds like there's been market transformation.
That's happened specifically in offices and maybe [00:19:00] also in retail, but maybe it's happening in all the verticals that you just talked about. I call this, so when I teach the foundations course, I call this there, there, like there needs to be a non-energy business, like core business reason for people to care about technology, to care about sustainability.
And this is a perfect example of a non-energy core business, reason to care being created out of a sustainability rating. So let's start this off by just talking about like the way things were before Nabors was created, but 15 years ago, right before this transformation. Started, what was it like?
Carlos Flores: Yeah.
So by the way, I love the way you frame the, the need for non-energy drivers to drive sustainability and I could not agree anymore. And I think that that's stronger. My experience that if you think about this energy consumption is only 1%, sometimes less than 1%, [00:20:00] couple of sectors where it's a bit bigger than that.
But for the most part, a lot of billing companies are not going to go bankrupt because they're inefficient. It's not, it's actually just going to be a bleep on, on the bottom line compared to other much bigger drivers in this activists. So if you want to tackle climate change and you want to say societal change in energy efficiency, and a lot of the companies investing the time to realize them, the opportunities we've been talking about for four decades, but a lot of people that don't pursue if you want to see that kind of change, you need to tap into drivers that are stronger than Joe.
You know, reducing 10% of your, 1% of your cost. There needs to be a lot stronger than that. I think if we go back 50 years ago in. Most property companies did not have a sustainability team, I think is the most notable, noticeable thing that you say walking into the office, who is the sustainability manager.
There isn't one, there isn't a team. And there isn't a manager. There would have been an operations manager and that person's role energy efficiency. Would it be part of that, but it would have been [00:21:00] a beside. And much more importantly, it would have been um, you know, it is the same person that is in charge of the facilities need to work well in our clients need to be happy.
So, and that is obviously core business for an office company. So this would have been a, you know, a less important secondary KPI that you would have done on a part-time capacity. I think that's like very noticeable and that is that building owners create demand for services in the sector. So they don't have somebody or a team or the interest enough to actually drive is it means that the size of the energy efficiency sector was a lot smaller.
And it means that the facility management profession, they didn't have. Environmental KPIs for the most part, because the owners weren't asking for that. So it means that they at this, the number of professionals with a lot of experience in this space was just significantly smaller. It's not that it didn't exist.
It's been there for four decades, but it was very, very small compared to now. And to me that's like the most visible thing, 2005. Where is the, where is everybody? Where are [00:22:00] you? Sustainability sector? What happened to it? I think that's the first impression that you will get, especially if you're wearing the Australian market today, going back just like, where is everybody?
James Dice: And so I think it's fair to say that sustainability was not connected to the core business in any way
Carlos Flores: back then. Yeah, I think very, very fair to say, even in the leaders in sustainable. The wearing really leading in, in, in a very meaningful way back in 2005. Totally.
James Dice: All right. So let's talk about the ways in which neighbors has added drivers and sort of created that core business reason to care.
What was like the first step that happened.
Carlos Flores: Right. So NABERS has been by 2005. It's been around for, you know, six to seven years by this point, but it wasn't driving, you know, whole of sector transformation where we said, if I am the crown jewel of a, you know, a certain portfolio, the latest the [00:23:00] flashiest building.
And by the way, even though. Often got poor ratings because they thought he was really good. And then in practice, they were using twice as much energy, right? So that's, that's a playing field in 2005. And what happened is, and maybe going into like, how do we get drivers beyond just energy costs? Are they older things that we can tap into in this market?
And the governments of Australia. So Australia is a Federation speed, like the U S where you have the state eight states and, and the Australian government. They came together because we are the biggest employers of people in the country then, and now it's about 20% of the Australian population works for the government at some, at some level.
And because we're the biggest employer, we're also the biggest renter of office space. Bye. Bye bye lodge. If, just to give you a sense in cities like Sydney and Melbourne, big city is 5 million people. About 20 to 25% of all the floor space is actually rented by governments, and that is from premium to, to meet tier two, to, to the, you know, the lower quality.
Be great to see great buildings, the whole [00:24:00] market. We are a big player on every segment of the market. We basically came together and said, let's use our procurement power to reward organizations that are doing something for the environment and give motivation for a lot of the ones that are not investing in energy efficiency and reducing emissions to actually do so.
And we did it by basically putting in requirements from this point onwards, if you want to lease, if you want it to sign any, lease in a building going forward, you need to have a nevus rating. You must have that. Before we actually signed that lease, it needs to meet a minimum energy efficiency requirement.
And that back in the day, it was four stars and it's been growing over time, but it's the concept has been applied the same and what he meant in change visit amazing and almost overnight. Because because of what it means for a property company, this is tapping into a driver is very deep rooted into the psychology of CFOs in, in an office portfolio.
What are you doing in office portfolio? You rent space. How do you lose a lot of money in property by having vacant [00:25:00] space as as we've seen in a lot of conversations around COVID-19 right. So you don't want to have vacancies and that's something that everybody in office companies really understand that that is that's a problem.
And what this policy meant was if we're unwilling to invest on energy efficiency or reducing our emissions, we're going to miss out on 20% of the market going for. Forever, like from this point forward. And it means that our portfolio might actually have 10, 15, 20% vacancies in the future. If we actually don't do something about that.
So the risk is is, is huge for a property company. But also the reward is really big. So we sell a lot of them coming forward and saying, well, if we actually do invest in energy efficient, We're going to put this asset that is going to be, you know, it tendons going to move in 18 months. We're going to put that asset into a smaller portion of the market that is going to get 100% of that business from the government.
And the business from the government is actually really, really great. They're very, very long lease as much longer than most of the companies. It's very secure because [00:26:00] obviously if the government goes bankrupt and we have much bigger problems than just that lease. And so they, it was a really big. I am in a really big stick at the same time.
And we sell within about a year, the majority of the big portfolios in Australia, certifying older buildings overnight, not just the good ones, but also the ones they're not so good ones, the ones that were getting zero stars, one star, the whole portfolio. And then we've seen that group of buildings, just reacting and improving very fast and never stopping.
It's been 15 years of that within two years, almost every company had a sustainability manager. Some of them had a sustainability team of multiple people. They had targets by certain years and a lot of that, the origin was a policy that really put energy efficiency on the map as a, you know, big reward, big opportunity, big risk for the business, not just for the cost of energy use.
Fascinating.
James Dice: So big lover tenants that are government. [00:27:00] Yeah. Government. Fascinating. Okay. So that was phase one. What was, what was the next phase?
Carlos Flores: Phase two was a, what we call in Australia, mandatory disclosure or, or just disclosure. It came in 2010 and, and just to see the context, by the time we got 2010, like five years after this government policy, we had about maybe 40, maybe even 50% of buildings participating in neighbors already on a voluntary capacity.
So nobody was obliged to get an A-plus rating, but they were doing so because of that policy and the fact that by this point they had their own motivations. A lot of them were really talking the sustainability talk by this point in 2010. And what happened then is that the, the Australian government mandated the use of neighbors for the disclosure of neighbors for financial transactions in offices.
So if you want to, if you want to sell an office building, or if you want to. It's space inside of an SBS building. Obviously renting is the most common of the two. If you want to do either of those, you must have enabled trading before that. [00:28:00] Otherwise you can not do their financial transaction. You must have that and you must make it public everywhere.
You need to put it outside of your building when you're advertising it, you need to put it on any website with the space has been advertised. You need to put it on the lease with tenants. So it meant that you could not transact in the office market without actually disclosing and providing transparency on am I doing better for the environment than other buildings in this.
And obviously what happened is that in any market, you will have some buildings that are leading and they're doing very well in that. We're very happy that they results were being publicly used and they were looking pretty good. But the reality is that a lot of buildings had not done any work in sustainability or energy efficiency for decades.
And a lot of them came into neighbors and there were zero stars, one star, this had a very, very poor score. And now it wasn't just something that they knew. A lot of them didn't know that by the way. So it was a shock to them. First of all. Oh, wow. We're using a little more energy than almost anyone else.
A lot of people just don't know that even today in local markets. But also the fact that they clients were going to [00:29:00] know, and then we're going to know before they were clients. So your, your, your presentation card for a client in the office market was they had this building is beautiful. It's premium, great location and terribly unsustainable.
And that. It's enough to drive a portion of the market that really cares about that off. There's a lot of companies imagine today, every company had to walk in into, into a work environment. And it, you knew, and every employee knew that the building is very unsustainable. What percentage of your own employees will be unhappy with that?
I, I I'm, I believe what if you, and we've seen that in Australia as well. So that shock of actually having to show everyone that you, your performance is terrible and you're using two, maybe three times more energy than other buildings really draw the entire market into action. So we've seen that was in 20.
And those group of buildings have been reducing that decade between then and now 2021. They've reduced energy consumption by about 30%. That is the entirety of the office market in Australia. It's not the leaders is [00:30:00] every single building, reducing energy consumption. And what's like likely to be the fastest reduction of energy use and carbon emissions in any building sector, in any country that was last decade in the office market.
And that policy was also the first of its kind in the world, like the first haul of disclosure across a whole market, using a performance rating where the only way to get better is using less. And that. That was another driver and the driver is like the naming and shaming driver as well as if I'm doing really well, everyone will know that I'm doing really well.
And I can attract tenants that are actually looking for sustainability as part of the core ethos as a company as well. So that's been, that's, that's faced you. And the great thing about that by the way, is that it produces so much data. We, I think Australia is probably the only country where we have 11 or 12 years of data of pretty much any building in that market for, for those 12 years.
And a lot of that data, by the way, it's publicly available on our website. So if this a load of data geeks like me out there, and you really want to [00:31:00] analyze a lot of trends and, and a lot of that data you can download from the Navy's website.
James Dice: Fascinating. All right. What's phase three
Carlos Flores: then. Well, phase three is not a driver that we orchestrated.
So unlike the other two, there were policies that the government was working on. Phase three is a global trend, which is invest. And that's been going on also for, from, for the past decade. But it is been very strong in the last five years. And what it means is that there are a lot of investors that are actively looking into the energy performance of portfolios.
And this is by the way, particularly true for companies that are exposed to. So if you're, if you're a private portfolio with one owner, you're not very exposed to, to to invest the drivers. But if you're a company that is listed on the Australian stock exchange you're, you, anyone can invest in your company, you can invest in that company.
Right. And it means that the price of your stock is really important. And the price of your stock is a [00:32:00] function of how many people are willing to buy that stock. So we have seen a lot of interest from investors and not just interest, but real pressure for better sustainability indicators.
And because they receive say certification system of your carbon footprint and your energy consumption, you get compare against all the buildings in the market. It's got all the things that a lot of investors want to know. I want them to be simple, to understand, are you one star or five stars? Almost anyone can engage in that kind of level of conversation.
And number two it allows them to track while you're doing better than that. This last year, you have four stars. Why is your rating 3.5 stars now? And we have seen anecdotally, and this is the great thing as well about working at scale with all the buildings in this market is that we get all the hard data.
So we have a lot of trends, but we also get a lot of the stories that go along with it. And that's a little more anecdotal, but I have heard a lot of people saying, you know, we had an issue with the controls in this building for two months. Any meant that it was just enough to drop us to the next, the next star rating.
[00:33:00] Cause we use 4% more energy than last year. We dropped to 3.5 stars and I got phone calls from a fund manager in Amsterdam about what are you doing? I'm investing in this portfolio. And you're meant to get better in doing more about the fight against climate change, not less. And I think that that kind of pressure is actually really healthy pressure because he really drives a lot of people to think about.
The energy performance of your buildings. These are big machines with lots of parts. If you want to become more sustainable, it's not just about doing a deep retrofit. Once every 50 years, that's not the way we actually win against climate change. It is about looking at this every day. It's about smart buildings, about good management.
It's about doing the, the little things it's I get it. It's like I see it as becoming an Olympian. You don't get you don't, you don't win a gold medal at the Olympics by buying the most expensive shoes and shorts and t-shirts that you can and then you think that's going to make you a gold medalist.
That might be good. Shoes might be an important part. [00:34:00] But the most important part is that this is about doing the little things every day and working really hard. And the buildings that we see getting to six stars in, in neighbors, but all of them have in common is that they have good. Synology not always the latest technology by the way, but good technology and really good systems.
Couple. Excellent management. And those things always have to go together because you don't get to use 80% less energy use than most buildings in your market. By doing nothing, you get to do it by doing the unsexy things. There's people who do nightmare. And the night audit is exactly what it sounds like you say, at least sexiest thing you can do in sustainability.
Somebody goes into a building on Tuesday at two in the morning and they go, why is 25% of the building load operating? And what's on. And literally go one by one, these six things we need to change the controls. Can we do that tomorrow? And they do that. And then they go again, the next season in the winter.
And what is on, on Wednesday or on Saturday and three in the morning. Well, this [00:35:00] you'd be surprised. Lots of things are on, on Saturday. They shouldn't be, or, and those are the kinds of things that a lot of people are doing to get to those star ratings. And I think those things cause often almost nothing like that is much, much cheaper than doing a deep retrofit for the whole asset.
And to me, that's been one of the most valuable lessons in, in, in working in this, in a space where a star rating rewards, reducing energy instead of installing specific features is that people get really creative on. What can we do to actually reduce energy consumption has been a huge driver of analytics in the last few years, as you well know.
And a lot of that has been well-documented on your podcasts. And, and the interesting thing about that trend is that in Australia is very, very focused on how do we actually maintain or improve the star rating. So he's looking at a lot of those small opportunities every day. Some companies, what they do is they take you know, they, they look at data from last week, for example, and they go [00:36:00] last week, you actually used, you know, 13%, less than a normal week.
What did you do? Like literally just using data to get them to reflect. Did you do something last week? Maybe we could do on an ongoing basis. Like what go back, Tracy steps. Did you owe somebody when they're on, when all this mechanical contractor, when they're on Wednesday talk to them and let's see what, what they did.
And because of that, because you're looking at that and looking for those opportunities. So actively people can find, you know, 50, 60% reductions, not across one building, but across portfolios. And that is what a lot of the leaders in the Australia market look like today. If you look at companies like GBT, Lend-Lease, Texas sock liner, a lot of others.
If you look at their sustainability reports, going back 10 years, a lot of them have reduced energy use by 50% or 60%, which is almost unheard of in a single decade and is for the most. Looking at doing this more things, better management, better technology. And instead of them spending a billion dollars on upgrades, it's [00:37:00] not like that it's actually a lower, much, much lower cost when you can muster the the attention and the time.
And you have the motivation, the drivers to actually improve those buildings.
James Dice: That's awesome. Nice audits are one of my favorite things. So whenever I used to do hospital, I used to do a lot of hospital retrocommissioning and do yeah. Would do they'd be out of town, so you'd be staying in a hotel. So what we do is we would like, you know, spend all day at the hospital, do the normal stuff, do the audit, you know, that kind of thing, hanging out different mechanical rooms, installing data, loggers, those types of things.
Then we would go out to dinner, have a few drinks, you know, extend dinner until, until I got to like 10, 11:00 PM. Before we went back to the hotel, we would actually go back to the hospital and walk around and take different pictures. Right. Which, which departments. No. Everyone thinks a hospital runs 24 7 actually.
No. About [00:38:00] 30% of the hospital runs 24 7. And so you go around all the other places and night audits are an underused energy hack for
Carlos Flores: sure. A hundred percent. It's so fascinating. You've done. I didn't know that you've, that you've done that in the past. And I think that the fascinating things that we work with, a lot of people that do not know what is, and is.
If you're doing one, you get to see a place that is very familiar. The most people have seen, most people have been to an office or a hospital in the lives. Um, But in ways that no one has ever seen when you walk through an office at night is so different and it's so unusual if you work through your hospital, when there's no one, there it's massive sprawling hospitals that have been built through 10 extensions over our last 40 years.
And they have, you know, 16 different BMS is like slightly saturating, but some of them are just a very, disjoined really big disjointed sort of, beast and getting to see that at night, it's just such a fascinating concept. Is it teaches you a lot about how is really [00:39:00] operating practice and also a lot of the bad things that can happen in buildings.
You see them at night when they shouldn't be happening and they're happening. Yeah.
James Dice: Yeah. And all the reasons why the next morning conversation was always the best, because it was like, did you know that this runs 24 7 and no one knew and then unpacking the reason why that is and like getting to the reason, like the root cause of it, you, you uncover a million different reasons why things are running 24 7 anyway.
Yeah.
Carlos Flores: And you know, no, totally. And I think that the, the, that example about things running for a long time and people not knowing it's just so common. That is so common that I, I, I am happy to say this on record that I would say the majority of buildings, every. Have things that are running when they shouldn't at denied.
Like the great majority is significantly more than 50%, maybe even 80, maybe even 90%. That is just how common it is and how underutilized night audits are as a, [00:40:00] as a tool. And we've seen by the way, it's not just in energy. We've seen this in water. Water is even worse because water tends to be a little more inexpensive in a lot of places, not everywhere is very inexpensive in Australia.
And it means that people pay less attention to it. And we've had lots of people doing it, a water rating, like a neighbor's water rating for the first time. And then they get zero stars and they're really angry. And then they realized they had a leak going into that. Didn't go into the building, so it wasn't visible.
But it was in their meters are going straight into the ground. And they've probably had it for like three or four years. Uh, And often this is the one example I'm thinking about now is a really high profile building that was in Sydney. Built to be very sustainable at the time, they were trying to make it one of the most sustainable in the world a few years ago.
And there was a water leak that was invisible. And then you did a rating and then the questioning about why do zero stars. You're not even on the scale outside of the scale. Why is that? Oh, we're using two or three times more water than in the rest of our portfolio. Why is that? And then you [00:41:00] found each leak that those cases are just so common and such long low-hanging fruit to make a really big difference in, in climate changes, sensibility.
James Dice: Hey guys, just another quick note from our sponsor Nexus labs. And then we'll get back to the show. This episode is brought to you by nexus foundations, our introductory course on the smart buildings industry. If you're new to the industry, this course is for you. If you're an industry vet, but want to understand how technology is changing things.
This course is also for you. The alumni are raving about the content, which they say pulls it all together, and they also love getting to meet the other students on the weekly zoom calls and in the private chat room, you can find out more about the course@courses.nexus lab. Start online. All right, back to the interview
Fascinating. All right. So let's, let's kind of reflect on. Has happened then after those three phases have taken new counts, we talked about where we were 15 years ago. And what are like, what are the way things are today that, that don't [00:42:00] match the rest of the world. Right. And one of the things I'm thinking about here is you, you started talking about how this was affecting all these different stakeholders.
And it sounds like it's like at the contract level, right? If I'm a JLL or a CVRE managing a facility, or if I'm a contractor servicing a facility, it sounds like neighbors it's affecting all the core business of not just the landlord. It's affecting the core business of all the stakeholders that are serving that building.
Am I right about
Carlos Flores: right? Yes. And I think that's one of the really fascinating things about the kind of the Australian model in the last decade. I do think that it's not just neighbors. It's really about using neighbors to be a really big ecosystem with lots of drivers, but, but you're totally right.
It's actually gone way, way beyond just the sustainability team or even the operations team. And he's going to a lot like this really, really big bubble around those teams. And I think they're, they're the best way to look at. So let's go one by one. I think facility managers are [00:43:00] fascinating. The case because facility managers worked for an owner.
So a company like CVRE in JLL, they might want to do a lot of those things, but if the owner is not on board, they actually can't really do a lot in sustainability with zero budget. And a lot of them today actually have neighbors star rating KPIs, as saying, you're taking a new contract for this building that is been operating on 4.5 stars.
You need to maintain that that's part of your contract. So whoever is going to go into that asset energy, performance and carbon performance is going to be a core part of their job. It's not going to be just a little side thing. And often a lot of these contracts have bonuses if you improve your ratings or even KPIs to improve these writings, which means the management team also has this responsibility, not just to ran the asset as well as they can, but to improve it along the course of, of of that lace.
So the management profession's changed just deeply. And, and just to give you an idea of how deeply did. The CEO of the facility management association sits in, in, in a steering [00:44:00] committee, which is the, the board, the sort of governance our program. And he's a huge champion of neighbors. And he talks about you know, how influential neighbors has been in really helping the facility management profession to be a really major driver of sustainability in Australia, instead of being just a passive player that that is secondary to other players in the sector.
So that's that's facility managers. Obviously owners, we talked about them before they have lots and lots of KPIs, partly because of investment, partly because of tenant demand. And partly because these companies have over those 15 years, that become like real true leaders in sustainability. So if you look at things like grasp today, the global real estate sustainability.
I don't know if you might have noticed that in the countries, but we definitely noticed that in, in Australia that every year they'd launch, obviously they rank over 1000 property companies on, on, on their survey and, and you get a score, you know, how are you doing against your peers and your region, how you're doing against the [00:45:00] rest of the world?
Ingress in the office market it's been around for 10 years every year. The top companies being an Australian company 10 years in a row in Australia is actually a small countries, less than 1% of the respondents to the survey are Australians. But the number one sport is being an Australian company every year.
And that's already impressive on its own, but it could have been maybe one company with a very enlightened it board and the sustainability team. But reality is that hardly every in any year being the same company is a different company every year. So there's say six or seven Australian companies fighting every year for the number one.
And I think that tells you it, not a lot about those companies, which are great and we're really fortunate to work with them, but he tells me a lot about the Australian ecosystem or just how important sustainability has become, how many companies are really internalizing it and, and invest in the law to, you know, compete in.
We want to be more sustainable than any other company in this market, in any other company in the world. [00:46:00] And I think that is such a visible in, in, in simple example, especially cause that service not run in Australia. It's run from Europe, from Amsterdam and almost every major portfolio you can think of in almost every region discloses their their indicators in, in, in grasp as well.
By the way, it's the same situation in the Dow Jones, sustainability index. Often Australian companies are the number one in offices and retail as well. And, and again, I do think it's a sign of, of that. And James, I'm not going to talk about a lot of the other players, but at a high level, just to see how deep this goes.
It goes not only into investors owners and facility managers, it goes into a lot of mechanical contractors and HVAC companies and analytics, and the market for analytics in Australia is huge. There's this probably as a proportion for its size, maybe the largest in the world's really big given that Australia is a very small country is you know, not even half of California in size.
And we've seen a lot of lawyers really coming into this space or leasing profession has a lot of this neighbors closest [00:47:00] in green leases that are constantly evolving around you know, what's the best what's best in practice in, in, in in energy performance. When we're talking about sustainable finance Australia is perhaps the single country in the world with the most green bonds and sustainability to link bones in the world as a proportion for its size.
A lot of them are in, in the building sector because the building sector in Australia by far it's. The leading edge of sustainability across all sectors in the country. And so suddenly it's this like ecosystem of tens of thousands of people working around many different parts of sustainability in different parts of the equation.
But a lot of that is powered by the fact that we have one star rating that is very simple and where the only way to get better, it's using less energy. And I think going back to all the way to the beginning, that design feature from somebody in 1997, it's been so influential because it means that if you're using NABERS for anything, any drivers built around it, it means that what you're really creating [00:48:00] is a driver for using less.
And that I think has been one of the, you know, one of the pillars of a lot of that transformation we've been saying
James Dice: so fascinating. The one thing we didn't talk about in terms of like the way things are now, I want, I want to get to like the future of neighbors and like expansion to other regions.
The one thing we didn't talk about though, is like the, when I think about real estate, I think about the value of an asset. Right. And. I think maybe to summarize all the things we talked about, like buildings with higher neighbors ratings are worth more. It seems like then buildings with lower rate neighbors ratings.
And is there like statistics on that and
Carlos Flores: published data? Yeah, there is so much published data these days. So I'm going to tell you like four sources at a high level. If people want to look into them, but there's a company called real investment analytics that has been tracking neighbor's ratings against financial performance for a lot of property companies for a decade every quarter.
So it goes way back. You can [00:49:00] see lots of trends on that. In more recently we've seen Morgan Stanley JLL Knight, Frank, all of them releasing their own versions of matching neighbors with the financial performance data that they have in their database, which are very big because some of these companies are just really, really major players in the leasing space.
And what we have seen is a really clear trend. A lot of these things we talked about before those drivers. Government's using the procurement power. It, the shame on disclosure investors be more willing to invest in companies doing more. A lot of those things are translating into the financial stability in a really, really strong way and, and, and growing.
So it's been bigger and bigger in the last few years. Do you, if your examples bill, if you're in the office market, for example you you have, if you have a higher neighbors energy rating, you have significantly longer leases on average. So, and that's one of the key indicators you look in in office is, well, how long is our leases, right?
And if your leases expire on average very soon you could have a lot of vacancies and that's a [00:50:00] really big financial risk indicator. So longer leases is actually really important and. Eh, buildings with high neighbors ratings have longer leases, partly because the government is renting those and the rent for longer.
And partly because a lot of companies now are doing the same thing that the government's big banks, a lot of big portfolios are just saying, we are not going to go into buildings that are not sustainable anymore. So longer leases. We've also seen significantly lower vacancies in buildings with high neighbors ratings.
And again, it's the same, it's the same driver. If there are less people in the market that are willing to go into an unsustainable building, then you will see higher vacancies on average. And we do see those very strongly and all of those things. And by the way, this morning indicators, but they really aggregate into the value of the asset.
So if you're selling a building all else equal, you sail in a building with a high NABERS rating you can get anywhere between 8% to 18%. For that asset with a higher nevus rating, all else equal. And in say to 18%, because a lot of these studies have [00:51:00] different methodologies. So you, so it's sometimes a little bit hard to compare it, but a lot of them go around that figure between 10% plus in 10%, if you're selling a 300 million.
You know, building office asset in the heart of Sydney or Melbourne 300, 10% of $300 million is $30 million. It is a lot more money than bringing in that building into high performance is ever going to be. And he's such a powerful driver on its own. And because this these understandings of, Hey, higher sustainability performance is translating into things that are much, much bigger than the energy are ever going to be.
We actually seen that become a driver on its own. We've seen lots of companies now going, we're going to go and buy poor performer buildings in this market. Do they mop and improve them and all their costs of two to three years, and then we're going to sell them for 10% more a few years later. And we're going to make a 400% return on that investment.
This actually quite a few companies doing that now as well. It really is becoming this snowball of drivers that [00:52:00] reinforce each other in this mesh of lots of drivers. So many that it's actually really hard to track them all. So there's lots of drivers that are happening in the market right now that not even I know about them, because there's just so many and so desegregated that it's just really difficult to do to track them all.
Wow,
James Dice: this makes me so
Carlos Flores: excited. It is really exciting. You know what James said? I think that it, maybe just to add a caveat into a lot of this, so we have been able to do this in a few sectors at this scale, like driving this kind of change. And to me that is it's exciting because a lot of these changes happen, you know, last decade with last decades, technology and expertise and costs.
So we're actually much better place now to do it. You know, something like that, this decade across most building sectors in most countries. But the key really is about. Creating an indicator that rewards the right thing, which is reducing energy use and then creating a lot of these [00:53:00] drivers around it.
It doesn't happen on its own. It's not just a rating tool. They're there. The Lincoln of those indicators to the right tools is really important. And it's, it's why it's so important where at a point, for example, in, in, in spaces, like, like sustainable finance, where there's a lot of things going on, but a lot of the indicators are not quite there yet, or, or everyone chooses their own indicator.
So we have the drivers. But we haven't linked to very well to we want this driver to drive the right behavior, not just to drive greenwashing. And at the moment is you see a letter of green bonds that are very green and a lot of green bonds that are just marketing. And it's very different, too difficult to tell them apart.
And a lot of our RGO about say program and also with a lot of people in this space around the world is how do we channel that into the ride metrics? So we, you know, use that force as a force for good in climate change instead of as having, you know, a lot of a lot of media releases, but you know, we're not making the planet any [00:54:00] safer because we're not really reducing or accelerating are, are trying to use in producing less emissions.
I do, I'm really hopeful in that space. I do think that we have really great metrics in a lot of countries. It's not just neighbors. And in Australia, we are actually working on a SAML finance framework ourselves to be able to, you know, if you have neighbors ratings, how do you use them? It really credible ways to be able to you know, get all the recognition that you want when you do in a green loan, but also to help us really accelerate the, the trajectory of Australia, reducing its emissions in the built environment.
James Dice: Really cool. So that's like one of the next phases
Carlos Flores: here, the a hundred percent, it's definitely something we're working really actively on.
James Dice: Cool. How about expansion into other countries? So the one thing when I'm listening to you this whole time, and I'm like smiling ear to ear, for those of you that are listening on just audio.
But the one thing I'm thinking this whole time is like, why aren't other [00:55:00] countries doing this? And I know that our other countries are doing this, but like, not like this, I guess is how I would put it. And it obviously hasn't had the market transformation yet. Like if I think about the U S we've had lots and lots of great city programs get passed and several states have done so as well, but is the market transformed?
I don't think so at this point. Right. And so what I guess I want to hear from you broadly on expansion, like, how does this model. Get expanded into the rest of the world, because if we're honest with ourselves, we need this transformation to happen. Every building down to my new house I'm sitting in right now.
Right. I'll gladly participate in the city doing this to my home. Right. And then I want to hear about how neighbors, like is this actual program getting expanded to other people.
Carlos Flores: I think that the topic about how do you drive transformation across a whole [00:56:00] market? SISA is a, it's a tricky one, I think.
And I think the U S is a really great case of how different conditions on, on how the country structure or the size of the country, or, or sometimes politics can actually really influence what are the options that you have at hand? Then? One thing w we have been really fortunate is, and this is nothing to do with neighbors is that Australia is a relatively small country, 25 million people.
It's not that big. And because of that, and also we, biggest neighbors was so early, we were able to create something national way before the states were actually creating the. Separate sort of splinter initiatives. So we have this like unified country and governments working together using one scheme.
That is the same for every city and every country. If you are a property company in five different states is the same thing. You don't have to like work out different tools. And so that gives it, it means that the scheme is low cost, low, easier for people to know how it works, because it works everywhere in the [00:57:00] same way.
And that is something that we've been really. To have that is very difficult to do in a country like the United States, if, you know, let alone just, just because of population alone, that's very difficult to do so to be country. And obviously all the states are not in the same page in terms of action.
There is that there's significant disparities with some states like California leading the world in so many things. And, but also a lot of states you know, not willing or being able to move at the same speed. The difference in speeds in Australia. So lots of. So we always have estate or two that are leading it every few years on different topics, but they're never all that far ahead from the other states because the other states wanting to catch up relatively quickly.
And I think that that environment is really facilitates things like let's have one national disclosure scheme set a place everywhere, the same, all the companies get hit in the same way. All the markets received the same information and companies that are, you know, very, very [00:58:00] progressive sustainability, ambitious, inability manager that happens to work in, in Melbourne.
But it has a portfolio across four states that person can drive change across four states because it's the same framework across the market. And I think that's something that we don't talk enough and this is, you know, the non-sexy side of sustainability, it's things like governance and, and stability.
Nah, we get requests about you know, neighbors should change the star rating and bring the, the, the average to the middle of three stars. And every now and then we get a comment like that. And in theory, if you were, if your goal was just to create the most beautiful, most perfect rating tool, you probably do that you know, every year.
But what we're trying to do is to create a rating tool where people can look for. And just plan for a gray transformation over time. And to do that, we just realize we actually need to give them certainty. And so that is a lot of the things that we do in the program is over that, how do we create a really stable th the measurement being really [00:59:00] stable and, and so people can take the risk, not on the rating tool, take the risk on the building.
Like, how do we, I want to say 70% target reduction by 2030 of energy consumption, that's difficult. That's difficult enough. Let's forget all the risk on, on, on the improvement of buildings instead of just switching metrics, which really paralyzed us, everybody. And so when I look at the, a lot of the schemes that are, that are popping up in the United States in, at the city level, on the one hand, my, I think is great.
And if I was you know, the, the, the head of sustainability in one of those cities is probably exactly what I will do, because that is the, you have, because creating something national. Incredibly difficult in 2021. But if you can create things that I go beyond the city, you do get the benefits of stability long long-term decision-making and people who are making a difference in their city and portfolios, as you know, are not based on one city, hardly ever.
Most of them are in multiple places. And a lot of them are in multiple states in the, in the United [01:00:00] States. So you have the same policies, a really ambitious portfolio can make a difference in a lot of places. And what they're doing is creating, you know, the. For transformation, they're creating the services that a lot of other companies are going to need to improve.
They are training their mechanical contractors on how to you know, get buildings to six stars in neighbors, maybe, you know, 98 on, on the energy on the energy star scale you're helping create demand for the analytics products to get real-time information or more efficient chillers and boilers and heat pumps.
And so that to me is is just really important in climate change. The more stability we can create in the way we measure in the more territory or CDs and states that can apply I think is something that can make a huge difference. So I know that I'm going a little bit away from from request and James, you were really asking about how to how to drive a lot of these change beyond that.
I think it's the second component, which [01:01:00] is we really need to focus on not just creating rating tools, but on the drivers. And we came to that conclusion quite a few years ago and neighbors, but it's when I joined that's 12 years ago. And is. We need to spend allocate a lot of time to working with policymakers or integrating neighbors with grasp the, the GRESB survey or creating a sustainable finance framework for neighbors.
So if somebody is doing it alone, they can do use neighbors really easily and getting more credible loan. Can we make that easy? A lot of those linkages, you really see the accumulated effect over time and often in sustainability. And you see this in all countries. So much of the focus is on the rating tool.
We need to create a rating, so we need to improve the rating. So, and we think that all the change is going to happen magically from them. But a rating tool is just a rating tool. A rating tool doesn't drive any change. What drives change is the drivers that you can call. Because you have a really good rate until and I do think that that space needs could [01:02:00] use a little more work and lot more minds thinking about how do we create the next wave of incentives.
And I do think that that's maybe the space where we can we can contribute the most as a program is just on coming to podcasts like this one in sharing the, you know, how we're being able to create some of those drivers. A lot of them are not going to work in, in other countries and some of them will.
And I think just sharing those stories can really enable, you know, other people in other regions to, to be able to create their own version of the government leasing policy or their own version of of disclosure. And likewise, we're always looking for ideas from other countries because you know, we have 20, 30 years to address climate change and it means that we have to be willing to share.
As much as we can share very quickly and we need to be actively looking for good ideas from everywhere. Cause we don't, we don't have time to mess around. And if we need to move really fast, you need to just open your ears and your eyes, share everything and just take as many good ideas as you can and bring them back home.
James Dice: Cool. Is [01:03:00] there a place online where all of the rating systems nerds, congregate, like is there like one place where the news happens?
Carlos Flores: I don't think so. Would I love to, I think we should probably create that. But don't think that there might be a website out there if there is I'm not very familiar with it, but I can tell you that if you're really interesting and a lot of these data, a lot of the stories, the neighbor's website has lots of things, including we've invested a lot into how do we make?
Not just like you can download all this data, but you can also, we have a. It's search engine for green buildings, I think is maybe the best way to look at it where you can search for thousands of buildings. They are database where they're located. And he's actually the second most visited page on our website.
It's like thousands of people go there every month. And we've actually seen, this is a fascinating about sharing data that is easily communicated. That a lot of people can stand, not just, not just engineers. And making it public is that we've seen a lot of banks, for example, going in there and say, Hey, for started [01:04:00] us in Lucas.
Good. This look at all this for status here. I think that, you know, why can you aim for six stars this already three in your own street? And I think that is the kind of things that we can see a little more. So if you, if you're looking at this and you're really into data and visualization and just great stories about market transformation, this a lot of that on the neighbor's website.
And we actually have this annual report, James, that again, it's one of the most visited pages on our website, which is you never hear that about annual reports. Nobody wants to read annual reports, but our annual report is a 70% live dashboards about what happened last year. So a lot of people going there to know you know, waste my billion located against the market in, in a COVID here.
What happened in class? Buildings using less energy, more energy. Is that the same in offices and shopping centers? A lot of people go in there and go, oh, okay. Well, offices were very impacted on the tendency side, but not so impacted on the building owner side. And you know, shopping centers, a lot of them continue to operate because they have supermarkets.
So you can see a lot of that in the data. [01:05:00] And so if you're into a lot of that, our annual report is just a gold mine for information. And that.
James Dice: Very cool. Anything else? That's that's next for neighbors before
Carlos Flores: we wrap up? I think at a high level, we are working on two fronts. Number one is that we're expanding neighbors to old building sectors.
And I mentioned that a little while earlier, so we are expanding to a lot of the, for neighbors is not in just yet. And the goal really is to cover the majority of the economy that operates around buildings, right? That's, that's really what we're trying to do as a program. At the same time, we're also working on expanding the scope of neighbors.
And I think that the most salient part of that is is embodied carbon, which by the way, you had a great podcast on last week. So we are looking into creating an embodied carbon and certification framework within neighbors. And the reason why we want to do that is because we think that we can do what we have done in operation in, in buildings, do that in body carbon in the sense that we can [01:06:00] create a single national well running framework for embodied carbon.
As you may know, a lot of the issue sandboarding carbon is that everyone has around methodology is this lots and lots and lots of methods, ways of measuring and databases benchmarks. So comparing buildings in the market is really difficult. And if you can't do that, it's really difficult to grade a lot of drivers around creating a national framework that is consistently applied across the whole country and was really, really high quality benchmarks.
That's really the thing that we do best is collect a lot of data. It's great, really high quality benchmarks to compare buildings. And that's something we're working on right now. And the goal is to have a, you know, a release within the next 18 months. And that is going to keep us really, basically, because he said it is the same.
A lot of the same stakeholders will be working before, but he's a completely different area, a new area for us. And I see if anyone's listening to this podcast you see how complex it is. It's a complex space with a lot of moving parts. And so that's something we're working very actively on.
other area we're working on at the [01:07:00] moment is, is internationally. We're working with quite a few people overseas to help them create programs, initiatives like neighbors, and also for us to learn from the, the, a lot of the breakthroughs that they're being, having an themselves. And they, the two highest profile examples I have is that neighbors is already operating in New Zealand.
It's run by the New Zealand government. And it's a, it's going great guns in, in, in New Zealand. And we'll work with gloss with them enables resources to launch recently in, in the United Kingdom which is also also really exciting is that very early days I think that the scheme has only been open for certification for, you know, a few weeks.
And so we probably gonna see the first participants in, in the scheme coming in, in early in 2022. But again, to me, a lot of these initiatives are about you know, how do we, how do we help other people to, to create initiatives like this internationally? Yeah. How do we better connect the sustainability sustainability markets in different countries?
It's really stuck. And when you work across cultures or regions, you go [01:08:00] to another country, you realize, oh my God, this country, same, same sector is really leading on these three things and is really trailing on these three things. And nobody realizes unless you've actually travel and work in another country for long enough to go, oh wow.
We can just take these three products that have existed there for like five years. And we could really sell these three products to this market because they had this, not that many providers of that. I think. Can do a lot more to create a highways for building sustainability business and IP and opportunities to flow a lot more seemingly.
And I think creating schemes like neighbors really helps with that because if you have a technology or expertise that is going to help a building reduce energy consumption a lot then you know, you can really, you can use this initiative to say, well, I've brought five buildings to five stars in natives in Australia.
I can do that when you're in London or in Paris or in Washington. And I think that is something that we need to [01:09:00] do if we want to make all this this targets that we're having climate change, which are overwhelmingly difficult and challenging. And in short timeframe we need to actively look for opportunities.
So the companies that are doing great work and creating great IP can actually share that with other countries a little more easily. So part of the. Part of the reason why we're doing this is to, you know, this is one way in which we can create those opportunities, not the only one, but it certainly helps.
And we're actually seeing that in the UK already in Australia, we were because we're so close to each other. A lot of companies already work between Australia and New Zealand. And sometimes the headquarters are in Oakland, in New Zealand, and sometimes they're in Sydney and, but a lot of companies kind of very fluently work across the two markets.
It's not the same in the UK because it's literally in the other side of the world from Australia. But we have seen a lot of mixed teams working on neighbor's ratings now and working on building design as well, where they go. Yes, we're going to have the leading design team is going to be in the UK, but we're going to get a [01:10:00] designer from Australia and sometimes the same company to actually join the team and be part of that team.
So we can bring lessons from that market into this project or the other way around as well. And this project hasn't been on the ground for that long, and we're already seen lots and lots of cases of that, of mutual collaboration and participation, which is exactly the kind of things that we want it to drive.
So it's really exciting to see. That's so cool.
James Dice: That same thing is happening within the nexus community on such a smaller scale. And it's just so amazing to see it happen. Thank you internet and thank you.
All right. Ready to close out with a little two
Carlos Flores: truths and a lie. Oh yeah. Yep. I am excited about this. James. So, I got three for you. So number one I traveled to Europe for two months paying no accommodation, no transport assemble one. Um, Number two is um, I [01:11:00] studied in Sweden and I can speak medium level Swedish that's number two.
And number three is I got married in a performance arts theater made entirely by timber. Those are my three mature, I believe
two months, a year of we know money speak, medium level Swedish got married in the theater.
James Dice: I
Carlos Flores: say, Swedish Swedish is the lie. That's very good. Yeah. And to be honest, I did study in Sweden and I really wanted to learn sewage, but it's so hard to learn the local language in a country where everybody speaks English and really good. And everybody like there, a young girl in the street who seven speaks English.
They're an old lady working at a supermarket, speaks English, all of them. So I try for a few months and [01:12:00] then I sort of gave up. It was impossible.
James Dice: I don't know if that's why I guess that because my subconscious may have made that connection, but I just guessed. But yeah, I do have, we do have several pro members.
Nexus pro members that are from Sweden and they speak English. And then I see their LinkedIn posts and I'm like, what is that language when they read it that doesn't look easy to learn
Carlos Flores: at all? It is. It is it is not. I'll tell you what it is, beautiful country to visit it and to live in for the, of just just really kind people.
It's just really kind society. And I really love that. You know, being there for a little while, especially coming from south America in a developing country, I was there in a scholarship, which explains why I travel for two months by just hiking and couch surfing. But it's it's such a just kind society where a lot of people care about the environment has its own challenges like every country, but it's it's just a really good perspective in life.
And you go, you know, a [01:13:00] lot of these issues that we think are unresolvable socially they do have solutions and a lot of these issues around the environment and climate, actually, we can build societies where the majority of people really care about that and are acting on that. And I do think that a lot of the Scandinavian countries have been you know, leading in some areas in particularly on the environment and care for it.
And I do think that's very.
James Dice: That's a good, great place to end and our, our show here. So thanks so much, Carlos. This has been fascinating and it has made me happier. It's been my day better. So I appreciate
Carlos Flores: it. Thanks, James. I had a lot of fun and thanks for having me. It's seven in the morning and Sydney, I was like, I haven't even had any coffee yet.
And I just really appreciate, I love your podcast, I think is displaying. So two big important role in, in our space in that. And like I told you before, I really admire people who can find a way to communicate really clearly on a topic that can be really inaccessible for a lot of people. And I do think that you do that [01:14:00] great in a lot of people who you've been, who have been in, in your podcast, I've been just really inspiring to, to, to listen to.
So, you know, keep it up and thanks so much for your service.
James Dice: Well, thanks for, thanks for coming on and be in one of the people that is so good at communicating. So talk to you soon.
James Dice: All right friends, thanks for listening to this episode of the Nexus Podcast. For more episodes like this and to get the weekly Nexus Newsletter, which by the way, readers have said is the best way to stay up to date on the future of the smart building industry, please subscribe at nexuslabs.online. You can find the show notes for this conversation there as well. Have a great day.
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