WEBVTT 00:00:00.000 --> 00:00:01.996 align:middle line:90% [SQUEAKING] 00:00:01.996 --> 00:00:03.992 align:middle line:90% [RUSTLING] 00:00:03.992 --> 00:00:06.487 align:middle line:90% [CLICKING] 00:00:06.487 --> 00:00:10.790 align:middle line:90% 00:00:10.790 --> 00:00:13.160 align:middle line:84% SIQI ZHENG: So today is our second lecture 00:00:13.160 --> 00:00:16.219 align:middle line:84% on the economics of green buildings. 00:00:16.219 --> 00:00:19.770 align:middle line:84% So last session, we talked about the first lecture. 00:00:19.770 --> 00:00:22.970 align:middle line:84% Remember, recap-- very, very quick recap. 00:00:22.970 --> 00:00:27.570 align:middle line:84% So last session, we talked about these green buildings. 00:00:27.570 --> 00:00:31.610 align:middle line:84% So we had this structural way that we 00:00:31.610 --> 00:00:36.700 align:middle line:84% talk how the market may work and how the market may not work. 00:00:36.700 --> 00:00:44.090 align:middle line:84% Remember, this market-- and we have that cash flow. 00:00:44.090 --> 00:00:50.890 align:middle line:84% We have that chain of the developer and investor and also 00:00:50.890 --> 00:00:51.530 align:middle line:90% tenants. 00:00:51.530 --> 00:00:54.610 align:middle line:84% So sometimes it works, and then you 00:00:54.610 --> 00:00:58.240 align:middle line:84% have the incentive from the tenant side, from the user side. 00:00:58.240 --> 00:01:01.700 align:middle line:84% You have a higher willingness to pay for rent. 00:01:01.700 --> 00:01:06.310 align:middle line:84% And then the owners, they can get higher revenue 00:01:06.310 --> 00:01:07.660 align:middle line:90% from the green buildings. 00:01:07.660 --> 00:01:09.940 align:middle line:84% If they have higher revenue for the green buildings, 00:01:09.940 --> 00:01:11.440 align:middle line:84% they are willing to pay higher price 00:01:11.440 --> 00:01:12.910 align:middle line:90% to purchase the green building. 00:01:12.910 --> 00:01:17.080 align:middle line:84% And that will incentivize the developers 00:01:17.080 --> 00:01:18.470 align:middle line:90% to build green building. 00:01:18.470 --> 00:01:19.880 align:middle line:90% So that's market work. 00:01:19.880 --> 00:01:23.450 align:middle line:84% And then we talk about how the market may not work-- 00:01:23.450 --> 00:01:25.030 align:middle line:90% so the market failure. 00:01:25.030 --> 00:01:27.400 align:middle line:84% We talk about several reasons of the market failure, 00:01:27.400 --> 00:01:30.080 align:middle line:84% for example, information asymmetry. 00:01:30.080 --> 00:01:34.210 align:middle line:84% Then we talk a little bit about how to solve this information 00:01:34.210 --> 00:01:37.870 align:middle line:84% asymmetry, which is the certificate, like the LEED, 00:01:37.870 --> 00:01:40.060 align:middle line:84% to solve this information problem, 00:01:40.060 --> 00:01:44.380 align:middle line:84% and also because externality and because other issues, 00:01:44.380 --> 00:01:46.190 align:middle line:90% the market may not work. 00:01:46.190 --> 00:01:48.140 align:middle line:90% So that's last session. 00:01:48.140 --> 00:01:51.550 align:middle line:84% So today, we continue our journey 00:01:51.550 --> 00:01:53.930 align:middle line:84% on the green buildings and the economics. 00:01:53.930 --> 00:01:55.600 align:middle line:90% And we have another way-- 00:01:55.600 --> 00:02:00.040 align:middle line:84% I have another way to organize today's session, which will 00:02:00.040 --> 00:02:02.860 align:middle line:90% be technology versus people-- 00:02:02.860 --> 00:02:06.105 align:middle line:90% technology versus people. 00:02:06.105 --> 00:02:09.289 align:middle line:90% 00:02:09.289 --> 00:02:12.630 align:middle line:84% We will look at some green building technology. 00:02:12.630 --> 00:02:14.570 align:middle line:90% We have so many technologies. 00:02:14.570 --> 00:02:18.650 align:middle line:84% Here is MIT, Massachusetts Institute of Technology. 00:02:18.650 --> 00:02:21.840 align:middle line:84% So we are not in short of all kinds of technologies. 00:02:21.840 --> 00:02:24.660 align:middle line:84% And we will talk mainly about two technologies. 00:02:24.660 --> 00:02:28.730 align:middle line:84% One is this passive house, and the other is the heat pump. 00:02:28.730 --> 00:02:32.400 align:middle line:84% So this is a very popular two technologies nowadays. 00:02:32.400 --> 00:02:35.630 align:middle line:84% Maybe you already heard of some of this from the media 00:02:35.630 --> 00:02:36.950 align:middle line:90% and from other people. 00:02:36.950 --> 00:02:38.580 align:middle line:90% So that's technology. 00:02:38.580 --> 00:02:44.555 align:middle line:84% But I will argue we cannot just look at technology and say, oh, 00:02:44.555 --> 00:02:46.610 align:middle line:84% this is so fancy, so advanced technology. 00:02:46.610 --> 00:02:49.020 align:middle line:84% But the technology may not work at all. 00:02:49.020 --> 00:02:51.380 align:middle line:84% And we also need to consider people. 00:02:51.380 --> 00:02:53.220 align:middle line:90% So that's the people side. 00:02:53.220 --> 00:02:55.620 align:middle line:84% People are those who are making decisions. 00:02:55.620 --> 00:02:58.310 align:middle line:84% We need to understand the people's incentives 00:02:58.310 --> 00:03:01.910 align:middle line:84% and behaviors so that we can make sure the technology can 00:03:01.910 --> 00:03:03.770 align:middle line:84% be used in the right way that can 00:03:03.770 --> 00:03:07.160 align:middle line:90% generate the right incentive. 00:03:07.160 --> 00:03:08.820 align:middle line:90% So that's today's session. 00:03:08.820 --> 00:03:12.410 align:middle line:84% So after today's session, if you understand 00:03:12.410 --> 00:03:15.680 align:middle line:84% this logic of technology versus people, 00:03:15.680 --> 00:03:18.110 align:middle line:90% you already got the point. 00:03:18.110 --> 00:03:21.690 align:middle line:84% So start from this building decarbonization. 00:03:21.690 --> 00:03:24.500 align:middle line:90% So this always show up. 00:03:24.500 --> 00:03:30.860 align:middle line:84% I already showed this in our intro session, session 0, 00:03:30.860 --> 00:03:31.760 align:middle line:90% is this-- 00:03:31.760 --> 00:03:36.260 align:middle line:84% real estate sector, we are responsible for 30% to 40% 00:03:36.260 --> 00:03:38.730 align:middle line:90% of the carbon and energy use. 00:03:38.730 --> 00:03:42.030 align:middle line:84% That's why we are always the target, 00:03:42.030 --> 00:03:46.810 align:middle line:84% the target when the country leaders, the city leaders-- 00:03:46.810 --> 00:03:49.370 align:middle line:90% 00:03:49.370 --> 00:03:51.430 align:middle line:90% is that OK? 00:03:51.430 --> 00:03:54.790 align:middle line:84% The country leaders, the city leaders, the mayors, 00:03:54.790 --> 00:03:57.790 align:middle line:84% they want to make sure their city 00:03:57.790 --> 00:03:59.770 align:middle line:84% can become net zero in which year. 00:03:59.770 --> 00:04:01.850 align:middle line:84% So they say, OK, look at this pie. 00:04:01.850 --> 00:04:07.000 align:middle line:90% We must-- we must target this-- 00:04:07.000 --> 00:04:09.386 align:middle line:90% where is the pointer? 00:04:09.386 --> 00:04:10.395 align:middle line:90% Oh, here? 00:04:10.395 --> 00:04:16.959 align:middle line:90% 00:04:16.959 --> 00:04:19.630 align:middle line:84% OK, when we look at this pie, they 00:04:19.630 --> 00:04:23.410 align:middle line:84% say, OK, if I want my city to become net zero in 2040, 00:04:23.410 --> 00:04:26.090 align:middle line:84% we must target this, the building sector. 00:04:26.090 --> 00:04:31.760 align:middle line:84% So that's why all the real estate stakeholders, 00:04:31.760 --> 00:04:35.810 align:middle line:84% they are under big pressure to decarbonize. 00:04:35.810 --> 00:04:38.150 align:middle line:90% This is just not about US story. 00:04:38.150 --> 00:04:39.800 align:middle line:90% It's about the global story. 00:04:39.800 --> 00:04:45.280 align:middle line:84% So there's some headlines in the media say "European Green Deal," 00:04:45.280 --> 00:04:50.930 align:middle line:84% renovate-- it's a renovation wave that they say, 00:04:50.930 --> 00:04:54.370 align:middle line:84% OK we will invest a lot to renovate those buildings 00:04:54.370 --> 00:04:56.150 align:middle line:90% and decarbonize those buildings. 00:04:56.150 --> 00:05:00.400 align:middle line:84% And Mumbai, Asia, Mexico City, and the US, 00:05:00.400 --> 00:05:03.370 align:middle line:84% we have this Inflation Reduction Act 00:05:03.370 --> 00:05:08.170 align:middle line:84% and just inject a lot of capital into this sector 00:05:08.170 --> 00:05:09.980 align:middle line:90% to decarbonize this sector. 00:05:09.980 --> 00:05:15.950 align:middle line:84% So that's basically all what's going on for decarbonization. 00:05:15.950 --> 00:05:17.840 align:middle line:90% And think about this. 00:05:17.840 --> 00:05:20.470 align:middle line:84% Decarbonize the building sector-- 00:05:20.470 --> 00:05:22.970 align:middle line:84% we first need to understand, what is carbon 00:05:22.970 --> 00:05:24.610 align:middle line:90% about for the building sector? 00:05:24.610 --> 00:05:28.330 align:middle line:84% We show this, the building's carbon footprint. 00:05:28.330 --> 00:05:33.710 align:middle line:84% So we know that in general, two major categories-- 00:05:33.710 --> 00:05:36.070 align:middle line:90% one is embodied carbon. 00:05:36.070 --> 00:05:38.290 align:middle line:84% That's in the concrete, in the cement, 00:05:38.290 --> 00:05:41.440 align:middle line:84% and in the production supply chain 00:05:41.440 --> 00:05:46.180 align:middle line:84% that you just gather all the materials and then you build. 00:05:46.180 --> 00:05:47.480 align:middle line:90% That's embodied carbon. 00:05:47.480 --> 00:05:49.630 align:middle line:90% All those are embodied carbon. 00:05:49.630 --> 00:05:53.320 align:middle line:84% And the other category is operational carbon. 00:05:53.320 --> 00:05:55.940 align:middle line:84% Operational carbon means building is already there. 00:05:55.940 --> 00:05:57.850 align:middle line:84% And then you operate the building, 00:05:57.850 --> 00:06:02.860 align:middle line:84% some very durable asset, 50 years, 100 years. 00:06:02.860 --> 00:06:05.110 align:middle line:84% And for each year you operate, then 00:06:05.110 --> 00:06:06.740 align:middle line:90% you have the operational carbon. 00:06:06.740 --> 00:06:08.000 align:middle line:90% So that's the idea. 00:06:08.000 --> 00:06:11.950 align:middle line:84% So now, when they are talking about this decarbonization, many 00:06:11.950 --> 00:06:18.190 align:middle line:84% of those policies, they first look at this operational carbon. 00:06:18.190 --> 00:06:22.190 align:middle line:84% They have not got the chance to look at the embodied carbon. 00:06:22.190 --> 00:06:24.410 align:middle line:84% Now, some of them, they try to look into this. 00:06:24.410 --> 00:06:28.880 align:middle line:84% But first, they say, decarbonize the buildings. 00:06:28.880 --> 00:06:30.630 align:middle line:84% They are talking about operational carbon. 00:06:30.630 --> 00:06:33.080 align:middle line:84% So that's basically the energy you 00:06:33.080 --> 00:06:37.120 align:middle line:84% are using-- the gas, all your electricity in the building. 00:06:37.120 --> 00:06:39.860 align:middle line:90% 00:06:39.860 --> 00:06:41.480 align:middle line:90% So think about now. 00:06:41.480 --> 00:06:43.660 align:middle line:90% We also make our life easier. 00:06:43.660 --> 00:06:47.040 align:middle line:84% Now let's put this embodied carbon aside, 00:06:47.040 --> 00:06:50.000 align:middle line:84% and we only think about the operational carbon. 00:06:50.000 --> 00:06:52.580 align:middle line:84% And for operational carbon, there 00:06:52.580 --> 00:06:55.910 align:middle line:84% are several strategies that can help 00:06:55.910 --> 00:06:58.140 align:middle line:90% to decarbonize the buildings. 00:06:58.140 --> 00:07:02.180 align:middle line:84% Do you have any idea of these strategies 00:07:02.180 --> 00:07:03.590 align:middle line:90% of the decarbonization? 00:07:03.590 --> 00:07:05.850 align:middle line:90% Look at operational carbon. 00:07:05.850 --> 00:07:06.600 align:middle line:90% Any thoughts? 00:07:06.600 --> 00:07:07.175 align:middle line:90% Please. 00:07:07.175 --> 00:07:08.550 align:middle line:84% AUDIENCE: Electrify the building? 00:07:08.550 --> 00:07:10.133 align:middle line:84% SIQI ZHENG: Electrifying the building. 00:07:10.133 --> 00:07:11.110 align:middle line:90% Yeah, that's good. 00:07:11.110 --> 00:07:14.020 align:middle line:84% That's one of the major topics we are going to talk about. 00:07:14.020 --> 00:07:17.580 align:middle line:84% But first, think about the high level. 00:07:17.580 --> 00:07:21.730 align:middle line:84% What are the ways that we can decarbonize the building? 00:07:21.730 --> 00:07:22.320 align:middle line:90% Yeah? 00:07:22.320 --> 00:07:25.680 align:middle line:84% AUDIENCE: Weatherization, is that it? 00:07:25.680 --> 00:07:28.320 align:middle line:84% SIQI ZHENG: Ah, yes, that'd help the building 00:07:28.320 --> 00:07:31.780 align:middle line:84% to have better insulation, for example, for the cold weather. 00:07:31.780 --> 00:07:33.495 align:middle line:90% Yes? 00:07:33.495 --> 00:07:36.570 align:middle line:84% AUDIENCE: [INAUDIBLE] passive strategies. 00:07:36.570 --> 00:07:38.550 align:middle line:90% SIQI ZHENG: Passive strategies. 00:07:38.550 --> 00:07:40.050 align:middle line:90% What kind of passive strategy? 00:07:40.050 --> 00:07:41.480 align:middle line:90% Give an example. 00:07:41.480 --> 00:07:44.190 align:middle line:84% AUDIENCE: Like a vent duct where you have a wind-- 00:07:44.190 --> 00:07:46.650 align:middle line:84% SIQI ZHENG: Ventilation, like this natural ventilation. 00:07:46.650 --> 00:07:50.970 align:middle line:84% They don't use a machine, but you use the natural wind, right? 00:07:50.970 --> 00:07:52.470 align:middle line:90% OK, Wilson? 00:07:52.470 --> 00:07:55.563 align:middle line:84% AUDIENCE: Maybe use less gas, all electricity. 00:07:55.563 --> 00:07:56.230 align:middle line:90% SIQI ZHENG: Yes. 00:07:56.230 --> 00:07:56.952 align:middle line:90% OK, good. 00:07:56.952 --> 00:07:58.910 align:middle line:84% So that's the first thing I want to talk about. 00:07:58.910 --> 00:08:00.140 align:middle line:90% Do you want to say something? 00:08:00.140 --> 00:08:02.311 align:middle line:84% AUDIENCE: Yeah, a passive house is 00:08:02.311 --> 00:08:06.050 align:middle line:84% because they don't use the energy and also 00:08:06.050 --> 00:08:07.443 align:middle line:90% the green building. 00:08:07.443 --> 00:08:08.110 align:middle line:90% SIQI ZHENG: Yes. 00:08:08.110 --> 00:08:10.250 align:middle line:84% So you are an expert on passive house. 00:08:10.250 --> 00:08:12.820 align:middle line:84% Later I will ask you questions about passive house 00:08:12.820 --> 00:08:15.520 align:middle line:84% because today we will talk a lot about passive house. 00:08:15.520 --> 00:08:20.320 align:middle line:84% So the three major strategies I look 00:08:20.320 --> 00:08:23.090 align:middle line:84% at the high level of because electrification 00:08:23.090 --> 00:08:25.690 align:middle line:84% and the passive house, they are specific technologies. 00:08:25.690 --> 00:08:26.985 align:middle line:90% But first think about this. 00:08:26.985 --> 00:08:30.040 align:middle line:90% 00:08:30.040 --> 00:08:32.140 align:middle line:90% First, use less. 00:08:32.140 --> 00:08:34.600 align:middle line:90% You cannot just waste energy. 00:08:34.600 --> 00:08:38.030 align:middle line:84% You should turn off the light when you are not here. 00:08:38.030 --> 00:08:40.280 align:middle line:84% You should put the temperature not so hot-- 00:08:40.280 --> 00:08:44.090 align:middle line:84% I mean, in the winter, inside, the heating, not so cold. 00:08:44.090 --> 00:08:49.300 align:middle line:84% And you need to put on a sweater in the summer with very 00:08:49.300 --> 00:08:49.970 align:middle line:90% strong AC. 00:08:49.970 --> 00:08:52.480 align:middle line:90% First, change your behaviors. 00:08:52.480 --> 00:08:57.250 align:middle line:84% And help improve the insulation of the house 00:08:57.250 --> 00:08:59.800 align:middle line:90% so that you first use less-- 00:08:59.800 --> 00:09:02.860 align:middle line:84% behavioral side and the insulation 00:09:02.860 --> 00:09:07.040 align:middle line:84% side so that you consume less energy. 00:09:07.040 --> 00:09:08.560 align:middle line:90% That's number one. 00:09:08.560 --> 00:09:11.560 align:middle line:84% But you cannot really consume zero energy. 00:09:11.560 --> 00:09:12.980 align:middle line:90% Otherwise, how can you do? 00:09:12.980 --> 00:09:15.580 align:middle line:84% You need to live, work, play, and you 00:09:15.580 --> 00:09:18.700 align:middle line:84% need to consume some energy, although you can reduce, 00:09:18.700 --> 00:09:20.080 align:middle line:90% reduce to the minimum. 00:09:20.080 --> 00:09:22.720 align:middle line:84% But you still need some energy for sure, 00:09:22.720 --> 00:09:24.880 align:middle line:84% because you don't want to sacrifice 00:09:24.880 --> 00:09:27.460 align:middle line:84% too much of your quality of life in the buildings. 00:09:27.460 --> 00:09:32.060 align:middle line:84% And then, for those energy to the minimum level, 00:09:32.060 --> 00:09:37.190 align:middle line:84% switch to renewable energy, either on site or off site. 00:09:37.190 --> 00:09:39.980 align:middle line:84% So that's-- basically, you can see these solar panels 00:09:39.980 --> 00:09:45.620 align:middle line:84% on the roof and an offsite wind farm and all those things. 00:09:45.620 --> 00:09:49.280 align:middle line:84% Then you buy some renewable energy from other places. 00:09:49.280 --> 00:09:52.640 align:middle line:84% And you can generate, but you don't have enough-- 00:09:52.640 --> 00:09:54.030 align:middle line:90% too much roof space. 00:09:54.030 --> 00:09:56.420 align:middle line:84% You have only limited roof space. 00:09:56.420 --> 00:09:58.950 align:middle line:90% So that's the on site. 00:09:58.950 --> 00:10:01.140 align:middle line:84% If you cannot do on site, go off site. 00:10:01.140 --> 00:10:05.990 align:middle line:84% And then another thing is you purchase a lot of energy 00:10:05.990 --> 00:10:11.490 align:middle line:84% from the city-level grid, the electricity. 00:10:11.490 --> 00:10:17.540 align:middle line:84% So then you need to, OK, change from the very, very fossil fuel 00:10:17.540 --> 00:10:23.510 align:middle line:84% gas into electricity for major type of energy consumption, 00:10:23.510 --> 00:10:27.360 align:middle line:84% especially winter heating, from gas to electricity. 00:10:27.360 --> 00:10:32.440 align:middle line:84% And then, if the city also is doing a good job, 00:10:32.440 --> 00:10:35.130 align:middle line:84% the city will make this grid decarbonized-- 00:10:35.130 --> 00:10:37.440 align:middle line:84% decarbonize the grids, the city grids. 00:10:37.440 --> 00:10:39.650 align:middle line:84% Then the city's electricity is from-- 00:10:39.650 --> 00:10:42.410 align:middle line:84% if the city's electricity is from the solar 00:10:42.410 --> 00:10:45.410 align:middle line:84% or from renewable energy, then if you 00:10:45.410 --> 00:10:48.380 align:middle line:84% switch to fully electrifying, then you 00:10:48.380 --> 00:10:51.200 align:middle line:84% are saying you are decarbonizing your buildings. 00:10:51.200 --> 00:10:53.910 align:middle line:84% If you only change to electricity, 00:10:53.910 --> 00:10:55.700 align:middle line:84% but the city's grid is still dirty 00:10:55.700 --> 00:10:59.030 align:middle line:84% and they use coal to generate electricity, 00:10:59.030 --> 00:11:02.030 align:middle line:90% then it still won't work. 00:11:02.030 --> 00:11:07.430 align:middle line:84% So that's a collaboration between a city and a building. 00:11:07.430 --> 00:11:11.360 align:middle line:84% AUDIENCE: I remember reading an article talking about that, 00:11:11.360 --> 00:11:15.320 align:middle line:84% and they said that even if the cities are not decarbonizing 00:11:15.320 --> 00:11:17.210 align:middle line:84% their grid, it's more efficient to use energy 00:11:17.210 --> 00:11:24.740 align:middle line:84% because the transportation footprint of coal, oil, 00:11:24.740 --> 00:11:27.020 align:middle line:84% it's a lot higher than a lot of electricity. 00:11:27.020 --> 00:11:29.500 align:middle line:84% It's very efficient to transport electricity. 00:11:29.500 --> 00:11:32.250 align:middle line:84% SIQI ZHENG: Yeah, that makes sense because the city is big, 00:11:32.250 --> 00:11:34.450 align:middle line:90% the economies of scale. 00:11:34.450 --> 00:11:37.000 align:middle line:84% They generate the electricity, and then you 00:11:37.000 --> 00:11:38.420 align:middle line:90% get electricity from them. 00:11:38.420 --> 00:11:41.950 align:middle line:84% It's better than every building buying some coal 00:11:41.950 --> 00:11:44.240 align:middle line:84% to generate the electricity by themselves. 00:11:44.240 --> 00:11:47.680 align:middle line:84% But ultimately, oil-- but ultimately, 00:11:47.680 --> 00:11:49.960 align:middle line:84% they need to decarbonize the grid 00:11:49.960 --> 00:11:52.060 align:middle line:90% so that you can get net zero. 00:11:52.060 --> 00:11:57.850 align:middle line:84% And if you use less, and you switch to renewables as much 00:11:57.850 --> 00:12:01.550 align:middle line:84% as possible, but you still cannot get to net zero, 00:12:01.550 --> 00:12:04.030 align:middle line:84% but you already pledged to be net zero, 00:12:04.030 --> 00:12:05.680 align:middle line:90% and what should you do? 00:12:05.680 --> 00:12:09.620 align:middle line:84% The only last resort is carbon offset. 00:12:09.620 --> 00:12:15.160 align:middle line:84% For example, MIT, here, our president, our former president, 00:12:15.160 --> 00:12:17.300 align:middle line:84% and the new president-- we have a new president, 00:12:17.300 --> 00:12:19.690 align:middle line:84% but our former president was very ambitious. 00:12:19.690 --> 00:12:22.720 align:middle line:84% They already pledged to the entire world 00:12:22.720 --> 00:12:26.350 align:middle line:84% that MIT will become net zero in 2026. 00:12:26.350 --> 00:12:29.610 align:middle line:90% Can you imagine, 2026? 00:12:29.610 --> 00:12:32.750 align:middle line:84% That's only 4 years or 3 years to go 00:12:32.750 --> 00:12:35.730 align:middle line:90% to become net zero in 2026. 00:12:35.730 --> 00:12:40.828 align:middle line:84% Do you think that's possible for this MIT campus? 00:12:40.828 --> 00:12:42.250 align:middle line:90% AUDIENCE: Nuclear. 00:12:42.250 --> 00:12:43.580 align:middle line:90% SIQI ZHENG: Nuclear. 00:12:43.580 --> 00:12:45.630 align:middle line:84% Yeah, but they cannot just only use nuclear. 00:12:45.630 --> 00:12:46.922 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:12:46.922 --> 00:12:47.630 align:middle line:90% SIQI ZHENG: Yeah. 00:12:47.630 --> 00:12:52.040 align:middle line:84% So now what they're doing is to buy carbon offset. 00:12:52.040 --> 00:12:54.830 align:middle line:84% But they don't want to look very stupid. 00:12:54.830 --> 00:13:00.440 align:middle line:84% So they are talking about how to buy the best carbon offset, 00:13:00.440 --> 00:13:04.080 align:middle line:84% because there are bad ones, there are good ones like that. 00:13:04.080 --> 00:13:06.800 align:middle line:90% So they create a committee. 00:13:06.800 --> 00:13:08.480 align:middle line:90% I'm on the committee. 00:13:08.480 --> 00:13:11.970 align:middle line:84% The committee is called MIT Net Zero 2026. 00:13:11.970 --> 00:13:16.220 align:middle line:84% And we have numerous meetings to discuss this carbon offset thing 00:13:16.220 --> 00:13:20.090 align:middle line:84% because it's no chance to really get to net zero 00:13:20.090 --> 00:13:23.060 align:middle line:90% even with this offset. 00:13:23.060 --> 00:13:26.120 align:middle line:84% And then we are talking about carbon offset. 00:13:26.120 --> 00:13:30.300 align:middle line:84% This is not my expertise, but we can discuss a little bit. 00:13:30.300 --> 00:13:32.660 align:middle line:84% I know you want to say something about carbon offset? 00:13:32.660 --> 00:13:33.350 align:middle line:90% AUDIENCE: Yes. 00:13:33.350 --> 00:13:35.270 align:middle line:84% Can you explain how you change from 00:13:35.270 --> 00:13:37.050 align:middle line:90% gas-based to electricity-based? 00:13:37.050 --> 00:13:41.820 align:middle line:84% And is electricity more cheaper as well? 00:13:41.820 --> 00:13:44.220 align:middle line:84% And so I'm understanding how you implement this 00:13:44.220 --> 00:13:45.643 align:middle line:90% because it's something that-- 00:13:45.643 --> 00:13:47.810 align:middle line:84% SIQI ZHENG: Yeah, later, we will discuss this a lot. 00:13:47.810 --> 00:13:50.780 align:middle line:84% Electrification-- that's a focus of this class. 00:13:50.780 --> 00:13:53.980 align:middle line:84% But first, let's talk a little bit of carbon offset. 00:13:53.980 --> 00:13:57.490 align:middle line:84% And I think many of you heard of the carbon offset-- 00:13:57.490 --> 00:13:59.710 align:middle line:90% is good things or bad things. 00:13:59.710 --> 00:14:01.840 align:middle line:84% What do you think, whether it's a good thing? 00:14:01.840 --> 00:14:06.050 align:middle line:84% What is the limitations of carbon offset? 00:14:06.050 --> 00:14:08.550 align:middle line:84% AUDIENCE: It's difficult to verify, just like what you said, 00:14:08.550 --> 00:14:11.100 align:middle line:84% as well as if a lot of the carbon offsets, 00:14:11.100 --> 00:14:13.080 align:middle line:90% unless there's actually any-- 00:14:13.080 --> 00:14:16.360 align:middle line:84% if you're just buying a carbon offset 00:14:16.360 --> 00:14:20.012 align:middle line:84% that is like a forest has been maintained 00:14:20.012 --> 00:14:21.750 align:middle line:90% and so that the carbon sink. 00:14:21.750 --> 00:14:23.670 align:middle line:84% Well, there's not really any behavior change. 00:14:23.670 --> 00:14:26.830 align:middle line:84% That forest was perhaps going to be there anyway. 00:14:26.830 --> 00:14:29.600 align:middle line:84% So whoever just can buy it all was just 00:14:29.600 --> 00:14:31.795 align:middle line:84% going to buy it at the beginning, and then, well, 00:14:31.795 --> 00:14:33.190 align:middle line:90% then they really [INAUDIBLE]. 00:14:33.190 --> 00:14:34.000 align:middle line:90% SIQI ZHENG: Yeah. 00:14:34.000 --> 00:14:37.720 align:middle line:84% I want to make sure first of you whether you 00:14:37.720 --> 00:14:40.240 align:middle line:90% understand offset as a concept. 00:14:40.240 --> 00:14:43.720 align:middle line:84% So here I put a small picture here 00:14:43.720 --> 00:14:45.640 align:middle line:84% to give you a sense of carbon offset. 00:14:45.640 --> 00:14:52.630 align:middle line:84% So basically, see, this is maybe a forest or a wind turbine. 00:14:52.630 --> 00:14:54.340 align:middle line:90% No matter what, it's very green. 00:14:54.340 --> 00:14:59.260 align:middle line:84% And they can absorb carbon from the atmosphere, 00:14:59.260 --> 00:15:01.900 align:middle line:84% or they generate renewable energy 00:15:01.900 --> 00:15:04.040 align:middle line:90% without emitting any carbon. 00:15:04.040 --> 00:15:08.650 align:middle line:84% So this will help the entire world to reduce carbon. 00:15:08.650 --> 00:15:11.470 align:middle line:84% On the other hand, there is a factory here, 00:15:11.470 --> 00:15:13.840 align:middle line:84% and they use a lot of dirty energy, 00:15:13.840 --> 00:15:15.650 align:middle line:84% and they emit a lot of carbon emission. 00:15:15.650 --> 00:15:19.150 align:middle line:84% But in the short run, this factory really cannot really 00:15:19.150 --> 00:15:21.920 align:middle line:90% switch to 100% renewable. 00:15:21.920 --> 00:15:23.890 align:middle line:90% How can they do? 00:15:23.890 --> 00:15:27.370 align:middle line:84% This forest will sell some carbon offset 00:15:27.370 --> 00:15:28.840 align:middle line:90% because they reduce carbon. 00:15:28.840 --> 00:15:32.060 align:middle line:84% And this factory will buy those carbon offset. 00:15:32.060 --> 00:15:36.050 align:middle line:84% And so in this way, overall, it will be balanced out. 00:15:36.050 --> 00:15:37.150 align:middle line:90% So that's the idea. 00:15:37.150 --> 00:15:39.970 align:middle line:84% So this forest will sell some carbon offset so this 00:15:39.970 --> 00:15:41.200 align:middle line:90% is giving money to this. 00:15:41.200 --> 00:15:45.100 align:middle line:84% And they can emit, but they will be offset by this forest, 00:15:45.100 --> 00:15:46.910 align:middle line:90% no matter where the forest is. 00:15:46.910 --> 00:15:49.256 align:middle line:90% This is carbon offset. 00:15:49.256 --> 00:15:52.670 align:middle line:84% AUDIENCE: I know the the limitation about to buy and sell 00:15:52.670 --> 00:15:54.030 align:middle line:90% carbon credits. 00:15:54.030 --> 00:16:04.070 align:middle line:84% [INAUDIBLE] like, it's the real case [INAUDIBLE], 00:16:04.070 --> 00:16:09.710 align:middle line:84% to the real estate industrial sale of carbon offsets. 00:16:09.710 --> 00:16:15.410 align:middle line:84% But I know many, many developing countries-- 00:16:15.410 --> 00:16:18.185 align:middle line:84% SIQI ZHENG: [INAUDIBLE] carb offsets a lot. 00:16:18.185 --> 00:16:18.890 align:middle line:90% AUDIENCE: Yeah. 00:16:18.890 --> 00:16:19.580 align:middle line:90% SIQI ZHENG: Yes. 00:16:19.580 --> 00:16:24.740 align:middle line:84% For example, this factory emit 100 tons of CO2 emission. 00:16:24.740 --> 00:16:27.410 align:middle line:84% And they pledge-- they say, oh, we 00:16:27.410 --> 00:16:30.150 align:middle line:84% want to be a good citizen to the entire world. 00:16:30.150 --> 00:16:33.330 align:middle line:84% We want to reduce our carbon emission to 50 tons. 00:16:33.330 --> 00:16:35.240 align:middle line:90% But how can they reduce? 00:16:35.240 --> 00:16:35.870 align:middle line:90% They cannot. 00:16:35.870 --> 00:16:38.150 align:middle line:90% Technologically, they cannot. 00:16:38.150 --> 00:16:42.180 align:middle line:84% They buy 50 tons of carbon offset from the forest. 00:16:42.180 --> 00:16:46.290 align:middle line:84% Then they say, although we emit 100 tons-- no change-- 00:16:46.290 --> 00:16:55.100 align:middle line:84% still 100 tons-- 100 tons, still emit this, but minus 50 tons 00:16:55.100 --> 00:16:56.230 align:middle line:90% from the forest. 00:16:56.230 --> 00:16:58.040 align:middle line:90% The forest reduces the 50 tons. 00:16:58.040 --> 00:17:01.070 align:middle line:84% And then, overall, it's artificially 00:17:01.070 --> 00:17:03.010 align:middle line:90% say, oh, we achieved this. 00:17:03.010 --> 00:17:04.990 align:middle line:90% So that's carbon offset idea. 00:17:04.990 --> 00:17:08.700 align:middle line:84% But as you said, it's a lot of limitations, especially 00:17:08.700 --> 00:17:11.260 align:middle line:90% this additionality. 00:17:11.260 --> 00:17:13.740 align:middle line:84% So carbon offset, the challenge of additionality 00:17:13.740 --> 00:17:18.890 align:middle line:84% is a big thing, which means of course you will need to verify. 00:17:18.890 --> 00:17:20.079 align:middle line:90% You cannot just cheat. 00:17:20.079 --> 00:17:23.140 align:middle line:84% If the forest didn't reduce, you cannot cheat. 00:17:23.140 --> 00:17:25.430 align:middle line:84% There is a verification that's very important. 00:17:25.430 --> 00:17:29.540 align:middle line:84% But besides verification, this is the minimum requirement. 00:17:29.540 --> 00:17:30.670 align:middle line:90% You cannot cheat. 00:17:30.670 --> 00:17:34.810 align:middle line:84% And then this additionality-- additionality means you cannot 00:17:34.810 --> 00:17:37.060 align:middle line:84% just say, OK, no matter, no matter, 00:17:37.060 --> 00:17:40.210 align:middle line:84% you will sell the carbon offsets, the forest, 00:17:40.210 --> 00:17:43.660 align:middle line:84% the forest or the wind farm or all these things. 00:17:43.660 --> 00:17:48.130 align:middle line:84% And even if you hadn't sold those offset, 00:17:48.130 --> 00:17:53.280 align:middle line:84% you will still have made that effort to reduce carbon offset. 00:17:53.280 --> 00:17:56.510 align:middle line:84% So for the entire society, there is no change. 00:17:56.510 --> 00:17:58.770 align:middle line:90% So that's a problem. 00:17:58.770 --> 00:18:03.400 align:middle line:84% So here I gave you some examples of this. 00:18:03.400 --> 00:18:09.730 align:middle line:84% For example, this Delta is a big airline company, right? 00:18:09.730 --> 00:18:14.710 align:middle line:84% And they emit a lot because they burn the oil for the flights. 00:18:14.710 --> 00:18:17.380 align:middle line:84% And then they buy the carbon offset 00:18:17.380 --> 00:18:20.380 align:middle line:90% from the Dominican Republic. 00:18:20.380 --> 00:18:23.620 align:middle line:84% The Dominican Republic, they have a wind farm there. 00:18:23.620 --> 00:18:24.980 align:middle line:90% They have a wind farm. 00:18:24.980 --> 00:18:29.050 align:middle line:84% Then they generate a lot of renewable energies. 00:18:29.050 --> 00:18:33.580 align:middle line:84% So this Delta bought some credits from there-- 00:18:33.580 --> 00:18:35.510 align:middle line:84% carbon offset credits from there. 00:18:35.510 --> 00:18:40.340 align:middle line:84% But later some scientists, they studied this case. 00:18:40.340 --> 00:18:44.920 align:middle line:84% And they showed that even if Delta didn't buy that, this wind 00:18:44.920 --> 00:18:48.400 align:middle line:84% farm would still be built. It's not depending on 00:18:48.400 --> 00:18:50.050 align:middle line:90% whether Delta buy or not. 00:18:50.050 --> 00:18:52.750 align:middle line:84% So this Delta buying something does not 00:18:52.750 --> 00:18:55.460 align:middle line:84% change anything that the Dominican Republic will do. 00:18:55.460 --> 00:18:58.210 align:middle line:84% So it's not additionality, right? 00:18:58.210 --> 00:18:59.630 align:middle line:90% So that's the thing. 00:18:59.630 --> 00:19:04.840 align:middle line:84% No matter what, the Dominican Republic still do the wind farm. 00:19:04.840 --> 00:19:09.190 align:middle line:84% It's no additional reduction of the carbon 00:19:09.190 --> 00:19:12.700 align:middle line:84% from the entire world, because global warming is 00:19:12.700 --> 00:19:14.220 align:middle line:90% an entire-world thing, right? 00:19:14.220 --> 00:19:18.060 align:middle line:84% So no matter what you, they still build. 00:19:18.060 --> 00:19:20.910 align:middle line:84% So you still emit by your flight. 00:19:20.910 --> 00:19:24.830 align:middle line:84% So this carbon offset has no additional net value 00:19:24.830 --> 00:19:27.290 align:middle line:90% to the carbon reduction. 00:19:27.290 --> 00:19:34.010 align:middle line:84% And General-- GE, this company, and they also did something. 00:19:34.010 --> 00:19:37.460 align:middle line:84% They bought some carbon offset from China. 00:19:37.460 --> 00:19:43.640 align:middle line:84% From China, they also have a solar farm and a wind farm 00:19:43.640 --> 00:19:45.090 align:middle line:90% there as renewable energy. 00:19:45.090 --> 00:19:46.850 align:middle line:84% They bought some credit from there. 00:19:46.850 --> 00:19:51.290 align:middle line:84% But then later they found out the China's government, 00:19:51.290 --> 00:19:54.180 align:middle line:84% they already heavily subsidized that wind farm. 00:19:54.180 --> 00:19:58.130 align:middle line:84% And so it means no matter whether GE will buy or not, 00:19:58.130 --> 00:20:00.410 align:middle line:84% the wind farm will always be built. 00:20:00.410 --> 00:20:02.750 align:middle line:90% It's nothing to do with this. 00:20:02.750 --> 00:20:05.730 align:middle line:84% So you didn't change the entire thing. 00:20:05.730 --> 00:20:07.300 align:middle line:90% So that's additionality. 00:20:07.300 --> 00:20:10.310 align:middle line:84% This will be a big problem for the carbon offset. 00:20:10.310 --> 00:20:12.570 align:middle line:84% So you just make yourself look good. 00:20:12.570 --> 00:20:15.440 align:middle line:84% But actually, you have no additional contribution 00:20:15.440 --> 00:20:18.110 align:middle line:84% to the global reduction of the carbon. 00:20:18.110 --> 00:20:20.480 align:middle line:84% You just make yourself feel not that guilty 00:20:20.480 --> 00:20:22.920 align:middle line:90% when you emit to the air. 00:20:22.920 --> 00:20:25.080 align:middle line:90% So that's basically the problem. 00:20:25.080 --> 00:20:27.530 align:middle line:90% But this is not our focus. 00:20:27.530 --> 00:20:35.700 align:middle line:84% Our focus is, OK, we know, for example, MIT, net zero, 2026. 00:20:35.700 --> 00:20:38.820 align:middle line:84% We know that for now, we have no other choice. 00:20:38.820 --> 00:20:40.380 align:middle line:90% We must be realistic. 00:20:40.380 --> 00:20:43.380 align:middle line:84% So we are discussing how to buy carbon offsets. 00:20:43.380 --> 00:20:47.330 align:middle line:84% But we know this is just a short-run, very, very temporary 00:20:47.330 --> 00:20:48.090 align:middle line:90% solution. 00:20:48.090 --> 00:20:49.410 align:middle line:90% We cannot rely on this. 00:20:49.410 --> 00:20:51.590 align:middle line:84% If we rely on this, MIT's reputation 00:20:51.590 --> 00:20:54.660 align:middle line:84% will be hurt because there's all the problems. 00:20:54.660 --> 00:21:00.020 align:middle line:84% So we really need to look at the long-term ways of decarbonize 00:21:00.020 --> 00:21:02.010 align:middle line:90% our campus. 00:21:02.010 --> 00:21:03.960 align:middle line:90% Now we talk about technology. 00:21:03.960 --> 00:21:06.030 align:middle line:90% Remember, the point is-- 00:21:06.030 --> 00:21:09.010 align:middle line:84% today's point is technology versus people. 00:21:09.010 --> 00:21:11.280 align:middle line:90% We first look at technology-- 00:21:11.280 --> 00:21:14.670 align:middle line:84% so many technologies I cannot cover all. 00:21:14.670 --> 00:21:20.850 align:middle line:84% Actually, last year, the MSRED, a graduate from MSRED, Hans, 00:21:20.850 --> 00:21:25.380 align:middle line:84% he already got a job in Europe in an ad company. 00:21:25.380 --> 00:21:29.160 align:middle line:84% And he did the MSRED thesis on 10 technologies 00:21:29.160 --> 00:21:31.140 align:middle line:90% on sustainable real estate. 00:21:31.140 --> 00:21:35.190 align:middle line:84% And his thesis got the best paper award-- best thesis award 00:21:35.190 --> 00:21:37.770 align:middle line:84% from MSRED, which is 10 technology 00:21:37.770 --> 00:21:41.760 align:middle line:90% on sustainable real estate. 00:21:41.760 --> 00:21:42.960 align:middle line:90% I only touch on two. 00:21:42.960 --> 00:21:45.750 align:middle line:84% But I think the logic will be very similar. 00:21:45.750 --> 00:21:47.910 align:middle line:84% So after you understand these two, 00:21:47.910 --> 00:21:51.900 align:middle line:84% then you understand all in terms of economic mechanism, not 00:21:51.900 --> 00:21:53.200 align:middle line:90% technology itself. 00:21:53.200 --> 00:21:55.000 align:middle line:90% First is passive house. 00:21:55.000 --> 00:21:57.750 align:middle line:84% Second is a heat pump, which is so 00:21:57.750 --> 00:22:00.780 align:middle line:84% critical for building decarbonization, building 00:22:00.780 --> 00:22:01.840 align:middle line:90% electrification. 00:22:01.840 --> 00:22:06.100 align:middle line:90% So first, passive house-- 00:22:06.100 --> 00:22:13.130 align:middle line:84% remember, last session, I talked about this big developer, 00:22:13.130 --> 00:22:14.630 align:middle line:90% Millennium Partners. 00:22:14.630 --> 00:22:17.240 align:middle line:84% And I talked about a little bit about their journey. 00:22:17.240 --> 00:22:19.080 align:middle line:84% Actually, they have dozens of buildings. 00:22:19.080 --> 00:22:20.300 align:middle line:90% I only put four here. 00:22:20.300 --> 00:22:22.250 align:middle line:90% But this is their journey. 00:22:22.250 --> 00:22:25.580 align:middle line:84% I just want to show that for this developer, not 00:22:25.580 --> 00:22:30.830 align:middle line:84% from the very beginning they have the DNA of green or DNA 00:22:30.830 --> 00:22:31.700 align:middle line:90% of ESG. 00:22:31.700 --> 00:22:33.020 align:middle line:90% No. 00:22:33.020 --> 00:22:35.840 align:middle line:84% When they first did their first several buildings-- nothing 00:22:35.840 --> 00:22:39.740 align:middle line:90% to do with ESG. 00:22:39.740 --> 00:22:43.380 align:middle line:84% Even they have a big problem of the sink of the building. 00:22:43.380 --> 00:22:47.100 align:middle line:84% And then they just want to make sure to please the mayor. 00:22:47.100 --> 00:22:49.290 align:middle line:84% They say, OK, this can create a lot of jobs. 00:22:49.290 --> 00:22:52.130 align:middle line:84% Then the mayor give them permit to do a building 00:22:52.130 --> 00:22:55.260 align:middle line:84% and help the mayor to solve an issue like that. 00:22:55.260 --> 00:23:00.950 align:middle line:84% And finally, for this newest building, Winthrop Center, 00:23:00.950 --> 00:23:06.800 align:middle line:84% then they started to focus on ESG, or sustainability. 00:23:06.800 --> 00:23:09.780 align:middle line:90% And so here is a story. 00:23:09.780 --> 00:23:11.870 align:middle line:84% Now we look at this Winthrop Center. 00:23:11.870 --> 00:23:17.070 align:middle line:84% Look at the Winthrop Center to think about more deeply. 00:23:17.070 --> 00:23:19.920 align:middle line:90% So here is a building. 00:23:19.920 --> 00:23:21.990 align:middle line:90% So I'm not sure-- 00:23:21.990 --> 00:23:25.320 align:middle line:84% next Thursday, Zhengzhen will talk about this case in depth. 00:23:25.320 --> 00:23:27.525 align:middle line:84% And we will have a guest speaker from Thursday. 00:23:27.525 --> 00:23:29.275 align:middle line:84% AUDIENCE: This Thursday not next Thursday. 00:23:29.275 --> 00:23:30.620 align:middle line:90% SIQI ZHENG: Oh, this Thursday. 00:23:30.620 --> 00:23:31.480 align:middle line:90% OK. 00:23:31.480 --> 00:23:34.190 align:middle line:84% This Thursday, the day after tomorrow, 00:23:34.190 --> 00:23:36.690 align:middle line:84% Zhengzhen will talk about this building in depth. 00:23:36.690 --> 00:23:39.710 align:middle line:84% So I can just give you a very quick preview. 00:23:39.710 --> 00:23:41.810 align:middle line:90% So this is the Winthrop Center. 00:23:41.810 --> 00:23:44.420 align:middle line:84% I'm not sure if you can see, it's in Boston downtown. 00:23:44.420 --> 00:23:47.760 align:middle line:84% It's many old buildings here and there as neighbors. 00:23:47.760 --> 00:23:50.100 align:middle line:84% And they are not-- they are not very beautiful. 00:23:50.100 --> 00:23:52.140 align:middle line:90% So this one is very beautiful. 00:23:52.140 --> 00:23:53.070 align:middle line:90% This is very new. 00:23:53.070 --> 00:23:55.460 align:middle line:90% And those are old buildings. 00:23:55.460 --> 00:23:57.560 align:middle line:90% And it's so tall. 00:23:57.560 --> 00:24:01.310 align:middle line:84% And they have two parts, almost have two half, half. 00:24:01.310 --> 00:24:03.150 align:middle line:90% The lower part is office. 00:24:03.150 --> 00:24:04.320 align:middle line:90% That's for lease. 00:24:04.320 --> 00:24:07.893 align:middle line:84% The upper part is condo, for luxury condo, because that's 00:24:07.893 --> 00:24:09.060 align:middle line:90% their competitive advantage. 00:24:09.060 --> 00:24:13.160 align:middle line:84% They always build and sell luxury condos in there. 00:24:13.160 --> 00:24:14.450 align:middle line:90% That's for sale. 00:24:14.450 --> 00:24:16.920 align:middle line:90% That's for these buildings. 00:24:16.920 --> 00:24:17.840 align:middle line:90% Think about this. 00:24:17.840 --> 00:24:21.170 align:middle line:84% Now, they really committed-- they really committed 00:24:21.170 --> 00:24:23.060 align:middle line:90% to ESG and sustainability. 00:24:23.060 --> 00:24:24.800 align:middle line:90% But they still not, like-- 00:24:24.800 --> 00:24:28.990 align:middle line:84% for two parts, they still treat them differently, 00:24:28.990 --> 00:24:31.710 align:middle line:84% I mean, in term of to what degree you 00:24:31.710 --> 00:24:34.290 align:middle line:84% want to achieve the highest sustainability, 00:24:34.290 --> 00:24:39.090 align:middle line:84% energy efficiency, they treat these two parts a little 00:24:39.090 --> 00:24:39.880 align:middle line:90% bit differently. 00:24:39.880 --> 00:24:41.940 align:middle line:84% One is very, very green, and the other 00:24:41.940 --> 00:24:44.580 align:middle line:90% is OK green, but not so green. 00:24:44.580 --> 00:24:46.770 align:middle line:90% Guess which part? 00:24:46.770 --> 00:24:49.830 align:middle line:90% Which part is extreme green? 00:24:49.830 --> 00:24:51.330 align:middle line:84% AUDIENCE: [INAUDIBLE] extreme green? 00:24:51.330 --> 00:24:52.260 align:middle line:90% SIQI ZHENG: Why? 00:24:52.260 --> 00:24:53.410 align:middle line:90% Any rationale? 00:24:53.410 --> 00:24:55.900 align:middle line:90% Quick rationale. 00:24:55.900 --> 00:25:00.020 align:middle line:90% Why office extreme green? 00:25:00.020 --> 00:25:03.350 align:middle line:84% AUDIENCE: The future tenants, that's what they're demanding. 00:25:03.350 --> 00:25:06.860 align:middle line:84% They can market it as being the largest passive house office 00:25:06.860 --> 00:25:09.140 align:middle line:84% building and attract financial service firms 00:25:09.140 --> 00:25:12.180 align:middle line:84% or others want to be in the area and have a greener footprint. 00:25:12.180 --> 00:25:14.680 align:middle line:84% SIQI ZHENG: OK, you are saying this greenness 00:25:14.680 --> 00:25:17.490 align:middle line:84% or this sustainability can be the selling point of the office 00:25:17.490 --> 00:25:17.990 align:middle line:90% part. 00:25:17.990 --> 00:25:20.500 align:middle line:84% And also because the tenants, they are more sophisticated, 00:25:20.500 --> 00:25:22.330 align:middle line:90% they demand. 00:25:22.330 --> 00:25:25.110 align:middle line:90% But for the condo, why not? 00:25:25.110 --> 00:25:27.000 align:middle line:84% The condo, the rich people, they don't care? 00:25:27.000 --> 00:25:28.030 align:middle line:90% Yeah, please? 00:25:28.030 --> 00:25:29.070 align:middle line:90% Will? 00:25:29.070 --> 00:25:31.620 align:middle line:84% AUDIENCE: At least operationally, it's your house 00:25:31.620 --> 00:25:33.160 align:middle line:90% and it's your condo. 00:25:33.160 --> 00:25:34.870 align:middle line:84% You can operate it however you want. 00:25:34.870 --> 00:25:36.100 align:middle line:84% You can live in it however you want. 00:25:36.100 --> 00:25:37.600 align:middle line:84% You can leave the lights on all day. 00:25:37.600 --> 00:25:41.310 align:middle line:84% You can turn the AC to 72, whereas when you're 00:25:41.310 --> 00:25:44.030 align:middle line:84% in an office, you have more control over maybe 00:25:44.030 --> 00:25:48.470 align:middle line:84% in the winter, you go with a lower temperature in the office. 00:25:48.470 --> 00:25:51.560 align:middle line:84% SIQI ZHENG: Central, centralized control like that. 00:25:51.560 --> 00:25:52.320 align:middle line:90% OK, good. 00:25:52.320 --> 00:25:55.590 align:middle line:84% So basically, your guess is correct. 00:25:55.590 --> 00:26:00.780 align:middle line:84% So both are relatively greener than the neighbors. 00:26:00.780 --> 00:26:02.760 align:middle line:90% But they still had a choice. 00:26:02.760 --> 00:26:06.560 align:middle line:84% They made the office part extremely green. 00:26:06.560 --> 00:26:08.603 align:middle line:84% Then they got all the certificates. 00:26:08.603 --> 00:26:09.770 align:middle line:90% They have the passive house. 00:26:09.770 --> 00:26:11.120 align:middle line:90% That's a certificate. 00:26:11.120 --> 00:26:15.740 align:middle line:84% And they got LEED Platinum, and they got WELL. 00:26:15.740 --> 00:26:18.140 align:middle line:84% This is a healthy building certificate-- 00:26:18.140 --> 00:26:18.990 align:middle line:90% WELL Gold. 00:26:18.990 --> 00:26:20.850 align:middle line:90% So they have this, this, this. 00:26:20.850 --> 00:26:22.760 align:middle line:90% And for the top part-- 00:26:22.760 --> 00:26:27.320 align:middle line:84% that's a condo part-- they did LEED Gold-- still OK, 00:26:27.320 --> 00:26:29.210 align:middle line:90% but not so extreme. 00:26:29.210 --> 00:26:32.000 align:middle line:90% So that's the choice. 00:26:32.000 --> 00:26:36.590 align:middle line:84% So just as a side note, last session, at the very end, 00:26:36.590 --> 00:26:39.780 align:middle line:84% I quickly went through LEED, remember? 00:26:39.780 --> 00:26:43.940 align:middle line:84% But Akrisht, today-- tomorrow recitation, Akrisht 00:26:43.940 --> 00:26:46.190 align:middle line:84% will cover more about the LEED details, 00:26:46.190 --> 00:26:47.820 align:middle line:90% technical details of the LEED. 00:26:47.820 --> 00:26:51.560 align:middle line:84% But overall, LEED is a certificate 00:26:51.560 --> 00:26:55.190 align:middle line:84% for the energy efficiency overall of the green buildings. 00:26:55.190 --> 00:27:01.190 align:middle line:84% And they were created by this US Green Building Council, USGBC. 00:27:01.190 --> 00:27:04.550 align:middle line:84% And they have many, many systems, 00:27:04.550 --> 00:27:06.530 align:middle line:84% not just the LEED itself, but they 00:27:06.530 --> 00:27:10.250 align:middle line:84% have certified silver, gold, and platinum, at least the four 00:27:10.250 --> 00:27:11.040 align:middle line:90% levels. 00:27:11.040 --> 00:27:14.970 align:middle line:84% And more importantly, they have many schemes. 00:27:14.970 --> 00:27:16.450 align:middle line:90% And they have new buildings. 00:27:16.450 --> 00:27:17.820 align:middle line:90% They have existing buildings. 00:27:17.820 --> 00:27:19.230 align:middle line:90% They have commercial buildings. 00:27:19.230 --> 00:27:20.820 align:middle line:90% They have residential. 00:27:20.820 --> 00:27:25.500 align:middle line:84% And they have core and shell, the outside part, and the frame. 00:27:25.500 --> 00:27:27.940 align:middle line:84% And they have school, retail, all kind of types. 00:27:27.940 --> 00:27:29.760 align:middle line:84% So they have many, many subtopics, 00:27:29.760 --> 00:27:32.430 align:middle line:90% subsections of the LEED. 00:27:32.430 --> 00:27:34.990 align:middle line:84% And Akrisht will cover some details. 00:27:34.990 --> 00:27:37.960 align:middle line:84% And another thing is a certificate of WELL. 00:27:37.960 --> 00:27:41.880 align:middle line:84% That's-- they look at the healthy perspective-- 00:27:41.880 --> 00:27:46.290 align:middle line:84% for example, water, air internal, daylight, 00:27:46.290 --> 00:27:49.590 align:middle line:84% and wellness and comfort, et cetera. 00:27:49.590 --> 00:27:52.020 align:middle line:84% So they got this very high level. 00:27:52.020 --> 00:27:54.700 align:middle line:90% So that's the certificate. 00:27:54.700 --> 00:27:59.430 align:middle line:84% And as we know, this really help fix that information asymmetry 00:27:59.430 --> 00:28:01.140 align:middle line:90% problem, as we discussed. 00:28:01.140 --> 00:28:03.750 align:middle line:90% With all this, we're terrible. 00:28:03.750 --> 00:28:05.130 align:middle line:90% Nobody can judge. 00:28:05.130 --> 00:28:07.450 align:middle line:84% And the developers just self-advertise. 00:28:07.450 --> 00:28:08.940 align:middle line:90% Remember my China paper. 00:28:08.940 --> 00:28:10.770 align:middle line:90% At that time, China had nothing. 00:28:10.770 --> 00:28:15.850 align:middle line:84% And these developers just said, what do they want you to say? 00:28:15.850 --> 00:28:17.650 align:middle line:90% And my building is great. 00:28:17.650 --> 00:28:19.390 align:middle line:84% My building is very energy-efficient. 00:28:19.390 --> 00:28:21.163 align:middle line:84% You don't need to pay any energy bill. 00:28:21.163 --> 00:28:22.330 align:middle line:90% Then there is a [INAUDIBLE]. 00:28:22.330 --> 00:28:25.860 align:middle line:90% And the buyers got cheated. 00:28:25.860 --> 00:28:27.450 align:middle line:84% And they didn't know the information, 00:28:27.450 --> 00:28:30.500 align:middle line:84% because for the building, they say experience good. 00:28:30.500 --> 00:28:31.740 align:middle line:90% They say experience good. 00:28:31.740 --> 00:28:33.340 align:middle line:84% You must live there for some time. 00:28:33.340 --> 00:28:34.620 align:middle line:90% You'll find out. 00:28:34.620 --> 00:28:36.750 align:middle line:84% So this kind of certificate really 00:28:36.750 --> 00:28:40.650 align:middle line:84% helped to fix that market failure problem. 00:28:40.650 --> 00:28:43.560 align:middle line:90% That's what we want to mention. 00:28:43.560 --> 00:28:47.670 align:middle line:84% And now, say, OK, this Winthrop Center, 00:28:47.670 --> 00:28:52.110 align:middle line:84% they chose for the office part, lower part, the office part, 00:28:52.110 --> 00:28:54.630 align:middle line:84% they chose this technology, this technology 00:28:54.630 --> 00:28:57.760 align:middle line:84% we are going to focus on, which is called passive house. 00:28:57.760 --> 00:28:59.700 align:middle line:90% It's not a house. 00:28:59.700 --> 00:29:01.320 align:middle line:84% When I first heard of this technology, 00:29:01.320 --> 00:29:02.620 align:middle line:90% I thought this is a house. 00:29:02.620 --> 00:29:07.680 align:middle line:84% No, this is just a terminology-- it's energy-efficiency building 00:29:07.680 --> 00:29:09.090 align:middle line:90% technology. 00:29:09.090 --> 00:29:12.480 align:middle line:84% Passive house, this is from Germany. 00:29:12.480 --> 00:29:14.310 align:middle line:90% This is from Germany. 00:29:14.310 --> 00:29:17.280 align:middle line:90% It's imported from Germany. 00:29:17.280 --> 00:29:19.650 align:middle line:84% And this is a certificate, but they 00:29:19.650 --> 00:29:23.430 align:middle line:84% can train all the developers, all the builders, 00:29:23.430 --> 00:29:27.080 align:middle line:84% how to build a passive house building. 00:29:27.080 --> 00:29:29.310 align:middle line:90% So the point is the following. 00:29:29.310 --> 00:29:31.970 align:middle line:84% Remember, this very, very important point 00:29:31.970 --> 00:29:36.600 align:middle line:84% of the passive house is super energy-efficient, 00:29:36.600 --> 00:29:41.480 align:middle line:84% reduce energy consumption by a lot by very good insulation, 00:29:41.480 --> 00:29:44.240 align:middle line:84% insulation, insulation, and the insulation. 00:29:44.240 --> 00:29:46.330 align:middle line:84% So that's the point of the passive house. 00:29:46.330 --> 00:29:49.130 align:middle line:84% You can see they have envelope very insulated 00:29:49.130 --> 00:29:53.150 align:middle line:84% and air sealed layer-- add some layers 00:29:53.150 --> 00:29:58.430 align:middle line:84% and eliminate some potential leak of the energy, 00:29:58.430 --> 00:30:01.880 align:middle line:84% and use a heat recovery ventilation and the window 00:30:01.880 --> 00:30:03.560 align:middle line:90% orientation, all the things. 00:30:03.560 --> 00:30:07.040 align:middle line:84% Then always they said, for passive house 00:30:07.040 --> 00:30:12.920 align:middle line:84% can reduce 60% to 80% of the energy consumption 00:30:12.920 --> 00:30:14.845 align:middle line:90% compared to a traditional house. 00:30:14.845 --> 00:30:16.220 align:middle line:84% I don't know if it's true or not. 00:30:16.220 --> 00:30:19.420 align:middle line:84% But on average, they reported like that. 00:30:19.420 --> 00:30:21.920 align:middle line:90% So that's passive house. 00:30:21.920 --> 00:30:24.150 align:middle line:84% I'm not a building technology person. 00:30:24.150 --> 00:30:25.430 align:middle line:90% I can only show you this. 00:30:25.430 --> 00:30:27.300 align:middle line:84% But I want to highlight one thing. 00:30:27.300 --> 00:30:29.860 align:middle line:90% It's not free lunch. 00:30:29.860 --> 00:30:33.550 align:middle line:84% The additional cost is 3% to 10%, 00:30:33.550 --> 00:30:36.760 align:middle line:84% based on some estimate from engineers-- 00:30:36.760 --> 00:30:40.630 align:middle line:84% 3% to 10%-- because you really need those materials. 00:30:40.630 --> 00:30:45.200 align:middle line:84% You need the actual piece you need to do this. 00:30:45.200 --> 00:30:50.150 align:middle line:84% If you invest more, 3% to 10%, to build a passive house 00:30:50.150 --> 00:30:53.690 align:middle line:84% building, you really have the benefits. 00:30:53.690 --> 00:31:00.200 align:middle line:84% You have the energy saving-- no, I put 90%, 60% to 80%, even 90%. 00:31:00.200 --> 00:31:02.250 align:middle line:90% That's very, very impressive. 00:31:02.250 --> 00:31:03.620 align:middle line:90% Very impressive. 00:31:03.620 --> 00:31:09.410 align:middle line:84% And the resilience-- and, for example, power outage. 00:31:09.410 --> 00:31:11.010 align:middle line:90% So then you still have that. 00:31:11.010 --> 00:31:14.090 align:middle line:84% And the house is not-- very clearly, 00:31:14.090 --> 00:31:16.080 align:middle line:90% this is not a plastic bag, OK? 00:31:16.080 --> 00:31:17.580 align:middle line:90% Not a plastic bag. 00:31:17.580 --> 00:31:20.960 align:middle line:84% Because you say, oh, all insulation, then it's kind of-- 00:31:20.960 --> 00:31:25.520 align:middle line:84% no, it's no exchange of the air, no. 00:31:25.520 --> 00:31:27.650 align:middle line:84% They have very good ventilation system 00:31:27.650 --> 00:31:31.410 align:middle line:84% to make sure the fresh air inside and comfortable. 00:31:31.410 --> 00:31:36.050 align:middle line:84% So that's basically the benefits of that. 00:31:36.050 --> 00:31:40.040 align:middle line:84% So then why the Winthrop Center-- 00:31:40.040 --> 00:31:44.730 align:middle line:84% I just asked question why they chose the lower part. 00:31:44.730 --> 00:31:49.130 align:middle line:84% They chose to go for passive house or extreme, this energy 00:31:49.130 --> 00:31:49.940 align:middle line:90% efficiency. 00:31:49.940 --> 00:31:54.210 align:middle line:84% But for the upper part, they just 00:31:54.210 --> 00:31:56.760 align:middle line:90% chose a relatively OK level. 00:31:56.760 --> 00:31:58.960 align:middle line:84% Just now we mentioned some factors. 00:31:58.960 --> 00:32:02.730 align:middle line:84% For example, the office tenants, they are more demanding. 00:32:02.730 --> 00:32:07.170 align:middle line:84% Or the offices, they can better control the temperature 00:32:07.170 --> 00:32:08.430 align:middle line:90% or something like that. 00:32:08.430 --> 00:32:12.150 align:middle line:84% But I think the fundamental story 00:32:12.150 --> 00:32:18.610 align:middle line:84% is that they understand the passive house has pros and cons. 00:32:18.610 --> 00:32:23.530 align:middle line:84% And that's from our interview because we need to understand. 00:32:23.530 --> 00:32:26.490 align:middle line:84% Zhengzhen and me and Juan, we went to interview them. 00:32:26.490 --> 00:32:29.920 align:middle line:84% We understand their logic, and we say they were very smart. 00:32:29.920 --> 00:32:32.490 align:middle line:84% They were very smart when they made the decision. 00:32:32.490 --> 00:32:35.060 align:middle line:90% It's the following. 00:32:35.060 --> 00:32:37.490 align:middle line:84% Think about comparative advantage. 00:32:37.490 --> 00:32:39.710 align:middle line:84% Comparative advantage means, of course, 00:32:39.710 --> 00:32:43.413 align:middle line:84% you need to choose the most strengths you have. 00:32:43.413 --> 00:32:47.780 align:middle line:90% So that's a strategy. 00:32:47.780 --> 00:32:50.605 align:middle line:84% Why they put the condos at the top? 00:32:50.605 --> 00:32:51.980 align:middle line:84% Because just now, remember, there 00:32:51.980 --> 00:32:55.050 align:middle line:84% are some ugly buildings around this. 00:32:55.050 --> 00:32:57.290 align:middle line:90% So lower part-- no WELL. 00:32:57.290 --> 00:32:59.930 align:middle line:84% You open the window, you'll see other buildings. 00:32:59.930 --> 00:33:03.110 align:middle line:84% And it's so crowded in downtown Boston. 00:33:03.110 --> 00:33:06.900 align:middle line:84% I think Zhengzhen will maybe organize an optional tour 00:33:06.900 --> 00:33:10.890 align:middle line:84% if you are interested to go visit Winthrop Center. 00:33:10.890 --> 00:33:12.067 align:middle line:90% They are almost done. 00:33:12.067 --> 00:33:12.900 align:middle line:90% They're almost done. 00:33:12.900 --> 00:33:15.020 align:middle line:90% They're almost completed. 00:33:15.020 --> 00:33:20.120 align:middle line:84% And we know for this condo, very luxury condo, they are so rich. 00:33:20.120 --> 00:33:24.590 align:middle line:84% They really enjoy the view of the ocean, 00:33:24.590 --> 00:33:27.150 align:middle line:84% of the downtown, vibrant downtown. 00:33:27.150 --> 00:33:31.490 align:middle line:84% So a window is so important, and for the office, no view at all. 00:33:31.490 --> 00:33:33.870 align:middle line:84% Open the window, see other ugly buildings. 00:33:33.870 --> 00:33:37.670 align:middle line:84% So they need to find another advantage. 00:33:37.670 --> 00:33:40.130 align:middle line:84% And now we know, oh, ESG is so hot. 00:33:40.130 --> 00:33:42.260 align:middle line:90% So ESG is important. 00:33:42.260 --> 00:33:44.190 align:middle line:90% And sustainability is important. 00:33:44.190 --> 00:33:48.140 align:middle line:84% All the S&P 500 companies, they really 00:33:48.140 --> 00:33:52.280 align:middle line:84% want you to rent some space and put their employees 00:33:52.280 --> 00:33:56.060 align:middle line:84% in a healthy and green building, good for reputation 00:33:56.060 --> 00:33:57.340 align:middle line:90% and all the things. 00:33:57.340 --> 00:33:58.640 align:middle line:90% OK, no WELL. 00:33:58.640 --> 00:34:01.630 align:middle line:90% Let's try Green. 00:34:01.630 --> 00:34:07.240 align:middle line:84% [? Upper-- ?] oh, we are so good, ocean and the downtown. 00:34:07.240 --> 00:34:11.980 align:middle line:84% And the luxury people, the wealthy people, they 00:34:11.980 --> 00:34:13.000 align:middle line:90% really value this. 00:34:13.000 --> 00:34:16.300 align:middle line:84% Even without anything about the ESG, they will come and buy. 00:34:16.300 --> 00:34:20.330 align:middle line:84% They understand how these rich people, they are thinking. 00:34:20.330 --> 00:34:24.010 align:middle line:84% So say, OK, green-- second-order thing, for the office, 00:34:24.010 --> 00:34:26.860 align:middle line:90% first-order because no WELL. 00:34:26.860 --> 00:34:28.010 align:middle line:90% That's my understanding. 00:34:28.010 --> 00:34:31.360 align:middle line:84% But this Thursday, the guest speaker 00:34:31.360 --> 00:34:32.949 align:middle line:90% will talk more about this. 00:34:32.949 --> 00:34:35.739 align:middle line:84% And another thing-- let me finish this point. 00:34:35.739 --> 00:34:39.030 align:middle line:90% Another thing is passive house-- 00:34:39.030 --> 00:34:42.969 align:middle line:84% really, really important thing is insulation. 00:34:42.969 --> 00:34:45.810 align:middle line:90% So they want very small windows. 00:34:45.810 --> 00:34:48.300 align:middle line:90% If too big windows, too hard-- 00:34:48.300 --> 00:34:52.530 align:middle line:84% the cost will go up because you want big window, 00:34:52.530 --> 00:34:54.960 align:middle line:84% and then you want a view, then you have 00:34:54.960 --> 00:34:56.500 align:middle line:90% a problem with installation. 00:34:56.500 --> 00:34:58.590 align:middle line:84% So you need to do a lot, invest a lot 00:34:58.590 --> 00:35:00.480 align:middle line:90% for the windows and the walls. 00:35:00.480 --> 00:35:03.450 align:middle line:90% So they want minimum windows. 00:35:03.450 --> 00:35:08.540 align:middle line:84% Minimum windows will be a disaster for luxury condos. 00:35:08.540 --> 00:35:09.890 align:middle line:90% We'll have a minimal window? 00:35:09.890 --> 00:35:11.210 align:middle line:90% No, not good. 00:35:11.210 --> 00:35:13.330 align:middle line:90% So they want big windows. 00:35:13.330 --> 00:35:16.010 align:middle line:84% Big windows means passive house is too hard to do. 00:35:16.010 --> 00:35:18.035 align:middle line:90% You have a question? 00:35:18.035 --> 00:35:19.910 align:middle line:84% AUDIENCE: Yeah, I was just going to ask about 00:35:19.910 --> 00:35:23.540 align:middle line:84% why is it either view or green, like one or the other? 00:35:23.540 --> 00:35:25.290 align:middle line:90% I think you just answered it. 00:35:25.290 --> 00:35:29.060 align:middle line:84% But also, on top of that, isn't it-- 00:35:29.060 --> 00:35:32.125 align:middle line:84% if you go back to the previous picture, you have also-- 00:35:32.125 --> 00:35:34.860 align:middle line:90% 00:35:34.860 --> 00:35:35.770 align:middle line:90% with the windows-- 00:35:35.770 --> 00:35:36.570 align:middle line:90% SIQI ZHENG: Yeah. 00:35:36.570 --> 00:35:40.380 align:middle line:84% AUDIENCE: --the way you take in light changes in the summer 00:35:40.380 --> 00:35:41.588 align:middle line:90% and in the winter, right? 00:35:41.588 --> 00:35:43.630 align:middle line:84% And if you're in the bottom part of the building, 00:35:43.630 --> 00:35:46.047 align:middle line:84% wouldn't that be affected because you have other buildings 00:35:46.047 --> 00:35:47.717 align:middle line:90% surrounding the property? 00:35:47.717 --> 00:35:48.550 align:middle line:90% SIQI ZHENG: Oh, yes. 00:35:48.550 --> 00:35:51.342 align:middle line:84% AUDIENCE: [INAUDIBLE] then you can fully do that. 00:35:51.342 --> 00:35:53.800 align:middle line:84% SIQI ZHENG: Right, the top, maybe the ventilation is easier 00:35:53.800 --> 00:35:54.715 align:middle line:90% to do, right? 00:35:54.715 --> 00:35:55.730 align:middle line:90% That's your point. 00:35:55.730 --> 00:35:56.200 align:middle line:84% AUDIENCE: The [? ventilation-- ?] 00:35:56.200 --> 00:35:57.533 align:middle line:90% SIQI ZHENG: And the ventilation. 00:35:57.533 --> 00:36:00.320 align:middle line:84% AUDIENCE: The [INAUDIBLE], it can [? take ?] you, 00:36:00.320 --> 00:36:03.242 align:middle line:84% in the winter, it can [? take ?] you from that angle-- 00:36:03.242 --> 00:36:03.950 align:middle line:90% SIQI ZHENG: Yeah. 00:36:03.950 --> 00:36:05.990 align:middle line:84% AUDIENCE: --whereas if you're in the bottom, 00:36:05.990 --> 00:36:07.650 align:middle line:90% you can take advantage of that. 00:36:07.650 --> 00:36:08.620 align:middle line:90% SIQI ZHENG: Yes. 00:36:08.620 --> 00:36:12.280 align:middle line:84% So that's all this building technology and design 00:36:12.280 --> 00:36:15.220 align:middle line:84% perspective to make sure that they 00:36:15.220 --> 00:36:18.190 align:middle line:84% can invest reasonable money to do the passive house 00:36:18.190 --> 00:36:22.130 align:middle line:84% but generate the most benefit from that. 00:36:22.130 --> 00:36:24.930 align:middle line:90% So then they are not stupid. 00:36:24.930 --> 00:36:26.780 align:middle line:90% They are a developer. 00:36:26.780 --> 00:36:28.410 align:middle line:90% They are not a NGO. 00:36:28.410 --> 00:36:29.730 align:middle line:90% They are not like philosophy. 00:36:29.730 --> 00:36:33.200 align:middle line:84% They understand they need to calculate whether that 00:36:33.200 --> 00:36:35.360 align:middle line:90% make business sense for this. 00:36:35.360 --> 00:36:41.640 align:middle line:84% So they say, OK, upfront cost at first, the $1.3 billion. 00:36:41.640 --> 00:36:45.240 align:middle line:84% And if we do passive house, if we, this lower part, 00:36:45.240 --> 00:36:49.610 align:middle line:84% really go extreme green, then plus 3% to 10% 00:36:49.610 --> 00:36:54.710 align:middle line:84% of the cost premium, and then we say, OK, reduce utility cost-- 00:36:54.710 --> 00:36:58.910 align:middle line:84% at a very rough estimate, and they really had a [INAUDIBLE], 00:36:58.910 --> 00:37:01.820 align:middle line:84% and also increased rent and occupancy rate. 00:37:01.820 --> 00:37:04.320 align:middle line:84% We all discussed these parts last session. 00:37:04.320 --> 00:37:06.320 align:middle line:90% Remember, the benefit? 00:37:06.320 --> 00:37:08.600 align:middle line:84% These all reduce the utility cost. 00:37:08.600 --> 00:37:10.130 align:middle line:90% You pay less. 00:37:10.130 --> 00:37:14.460 align:middle line:84% And all the tenants are so happy they pay higher rent. 00:37:14.460 --> 00:37:17.070 align:middle line:90% And you can lease out very fast. 00:37:17.070 --> 00:37:20.600 align:middle line:84% So that's basically benefit, benefit, cost. 00:37:20.600 --> 00:37:22.350 align:middle line:90% They compare cost and benefit. 00:37:22.350 --> 00:37:24.080 align:middle line:84% They say, OK, this is a good deal. 00:37:24.080 --> 00:37:25.610 align:middle line:90% Let's do it. 00:37:25.610 --> 00:37:28.760 align:middle line:84% But actually, at that time, when they made the decision, 00:37:28.760 --> 00:37:30.140 align:middle line:90% they were uncertain. 00:37:30.140 --> 00:37:34.400 align:middle line:84% They were uncertain [INAUDIBLE], especially the market. 00:37:34.400 --> 00:37:36.320 align:middle line:90% Who knows? 00:37:36.320 --> 00:37:40.240 align:middle line:84% How can you be so certain that if you build this, 00:37:40.240 --> 00:37:43.370 align:middle line:84% it will become so popular and then all the tenants will come? 00:37:43.370 --> 00:37:44.230 align:middle line:90% No. 00:37:44.230 --> 00:37:45.710 align:middle line:90% They were uncertain. 00:37:45.710 --> 00:37:47.830 align:middle line:84% So they said, no matter what, I don't care. 00:37:47.830 --> 00:37:52.190 align:middle line:84% I look at the long value because I hold this asset. 00:37:52.190 --> 00:37:53.475 align:middle line:90% Remember, this is a lease. 00:37:53.475 --> 00:37:55.430 align:middle line:84% It's a hold for many, many years. 00:37:55.430 --> 00:37:57.380 align:middle line:90% Maybe for some years, not good. 00:37:57.380 --> 00:38:01.240 align:middle line:84% But I'm so patient, and I can wait for another 10 years, 00:38:01.240 --> 00:38:01.740 align:middle line:90% they said. 00:38:01.740 --> 00:38:03.657 align:middle line:84% So I'm not sure whether they were thinking so, 00:38:03.657 --> 00:38:04.420 align:middle line:90% but they said so. 00:38:04.420 --> 00:38:07.500 align:middle line:90% They said, good, long-term will. 00:38:07.500 --> 00:38:10.200 align:middle line:90% And the condos is your sell. 00:38:10.200 --> 00:38:11.620 align:middle line:90% So that's basically OK. 00:38:11.620 --> 00:38:16.590 align:middle line:84% Even if no increase, even if this doesn't exist, I'm fine. 00:38:16.590 --> 00:38:18.160 align:middle line:90% I'm going to take the risk. 00:38:18.160 --> 00:38:19.810 align:middle line:84% I'm the first mover of the market. 00:38:19.810 --> 00:38:21.210 align:middle line:90% I'll take the risk. 00:38:21.210 --> 00:38:24.360 align:middle line:84% Actually, this is more difficult for now, remember, 00:38:24.360 --> 00:38:27.750 align:middle line:84% because not about Winthrop Center, 00:38:27.750 --> 00:38:31.740 align:middle line:84% but because the overall office market after the pandemic, 00:38:31.740 --> 00:38:33.450 align:middle line:90% all the people work from home. 00:38:33.450 --> 00:38:36.930 align:middle line:84% The office market becomes so weak and so weakened 00:38:36.930 --> 00:38:38.400 align:middle line:90% in the downtown-- 00:38:38.400 --> 00:38:40.360 align:middle line:90% so very unfortunate. 00:38:40.360 --> 00:38:46.290 align:middle line:84% They had such a big chunk of the office part after the pandemic. 00:38:46.290 --> 00:38:48.210 align:middle line:84% And at that time, maybe the green 00:38:48.210 --> 00:38:50.010 align:middle line:90% is not the first order at all. 00:38:50.010 --> 00:38:52.680 align:middle line:84% The first order is how to convince the firms to get 00:38:52.680 --> 00:38:54.665 align:middle line:90% into here and rent your space. 00:38:54.665 --> 00:38:56.790 align:middle line:90% 00:38:56.790 --> 00:38:58.290 align:middle line:84% AUDIENCE: I guess, for our learning, 00:38:58.290 --> 00:39:02.490 align:middle line:84% is this kind of green versus view tradeoff strategy fairly 00:39:02.490 --> 00:39:04.603 align:middle line:84% common and precedented, or is it-- 00:39:04.603 --> 00:39:05.770 align:middle line:90% SIQI ZHENG: Not very common. 00:39:05.770 --> 00:39:07.440 align:middle line:90% This is just a case study. 00:39:07.440 --> 00:39:11.700 align:middle line:84% But the tradeoff of this logic is clear. 00:39:11.700 --> 00:39:13.830 align:middle line:84% Maybe for another building, it's not 00:39:13.830 --> 00:39:15.570 align:middle line:84% the tradeoff between green and the view, 00:39:15.570 --> 00:39:18.420 align:middle line:84% but the tradeoff between green or something else. 00:39:18.420 --> 00:39:21.780 align:middle line:84% But this thinking, I want you to have this thinking approach 00:39:21.780 --> 00:39:24.507 align:middle line:90% that always there's a tradeoff. 00:39:24.507 --> 00:39:25.340 align:middle line:90% You have a question? 00:39:25.340 --> 00:39:30.150 align:middle line:84% AUDIENCE: Yeah, so when the developers do the assumption, 00:39:30.150 --> 00:39:33.750 align:middle line:84% what do they assume for the increased [INAUDIBLE]? 00:39:33.750 --> 00:39:35.600 align:middle line:90% SIQI ZHENG: What do you mean? 00:39:35.600 --> 00:39:37.170 align:middle line:90% AUDIENCE: To which percent-- 00:39:37.170 --> 00:39:39.355 align:middle line:84% SIQI ZHENG: They had no very accurate estimate. 00:39:39.355 --> 00:39:40.770 align:middle line:90% AUDIENCE: It was just an idea. 00:39:40.770 --> 00:39:43.490 align:middle line:84% SIQI ZHENG: Idea, yes, I think conceptual level. 00:39:43.490 --> 00:39:47.660 align:middle line:84% Or it's just a very rough estimate. 00:39:47.660 --> 00:39:50.090 align:middle line:84% AUDIENCE: So if you reduce the size of the window, 00:39:50.090 --> 00:39:52.260 align:middle line:90% you get a better LEED rating. 00:39:52.260 --> 00:39:56.580 align:middle line:84% But, for example, for the WELL rating, 00:39:56.580 --> 00:39:58.703 align:middle line:84% you want more sunlight to come in. 00:39:58.703 --> 00:40:00.120 align:middle line:84% SIQI ZHENG: You need a big window. 00:40:00.120 --> 00:40:01.530 align:middle line:84% AUDIENCE: So then how does that-- 00:40:01.530 --> 00:40:03.405 align:middle line:84% SIQI ZHENG: Yes, that's a very good question. 00:40:03.405 --> 00:40:05.160 align:middle line:84% So I think that's another tradeoff. 00:40:05.160 --> 00:40:07.260 align:middle line:84% I think last session we discussed this. 00:40:07.260 --> 00:40:11.220 align:middle line:84% Sometimes, it's a healthy part-- healthy buildings 00:40:11.220 --> 00:40:12.730 align:middle line:84% and the energy-efficient buildings, 00:40:12.730 --> 00:40:16.630 align:middle line:84% they are not always going to the same direction. 00:40:16.630 --> 00:40:19.380 align:middle line:90% There are always some tradeoffs. 00:40:19.380 --> 00:40:23.250 align:middle line:84% But I want to say we cannot think about this in a static 00:40:23.250 --> 00:40:23.750 align:middle line:90% view. 00:40:23.750 --> 00:40:26.310 align:middle line:84% We need to think about this dynamic view. 00:40:26.310 --> 00:40:29.060 align:middle line:84% Dynamic view, benefit-- and further, 00:40:29.060 --> 00:40:31.440 align:middle line:84% they thought, oh, people understood a little bit 00:40:31.440 --> 00:40:33.960 align:middle line:90% of how important the health is. 00:40:33.960 --> 00:40:36.990 align:middle line:90% And then, after COVID go up-- 00:40:36.990 --> 00:40:38.640 align:middle line:90% I mean, the health benefit-- 00:40:38.640 --> 00:40:43.080 align:middle line:84% oh, indoor air quality is so important, especially 00:40:43.080 --> 00:40:44.000 align:middle line:90% after the COVID. 00:40:44.000 --> 00:40:45.000 align:middle line:90% So the benefit go up. 00:40:45.000 --> 00:40:49.260 align:middle line:84% This is unexpected, which means they were lucky in term of this. 00:40:49.260 --> 00:40:51.750 align:middle line:84% But, of course, as I mentioned, this 00:40:51.750 --> 00:40:54.630 align:middle line:84% work from home, this problem of the high vacancy 00:40:54.630 --> 00:40:58.560 align:middle line:84% rate of the office buildings-- thus, they are so unlucky. 00:40:58.560 --> 00:41:00.330 align:middle line:84% They just encountered this problem. 00:41:00.330 --> 00:41:03.210 align:middle line:84% And the cost [? is ?] also dynamic. 00:41:03.210 --> 00:41:07.050 align:middle line:84% And first, when they planned for the decision, they say 3% to 10% 00:41:07.050 --> 00:41:10.600 align:middle line:84% because at that time, passive house was not so popular. 00:41:10.600 --> 00:41:14.370 align:middle line:84% They need to send their staff to Germany to learn. 00:41:14.370 --> 00:41:18.940 align:middle line:84% Now, so many passive house projects and so many experts 00:41:18.940 --> 00:41:20.860 align:middle line:84% and the builders, they understand 00:41:20.860 --> 00:41:23.980 align:middle line:84% how to do, when they implemented, 1% to 3%, 00:41:23.980 --> 00:41:26.150 align:middle line:84% which is good, which is good for them. 00:41:26.150 --> 00:41:29.660 align:middle line:84% So think about this conceptually. 00:41:29.660 --> 00:41:32.930 align:middle line:84% So that means we really need very sophisticated understanding 00:41:32.930 --> 00:41:35.480 align:middle line:84% because real estate, even for the construction period, 00:41:35.480 --> 00:41:37.000 align:middle line:90% is not, like, one day. 00:41:37.000 --> 00:41:39.260 align:middle line:84% It may extend, like, two or three years. 00:41:39.260 --> 00:41:43.200 align:middle line:84% And all situations change, especially for the COVID thing. 00:41:43.200 --> 00:41:47.910 align:middle line:84% Who can-- who could anticipate that? 00:41:47.910 --> 00:41:50.760 align:middle line:84% They are very brave because I think 00:41:50.760 --> 00:41:55.290 align:middle line:84% this is the first passive house office building in-- 00:41:55.290 --> 00:41:57.900 align:middle line:84% I'm not sure whether the entire country or just Boston area. 00:41:57.900 --> 00:41:59.610 align:middle line:84% I think maybe in the entire country. 00:41:59.610 --> 00:42:04.290 align:middle line:84% This is the first large-scale passive house office building 00:42:04.290 --> 00:42:08.730 align:middle line:84% because for passive house, they always build multifamily houses 00:42:08.730 --> 00:42:10.120 align:middle line:90% or single-family houses-- 00:42:10.120 --> 00:42:12.240 align:middle line:84% passive house, very popular, very common. 00:42:12.240 --> 00:42:17.250 align:middle line:84% You go to this website, passivehousema.org. 00:42:17.250 --> 00:42:23.490 align:middle line:84% They have a Massachusetts Association of Passive House. 00:42:23.490 --> 00:42:25.600 align:middle line:84% All the builders of passive house, 00:42:25.600 --> 00:42:28.320 align:middle line:84% they have this association right now. 00:42:28.320 --> 00:42:31.980 align:middle line:84% They become a club to share knowledge, information, 00:42:31.980 --> 00:42:36.660 align:middle line:84% and advocate for passive house, and also lobby the government 00:42:36.660 --> 00:42:39.260 align:middle line:84% to give them more subsidy to build a passive house, all 00:42:39.260 --> 00:42:39.760 align:middle line:90% the things. 00:42:39.760 --> 00:42:41.530 align:middle line:90% So go to this website. 00:42:41.530 --> 00:42:42.990 align:middle line:90% You will see this-- 00:42:42.990 --> 00:42:45.210 align:middle line:90% I think now we have at least-- 00:42:45.210 --> 00:42:48.700 align:middle line:84% you can see-- at least 100 passive house projects 00:42:48.700 --> 00:42:51.760 align:middle line:84% all over the Massachusetts, Boston area. 00:42:51.760 --> 00:42:55.930 align:middle line:84% I'll give you some examples, all single-family or multifamily. 00:42:55.930 --> 00:42:56.600 align:middle line:90% It's small. 00:42:56.600 --> 00:42:58.330 align:middle line:90% See this small thing? 00:42:58.330 --> 00:43:01.720 align:middle line:84% And they say 80% reduction in energy use. 00:43:01.720 --> 00:43:05.720 align:middle line:84% So this is a multifamily, I guess. 00:43:05.720 --> 00:43:08.570 align:middle line:84% And this one, this is Somerville. 00:43:08.570 --> 00:43:09.800 align:middle line:90% This is close by. 00:43:09.800 --> 00:43:12.670 align:middle line:84% If you have time, go there to take a look, 00:43:12.670 --> 00:43:15.160 align:middle line:90% this Somerville passive house. 00:43:15.160 --> 00:43:17.890 align:middle line:90% Yeah, so this is also-- 00:43:17.890 --> 00:43:20.170 align:middle line:84% I think this is also multifamily. 00:43:20.170 --> 00:43:23.990 align:middle line:84% And this one is another one, Union Square one. 00:43:23.990 --> 00:43:29.020 align:middle line:84% As you can see, it's also 80% reduction, 00:43:29.020 --> 00:43:32.890 align:middle line:84% this one built by our MSRED alum. 00:43:32.890 --> 00:43:36.190 align:middle line:84% Zhengzhen and I, we went there two years ago, one year ago. 00:43:36.190 --> 00:43:37.420 align:middle line:90% We visited the project. 00:43:37.420 --> 00:43:41.020 align:middle line:84% At that time, they had nothing, because they were still 00:43:41.020 --> 00:43:43.990 align:middle line:84% struggling with this permit and the community 00:43:43.990 --> 00:43:46.420 align:middle line:84% saying-- they have all kinds of community meetings 00:43:46.420 --> 00:43:49.870 align:middle line:84% to get support from the community to build. 00:43:49.870 --> 00:43:51.940 align:middle line:90% So we visited Kent. 00:43:51.940 --> 00:43:56.110 align:middle line:84% And we know they have this very ambitious goal 00:43:56.110 --> 00:43:58.330 align:middle line:84% to build largest passive house, residential, 00:43:58.330 --> 00:44:00.710 align:middle line:84% but still residential community in the US. 00:44:00.710 --> 00:44:01.900 align:middle line:90% That's also nearby. 00:44:01.900 --> 00:44:03.460 align:middle line:90% This is in Newton. 00:44:03.460 --> 00:44:05.063 align:middle line:90% So we have all this. 00:44:05.063 --> 00:44:05.980 align:middle line:90% You go to the website. 00:44:05.980 --> 00:44:08.930 align:middle line:90% You have all the passive house. 00:44:08.930 --> 00:44:11.920 align:middle line:84% Now let's move on to the second technology. 00:44:11.920 --> 00:44:12.780 align:middle line:90% You have a question? 00:44:12.780 --> 00:44:15.030 align:middle line:84% AUDIENCE: Just one more question on the passive house. 00:44:15.030 --> 00:44:17.500 align:middle line:84% Is it possible to change existing buildings 00:44:17.500 --> 00:44:18.970 align:middle line:90% into passive houses? 00:44:18.970 --> 00:44:20.830 align:middle line:84% Because I think, in a lot of countries, 00:44:20.830 --> 00:44:22.520 align:middle line:90% making the existing houses-- 00:44:22.520 --> 00:44:23.930 align:middle line:90% SIQI ZHENG: Yes, renovation. 00:44:23.930 --> 00:44:24.580 align:middle line:90% That's true. 00:44:24.580 --> 00:44:25.520 align:middle line:90% Yes, you can. 00:44:25.520 --> 00:44:29.150 align:middle line:84% But it will be more costly to do that because you need to change 00:44:29.150 --> 00:44:31.310 align:middle line:90% the original settings. 00:44:31.310 --> 00:44:35.390 align:middle line:84% OK, now let's move on to the second technology. 00:44:35.390 --> 00:44:38.870 align:middle line:84% I feel so embarrassed that I'm talking about technology, 00:44:38.870 --> 00:44:40.850 align:middle line:84% although I'm not a technology person. 00:44:40.850 --> 00:44:44.540 align:middle line:84% But I tried my best to explain the technology in a way 00:44:44.540 --> 00:44:46.400 align:middle line:90% that we can understand. 00:44:46.400 --> 00:44:49.070 align:middle line:84% Now we are talking about electrification-- 00:44:49.070 --> 00:44:53.400 align:middle line:84% means switch from gas to electricity. 00:44:53.400 --> 00:44:54.890 align:middle line:90% That's very important. 00:44:54.890 --> 00:44:57.880 align:middle line:84% Now, we assume we cannot control the city grid. 00:44:57.880 --> 00:45:00.500 align:middle line:84% Now we assume the city grid will become greener and greener. 00:45:00.500 --> 00:45:02.980 align:middle line:84% If the city's grid is greener and greener, 00:45:02.980 --> 00:45:06.350 align:middle line:84% it's good to switch from gas to electricity. 00:45:06.350 --> 00:45:09.960 align:middle line:90% Think about this-- cooling. 00:45:09.960 --> 00:45:11.390 align:middle line:90% We all use electricity. 00:45:11.390 --> 00:45:12.380 align:middle line:90% This is ACs. 00:45:12.380 --> 00:45:16.250 align:middle line:84% But it's very decentralized and very old-style ACs. 00:45:16.250 --> 00:45:17.920 align:middle line:90% It's not very efficient. 00:45:17.920 --> 00:45:18.740 align:middle line:90% That's true. 00:45:18.740 --> 00:45:21.500 align:middle line:84% And this is old-style, but this is already 00:45:21.500 --> 00:45:23.480 align:middle line:90% electricity, no problem. 00:45:23.480 --> 00:45:26.900 align:middle line:84% Heating, especially in the New England area-- 00:45:26.900 --> 00:45:29.810 align:middle line:84% still a lot of gas-based heating. 00:45:29.810 --> 00:45:32.970 align:middle line:84% The gas-based heating or oil-based, no matter what. 00:45:32.970 --> 00:45:35.820 align:middle line:84% Now it's a very important trend is 00:45:35.820 --> 00:45:38.070 align:middle line:84% to change from the gas-based heating 00:45:38.070 --> 00:45:43.990 align:middle line:84% to electric heat pump that can use the electricity 00:45:43.990 --> 00:45:45.020 align:middle line:90% to do heating. 00:45:45.020 --> 00:45:47.210 align:middle line:84% And actually, it can also do cooling. 00:45:47.210 --> 00:45:48.680 align:middle line:90% I will let you-- show. 00:45:48.680 --> 00:45:53.050 align:middle line:84% But point is the old-style gas-based-- 00:45:53.050 --> 00:45:56.500 align:middle line:90% you have this natural gas-- 00:45:56.500 --> 00:45:58.450 align:middle line:90% these are water boilers. 00:45:58.450 --> 00:46:00.873 align:middle line:84% And you just boil the water, become hot water, 00:46:00.873 --> 00:46:02.540 align:middle line:84% then use the water to heat the building. 00:46:02.540 --> 00:46:05.170 align:middle line:90% So you have this. 00:46:05.170 --> 00:46:07.240 align:middle line:84% But if you change it to electricity, 00:46:07.240 --> 00:46:11.120 align:middle line:84% then you need to put a lot of this technology, 00:46:11.120 --> 00:46:14.020 align:middle line:84% these machine called heat pumps-- 00:46:14.020 --> 00:46:18.400 align:middle line:84% big heat pumps, especially the air source heat pumps here. 00:46:18.400 --> 00:46:21.460 align:middle line:84% So then this is what we did last year-- 00:46:21.460 --> 00:46:23.320 align:middle line:84% it's an office building in New York city. 00:46:23.320 --> 00:46:26.020 align:middle line:84% But you can also use this in residential houses. 00:46:26.020 --> 00:46:29.060 align:middle line:84% But this is a high-rise office building. 00:46:29.060 --> 00:46:33.020 align:middle line:84% So the point is, electricity is so important. 00:46:33.020 --> 00:46:35.300 align:middle line:90% Heat pump is more efficient. 00:46:35.300 --> 00:46:36.880 align:middle line:90% But you can see the heat pump. 00:46:36.880 --> 00:46:40.270 align:middle line:84% This machine will occupy a lot of space. 00:46:40.270 --> 00:46:45.070 align:middle line:84% That's a downside of this electricity 00:46:45.070 --> 00:46:48.410 align:middle line:84% because then you have to sacrifice. 00:46:48.410 --> 00:46:50.900 align:middle line:84% You have to sacrifice some leasable space. 00:46:50.900 --> 00:46:53.840 align:middle line:84% At first you can lease this out and get rental revenue. 00:46:53.840 --> 00:46:57.040 align:middle line:84% But if you want to put all the machines here, 00:46:57.040 --> 00:47:01.330 align:middle line:84% then you lose leasable space, which 00:47:01.330 --> 00:47:03.290 align:middle line:90% will hurt your rental revenue. 00:47:03.290 --> 00:47:06.420 align:middle line:90% So that's the cost of this. 00:47:06.420 --> 00:47:08.430 align:middle line:84% But the benefit, you have a lot of benefit. 00:47:08.430 --> 00:47:10.550 align:middle line:90% So that's this. 00:47:10.550 --> 00:47:13.820 align:middle line:90% And heat pump technology-- 00:47:13.820 --> 00:47:15.020 align:middle line:90% Google. 00:47:15.020 --> 00:47:19.060 align:middle line:84% I just want to say it can do heating cycle and cooling cycle. 00:47:19.060 --> 00:47:20.790 align:middle line:90% You will have the same thing. 00:47:20.790 --> 00:47:22.760 align:middle line:84% Let me show you the picture here so that you 00:47:22.760 --> 00:47:25.620 align:middle line:90% have better understanding. 00:47:25.620 --> 00:47:28.980 align:middle line:84% So you have an outside unit outside your door 00:47:28.980 --> 00:47:30.085 align:middle line:90% or outside your house. 00:47:30.085 --> 00:47:31.710 align:middle line:84% There's an outside unit, and inside you 00:47:31.710 --> 00:47:33.690 align:middle line:84% have-- it's very similar to an air conditioner, 00:47:33.690 --> 00:47:35.040 align:middle line:90% but it's a heat pump. 00:47:35.040 --> 00:47:37.830 align:middle line:84% And you have this outside unit and the inside unit, 00:47:37.830 --> 00:47:41.670 align:middle line:84% and [INAUDIBLE] electricity, and you heat your house. 00:47:41.670 --> 00:47:46.850 align:middle line:84% When it's heating, then you have this refrigerate, 00:47:46.850 --> 00:47:48.930 align:middle line:90% and it go through this first. 00:47:48.930 --> 00:47:54.590 align:middle line:84% This is a circle that they can just emit heat into the room 00:47:54.590 --> 00:47:57.620 align:middle line:84% and become cooler and then become cooler and then 00:47:57.620 --> 00:48:00.260 align:middle line:84% get heat from outside and the compressor here, 00:48:00.260 --> 00:48:02.100 align:middle line:90% and it becomes hotter. 00:48:02.100 --> 00:48:03.890 align:middle line:90% Then it's a cycle here. 00:48:03.890 --> 00:48:06.480 align:middle line:84% And the cooling is the reverse cycle. 00:48:06.480 --> 00:48:09.560 align:middle line:84% And then you get cooler, and then you 00:48:09.560 --> 00:48:12.680 align:middle line:84% emit cold air into the internal, and then 00:48:12.680 --> 00:48:15.050 align:middle line:84% you become warmer and then go outside. 00:48:15.050 --> 00:48:18.950 align:middle line:90% So that's a cycle of this. 00:48:18.950 --> 00:48:21.950 align:middle line:84% So basically, you can use this anywhere, not just the heating, 00:48:21.950 --> 00:48:23.070 align:middle line:90% but also cooling. 00:48:23.070 --> 00:48:27.530 align:middle line:84% And data shows for cooling, it has better efficiency 00:48:27.530 --> 00:48:33.710 align:middle line:84% than these old-style, old-fashioned window ACs. 00:48:33.710 --> 00:48:38.870 align:middle line:84% So that's why, even in very hot area, you can use it for AC, 00:48:38.870 --> 00:48:43.910 align:middle line:84% but in a cold area, you can use it for both heating and cooling. 00:48:43.910 --> 00:48:47.670 align:middle line:90% So that's a heat pump. 00:48:47.670 --> 00:48:52.440 align:middle line:84% So now they really promote heat pump a lot because they really 00:48:52.440 --> 00:48:56.730 align:middle line:84% want to switch from the gas boilers, the gas-based boilers, 00:48:56.730 --> 00:49:01.550 align:middle line:84% to the heat pumps that are fully electrified, only electricity. 00:49:01.550 --> 00:49:03.350 align:middle line:90% Then we have a massive-- 00:49:03.350 --> 00:49:06.200 align:middle line:84% I'm not sure, for those who live here for some years, you know, 00:49:06.200 --> 00:49:07.040 align:middle line:90% massive. 00:49:07.040 --> 00:49:09.170 align:middle line:90% I think you nod your head a lot. 00:49:09.170 --> 00:49:10.280 align:middle line:90% AUDIENCE: I just did this. 00:49:10.280 --> 00:49:11.785 align:middle line:84% SIQI ZHENG: Oh, you applied to this. 00:49:11.785 --> 00:49:12.410 align:middle line:90% AUDIENCE: Yeah. 00:49:12.410 --> 00:49:13.580 align:middle line:84% SIQI ZHENG: You applied [INAUDIBLE]. 00:49:13.580 --> 00:49:14.150 align:middle line:90% AUDIENCE: Yeah. 00:49:14.150 --> 00:49:14.830 align:middle line:90% SIQI ZHENG: For your house. 00:49:14.830 --> 00:49:15.120 align:middle line:90% AUDIENCE: [INAUDIBLE]. 00:49:15.120 --> 00:49:16.130 align:middle line:90% SIQI ZHENG: For what? 00:49:16.130 --> 00:49:18.020 align:middle line:84% AUDIENCE: For installing [INAUDIBLE]. 00:49:18.020 --> 00:49:18.920 align:middle line:90% SIQI ZHENG: Good. 00:49:18.920 --> 00:49:20.180 align:middle line:90% OK. 00:49:20.180 --> 00:49:23.360 align:middle line:84% [INAUDIBLE], you have an example, yeah? 00:49:23.360 --> 00:49:27.290 align:middle line:84% Then, if you decide to install a heat pump, 00:49:27.290 --> 00:49:29.830 align:middle line:84% $10,000 you can get from the state. 00:49:29.830 --> 00:49:32.990 align:middle line:90% So that incentivizes you to-- 00:49:32.990 --> 00:49:34.920 align:middle line:90% [? MacKenzie, ?] to do this. 00:49:34.920 --> 00:49:38.660 align:middle line:84% But whether your neighbors all did this or only you-- 00:49:38.660 --> 00:49:39.685 align:middle line:90% AUDIENCE: Just me. 00:49:39.685 --> 00:49:40.560 align:middle line:90% SIQI ZHENG: Just you? 00:49:40.560 --> 00:49:44.120 align:middle line:84% Why your neighbors didn't get this $10,000? 00:49:44.120 --> 00:49:46.970 align:middle line:84% AUDIENCE: Right, they-- well, you know, 00:49:46.970 --> 00:49:50.015 align:middle line:90% it is a difficult process. 00:49:50.015 --> 00:49:52.140 align:middle line:84% SIQI ZHENG: You mean the application, bureaucratic? 00:49:52.140 --> 00:49:54.650 align:middle line:84% AUDIENCE: Yeah, and actually, a big issue 00:49:54.650 --> 00:49:57.470 align:middle line:84% with triple-deckers, older triple-deckers 00:49:57.470 --> 00:50:00.670 align:middle line:84% is they don't have the electrical capacity. 00:50:00.670 --> 00:50:05.500 align:middle line:84% So we only have 100 amps coming into the building, which 00:50:05.500 --> 00:50:06.670 align:middle line:90% is crazy low. 00:50:06.670 --> 00:50:13.770 align:middle line:84% So [INAUDIBLE], they literally can't until we get our home-- 00:50:13.770 --> 00:50:14.680 align:middle line:90% SIQI ZHENG: OK, good. 00:50:14.680 --> 00:50:20.484 align:middle line:84% Who else in this classroom got this $10,000 in your pocket? 00:50:20.484 --> 00:50:23.130 align:middle line:84% Of course, because many of you don't live here. 00:50:23.130 --> 00:50:24.580 align:middle line:90% Zhengzhen, did you get this? 00:50:24.580 --> 00:50:26.670 align:middle line:90% You have a house here. 00:50:26.670 --> 00:50:29.280 align:middle line:90% Are you planning to do so? 00:50:29.280 --> 00:50:34.390 align:middle line:84% AUDIENCE: So usually the [? guests-- ?] it's 30 years. 00:50:34.390 --> 00:50:37.660 align:middle line:84% So I put my [? guests ?] [INAUDIBLE]. 00:50:37.660 --> 00:50:39.550 align:middle line:84% So I guess the best business case 00:50:39.550 --> 00:50:44.670 align:middle line:84% is that towards the end of use, it makes more financial sense, 00:50:44.670 --> 00:50:47.640 align:middle line:84% that you are going to change it anyway. 00:50:47.640 --> 00:50:49.740 align:middle line:84% But [INAUDIBLE] system is working. 00:50:49.740 --> 00:50:53.020 align:middle line:84% So that's really the hard part of the industry right now. 00:50:53.020 --> 00:50:56.576 align:middle line:84% It's not like that's part of [INAUDIBLE] 00:50:56.576 --> 00:50:59.543 align:middle line:90% 100% pure [INAUDIBLE]. 00:50:59.543 --> 00:51:01.960 align:middle line:84% SIQI ZHENG: So you are going to wait for another 20 years. 00:51:01.960 --> 00:51:05.820 align:middle line:84% When we become 60 years old, we are going to do this. 00:51:05.820 --> 00:51:09.220 align:middle line:84% Yes, I also have my house here, and I haven't done this. 00:51:09.220 --> 00:51:15.240 align:middle line:84% I haven't applied to this-- not so progressive as MacKenzie. 00:51:15.240 --> 00:51:17.110 align:middle line:90% And, no, I understand. 00:51:17.110 --> 00:51:19.760 align:middle line:84% I need to wait for when I get 60 years old. 00:51:19.760 --> 00:51:21.010 align:middle line:90% Yeah, what's your [INAUDIBLE]? 00:51:21.010 --> 00:51:22.052 align:middle line:90% AUDIENCE: Oh, I remember. 00:51:22.052 --> 00:51:23.280 align:middle line:90% SIQI ZHENG: OK, you got it. 00:51:23.280 --> 00:51:25.770 align:middle line:84% AUDIENCE: I have a question about how the heat pumps work. 00:51:25.770 --> 00:51:30.480 align:middle line:84% So is it-- can it either do heating or cooling, 00:51:30.480 --> 00:51:32.127 align:middle line:84% or can it do both at the same time? 00:51:32.127 --> 00:51:33.210 align:middle line:90% Because in Massachusetts-- 00:51:33.210 --> 00:51:33.540 align:middle line:90% SIQI ZHENG: I don't-- 00:51:33.540 --> 00:51:35.957 align:middle line:84% AUDIENCE: --with the shoulder seasons, sometimes, one day, 00:51:35.957 --> 00:51:38.373 align:middle line:84% you may have to heat, one day you may have to cool. 00:51:38.373 --> 00:51:40.290 align:middle line:84% SIQI ZHENG: I really don't know how to answer, 00:51:40.290 --> 00:51:42.115 align:middle line:90% but maybe MacKenzie can. 00:51:42.115 --> 00:51:43.240 align:middle line:90% AUDIENCE: How easy is that? 00:51:43.240 --> 00:51:44.460 align:middle line:84% You just do it on the thermostat? 00:51:44.460 --> 00:51:44.880 align:middle line:90% AUDIENCE: Yep. 00:51:44.880 --> 00:51:45.660 align:middle line:90% AUDIENCE: OK, perfect. 00:51:45.660 --> 00:51:46.570 align:middle line:90% SIQI ZHENG: OK, good. 00:51:46.570 --> 00:51:50.480 align:middle line:84% So, yes, for example, one day is cold and the other day is hot. 00:51:50.480 --> 00:51:52.190 align:middle line:90% So you switch very easily. 00:51:52.190 --> 00:51:52.710 align:middle line:90% Good. 00:51:52.710 --> 00:51:57.300 align:middle line:84% So now we had a very small poll that three of us, 00:51:57.300 --> 00:52:01.420 align:middle line:84% we live in Massachusetts, only one person got one [INAUDIBLE], 00:52:01.420 --> 00:52:04.240 align:middle line:90% and two of us, we didn't. 00:52:04.240 --> 00:52:07.640 align:middle line:84% It's not because we don't want to do so, 00:52:07.640 --> 00:52:09.370 align:middle line:90% but we really have a rationale. 00:52:09.370 --> 00:52:13.930 align:middle line:90% We have the rationale of this. 00:52:13.930 --> 00:52:16.210 align:middle line:84% So it's not like, oh, all everything 00:52:16.210 --> 00:52:18.370 align:middle line:84% is so perfect for heat pump, right? 00:52:18.370 --> 00:52:21.130 align:middle line:84% This is really good, favorable conditions. 00:52:21.130 --> 00:52:23.830 align:middle line:84% Technological improvement becomes smaller and smaller. 00:52:23.830 --> 00:52:25.540 align:middle line:84% This is where we think about office. 00:52:25.540 --> 00:52:27.190 align:middle line:84% If you have smaller, smaller, good. 00:52:27.190 --> 00:52:29.290 align:middle line:90% Then you won't lose space. 00:52:29.290 --> 00:52:31.810 align:middle line:84% And then you have the subsidy good-- 00:52:31.810 --> 00:52:36.190 align:middle line:84% government pay and all those other things. 00:52:36.190 --> 00:52:41.680 align:middle line:84% But sometimes it's also some unfavorable conditions, 00:52:41.680 --> 00:52:45.460 align:middle line:84% such as the electricity is sometimes more 00:52:45.460 --> 00:52:46.670 align:middle line:90% expensive than gas. 00:52:46.670 --> 00:52:47.870 align:middle line:90% It's not cheap. 00:52:47.870 --> 00:52:49.600 align:middle line:84% Just because you want to go net zero, 00:52:49.600 --> 00:52:52.780 align:middle line:84% then you choose electricity, not because electricity is cheap. 00:52:52.780 --> 00:52:54.290 align:middle line:90% So you switch to heat pump. 00:52:54.290 --> 00:52:56.890 align:middle line:84% Maybe your monthly bill will become higher because you 00:52:56.890 --> 00:52:58.660 align:middle line:90% are using more electricity. 00:52:58.660 --> 00:53:00.550 align:middle line:84% And when the gas is cheaper-- of course, 00:53:00.550 --> 00:53:01.900 align:middle line:90% now gas is also not cheap. 00:53:01.900 --> 00:53:05.290 align:middle line:84% But it depends on the relative prices of the electricity 00:53:05.290 --> 00:53:07.420 align:middle line:90% and gas to make business sense. 00:53:07.420 --> 00:53:09.220 align:middle line:90% Right? 00:53:09.220 --> 00:53:10.870 align:middle line:84% And another thing-- so you can see 00:53:10.870 --> 00:53:14.980 align:middle line:84% that MA is so lagging behind these other states of adoption 00:53:14.980 --> 00:53:15.730 align:middle line:90% of heat pumps. 00:53:15.730 --> 00:53:17.440 align:middle line:90% MA is here. 00:53:17.440 --> 00:53:19.240 align:middle line:90% So that's because of us. 00:53:19.240 --> 00:53:20.330 align:middle line:90% We didn't do this. 00:53:20.330 --> 00:53:24.250 align:middle line:84% We need to learn how to follow MacKenzie to do this, 00:53:24.250 --> 00:53:26.020 align:middle line:90% to push MA like this. 00:53:26.020 --> 00:53:27.530 align:middle line:90% Yes, so that's the point. 00:53:27.530 --> 00:53:30.790 align:middle line:84% But then we are now doing research. 00:53:30.790 --> 00:53:34.220 align:middle line:84% Me, our group, my lab is doing research on 00:53:34.220 --> 00:53:38.510 align:middle line:84% to understand why the slow, slow adoption of heat pumps. 00:53:38.510 --> 00:53:40.610 align:middle line:90% Because of what? 00:53:40.610 --> 00:53:44.960 align:middle line:84% Now I'm working with professor Chris Knittel who is a Sloan 00:53:44.960 --> 00:53:47.040 align:middle line:90% professor on energy economics. 00:53:47.040 --> 00:53:48.140 align:middle line:90% So we are doing. 00:53:48.140 --> 00:53:52.100 align:middle line:84% We got a small grant from MIT Energy Initiative 00:53:52.100 --> 00:53:53.660 align:middle line:90% because they want to understand. 00:53:53.660 --> 00:53:58.160 align:middle line:84% Then we just surveyed, and we got data from all the houses 00:53:58.160 --> 00:54:02.810 align:middle line:84% who chose to install a heat pump in their houses, households. 00:54:02.810 --> 00:54:04.135 align:middle line:90% Then we counted their cost. 00:54:04.135 --> 00:54:05.090 align:middle line:90% See this is cost. 00:54:05.090 --> 00:54:07.440 align:middle line:90% One square is $100. 00:54:07.440 --> 00:54:13.430 align:middle line:84% So altogether, total cost will be $22k. 00:54:13.430 --> 00:54:16.340 align:middle line:84% But you can get $10k from the government. 00:54:16.340 --> 00:54:20.540 align:middle line:84% So these green squares are the equipment. 00:54:20.540 --> 00:54:22.520 align:middle line:84% Just the heat pump itself is a machine. 00:54:22.520 --> 00:54:25.160 align:middle line:84% But you cannot just buy a machine and put it 00:54:25.160 --> 00:54:25.790 align:middle line:90% in your house. 00:54:25.790 --> 00:54:26.810 align:middle line:90% You need to install. 00:54:26.810 --> 00:54:30.170 align:middle line:84% You need to hire some companies to install. 00:54:30.170 --> 00:54:31.460 align:middle line:90% That's installers. 00:54:31.460 --> 00:54:35.510 align:middle line:84% And then you need to do this labor and electricity 00:54:35.510 --> 00:54:38.730 align:middle line:84% and permitting and this, all kinds of things. 00:54:38.730 --> 00:54:44.600 align:middle line:84% So the MA subsidy $10k cover about half. 00:54:44.600 --> 00:54:46.830 align:middle line:84% And the other, you still need to pay money. 00:54:46.830 --> 00:54:47.960 align:middle line:90% It's not free. 00:54:47.960 --> 00:54:49.460 align:middle line:90% So that may be one reason. 00:54:49.460 --> 00:54:51.350 align:middle line:84% You still need to go through all this. 00:54:51.350 --> 00:54:54.240 align:middle line:84% And also, it's a lengthy permitting process-- 00:54:54.240 --> 00:54:57.050 align:middle line:84% not like you fill out a form and then tomorrow someone 00:54:57.050 --> 00:54:57.990 align:middle line:90% will come to install. 00:54:57.990 --> 00:54:58.670 align:middle line:90% No. 00:54:58.670 --> 00:55:03.530 align:middle line:84% And we also had so many installers. 00:55:03.530 --> 00:55:07.880 align:middle line:84% And we found out that the installation fee varies so much 00:55:07.880 --> 00:55:09.560 align:middle line:90% across different installers. 00:55:09.560 --> 00:55:12.120 align:middle line:84% And we even found some bigger installers, 00:55:12.120 --> 00:55:14.270 align:middle line:84% they charge higher price to install. 00:55:14.270 --> 00:55:16.940 align:middle line:84% The smaller ones, they charge lower. 00:55:16.940 --> 00:55:18.950 align:middle line:84% But the bigger ones, they charge high. 00:55:18.950 --> 00:55:21.290 align:middle line:90% So this market is not mature. 00:55:21.290 --> 00:55:22.520 align:middle line:90% So that's one reason. 00:55:22.520 --> 00:55:24.200 align:middle line:84% We are still going on the project. 00:55:24.200 --> 00:55:27.110 align:middle line:84% And we will find more interesting things. 00:55:27.110 --> 00:55:30.330 align:middle line:84% OK, now this leads to this economics. 00:55:30.330 --> 00:55:32.670 align:middle line:84% We cannot just technology, technology, technology. 00:55:32.670 --> 00:55:35.280 align:middle line:84% No, even if the technology is perfect, 00:55:35.280 --> 00:55:39.080 align:middle line:84% heat pumps still have this low adoption problem, 00:55:39.080 --> 00:55:41.310 align:middle line:90% as I just showed. 00:55:41.310 --> 00:55:42.570 align:middle line:90% And think about this. 00:55:42.570 --> 00:55:46.325 align:middle line:84% Then we go back to this conceptual-level pro 00:55:46.325 --> 00:55:50.480 align:middle line:84% forma we always use as a tool to understand. 00:55:50.480 --> 00:55:52.490 align:middle line:90% Then think about this. 00:55:52.490 --> 00:55:57.170 align:middle line:84% The arrows, this is a baseline thing, right? 00:55:57.170 --> 00:55:58.980 align:middle line:90% Think about upfront cost. 00:55:58.980 --> 00:56:03.620 align:middle line:84% You need to invest money, $22k, to install. 00:56:03.620 --> 00:56:05.240 align:middle line:90% That's $22k for our house. 00:56:05.240 --> 00:56:08.210 align:middle line:84% For such a building, it will be much higher cost. 00:56:08.210 --> 00:56:12.710 align:middle line:84% And then you get rent [INAUDIBLE] if you don't do. 00:56:12.710 --> 00:56:15.770 align:middle line:84% Now, remember, I introduced a little bit 00:56:15.770 --> 00:56:19.490 align:middle line:84% about New York City's local law 97 in the intro session. 00:56:19.490 --> 00:56:24.530 align:middle line:84% It said, by 2035, if you are not net zero, 00:56:24.530 --> 00:56:26.750 align:middle line:84% or if your carbon emission is above the cap, 00:56:26.750 --> 00:56:29.930 align:middle line:84% you need to pay a penalty to the city. 00:56:29.930 --> 00:56:30.835 align:middle line:90% That's why-- 00:56:30.835 --> 00:56:33.152 align:middle line:90% [PHONE RINGS] 00:56:33.152 --> 00:56:34.100 align:middle line:90% 00:56:34.100 --> 00:56:38.900 align:middle line:84% That's why this is an office building in Manhattan that 00:56:38.900 --> 00:56:43.040 align:middle line:84% is under the big pressure to go to this heat pump 00:56:43.040 --> 00:56:46.160 align:middle line:84% because they know if they don't do that, later, we'll 00:56:46.160 --> 00:56:48.120 align:middle line:90% pay the city a penalty. 00:56:48.120 --> 00:56:49.910 align:middle line:84% Penalty becomes negative cash flow. 00:56:49.910 --> 00:56:54.410 align:middle line:84% So if you don't do this, you have this cash flow. 00:56:54.410 --> 00:56:55.740 align:middle line:90% And then you compare. 00:56:55.740 --> 00:56:58.640 align:middle line:84% If you do this, then which arrows 00:56:58.640 --> 00:57:01.380 align:middle line:84% will change, and to which direction? 00:57:01.380 --> 00:57:03.610 align:middle line:90% Guess. 00:57:03.610 --> 00:57:07.030 align:middle line:84% Which of the arrows will change if you really decide? 00:57:07.030 --> 00:57:08.200 align:middle line:90% It's not a house. 00:57:08.200 --> 00:57:11.990 align:middle line:84% It's a high-rise office building like that. 00:57:11.990 --> 00:57:15.660 align:middle line:84% It's a New York City downtown Manhattan building. 00:57:15.660 --> 00:57:17.240 align:middle line:84% And the designer of this building 00:57:17.240 --> 00:57:20.690 align:middle line:84% will come after midterm to teach three sustainable design 00:57:20.690 --> 00:57:21.550 align:middle line:90% sessions. 00:57:21.550 --> 00:57:22.880 align:middle line:90% Carlos will come. 00:57:22.880 --> 00:57:26.660 align:middle line:84% The other Carlos will come to teach three design sessions. 00:57:26.660 --> 00:57:27.740 align:middle line:90% He designed the building. 00:57:27.740 --> 00:57:29.360 align:middle line:90% And the developer-- 00:57:29.360 --> 00:57:30.990 align:middle line:84% I think that's Boston Properties, 00:57:30.990 --> 00:57:34.730 align:middle line:84% I guess-- they asked them to tell 00:57:34.730 --> 00:57:39.200 align:middle line:84% what's the pros and cons of fully electrifying 00:57:39.200 --> 00:57:40.910 align:middle line:90% and use heat pump. 00:57:40.910 --> 00:57:43.840 align:middle line:84% Carlos had to answer that question-- 00:57:43.840 --> 00:57:47.240 align:middle line:84% then how they answer from this economics perspective. 00:57:47.240 --> 00:57:49.940 align:middle line:90% 00:57:49.940 --> 00:57:51.320 align:middle line:90% Just a guess. 00:57:51.320 --> 00:57:52.200 align:middle line:90% Please? 00:57:52.200 --> 00:57:55.032 align:middle line:84% AUDIENCE: The upfront cost will be much more? 00:57:55.032 --> 00:57:56.490 align:middle line:84% SIQI ZHENG: Yes, you need to invest 00:57:56.490 --> 00:57:58.770 align:middle line:84% more money for the machines and the installation-- 00:57:58.770 --> 00:58:01.920 align:middle line:84% AUDIENCE: Your operation costs will be much less. 00:58:01.920 --> 00:58:06.080 align:middle line:84% SIQI ZHENG: Go up, reduce operational cost. 00:58:06.080 --> 00:58:09.320 align:middle line:84% AUDIENCE: And you can probably raise your [INAUDIBLE] rates. 00:58:09.320 --> 00:58:10.160 align:middle line:90% SIQI ZHENG: Yeah. 00:58:10.160 --> 00:58:13.944 align:middle line:84% And the most important thing is to eliminate what? 00:58:13.944 --> 00:58:14.780 align:middle line:90% AUDIENCE: Penalties. 00:58:14.780 --> 00:58:16.490 align:middle line:90% SIQI ZHENG: Yes. 00:58:16.490 --> 00:58:20.970 align:middle line:84% But it's not that easy to judge, as you can imagine. 00:58:20.970 --> 00:58:24.840 align:middle line:84% So here is all the uncertainties. 00:58:24.840 --> 00:58:28.920 align:middle line:84% That's why this is not an easy question for Carlos to answer. 00:58:28.920 --> 00:58:33.090 align:middle line:84% Of course, we know this will be additional cost because you 00:58:33.090 --> 00:58:34.440 align:middle line:90% have those heat pumps. 00:58:34.440 --> 00:58:37.710 align:middle line:84% And also, they have specific requirements for the facade 00:58:37.710 --> 00:58:40.490 align:middle line:84% because they really need a very good insulation. 00:58:40.490 --> 00:58:44.820 align:middle line:84% So if you really choose heat pump, that direction, very good, 00:58:44.820 --> 00:58:49.242 align:middle line:84% very specially designed facade, that's another investment. 00:58:49.242 --> 00:58:52.680 align:middle line:84% Oh, thank god, we will eliminate this penalty 00:58:52.680 --> 00:58:56.430 align:middle line:84% because at that time, we showed to the city, oh, all electricity 00:58:56.430 --> 00:58:58.480 align:middle line:90% and the net zero, no problem. 00:58:58.480 --> 00:58:59.980 align:middle line:90% So no penalty. 00:58:59.980 --> 00:59:01.290 align:middle line:90% Good. 00:59:01.290 --> 00:59:03.560 align:middle line:90% Who knows about effective rent? 00:59:03.560 --> 00:59:05.405 align:middle line:84% Yes, maybe this becomes so popular, 00:59:05.405 --> 00:59:06.780 align:middle line:84% and the tenants want to pay more, 00:59:06.780 --> 00:59:08.190 align:middle line:90% and you'll get more tenants. 00:59:08.190 --> 00:59:11.280 align:middle line:84% But remember, you'll lose some space. 00:59:11.280 --> 00:59:12.430 align:middle line:90% You'll lose some space. 00:59:12.430 --> 00:59:14.230 align:middle line:84% Then you put all the machines there. 00:59:14.230 --> 00:59:18.580 align:middle line:84% Then you lose the space to generate rental revenue. 00:59:18.580 --> 00:59:19.650 align:middle line:90% Who knows? 00:59:19.650 --> 00:59:21.570 align:middle line:90% Operational costs-- who knows? 00:59:21.570 --> 00:59:24.400 align:middle line:84% Whether the electricity will become very expensive-- 00:59:24.400 --> 00:59:25.450 align:middle line:90% don't know. 00:59:25.450 --> 00:59:29.200 align:middle line:84% So all these different scenarios. 00:59:29.200 --> 00:59:33.520 align:middle line:84% So that's why this is not an easy question for an investor 00:59:33.520 --> 00:59:40.210 align:middle line:84% or developer to decide whether to go for electrification 00:59:40.210 --> 00:59:42.460 align:middle line:90% immediately. 00:59:42.460 --> 00:59:45.400 align:middle line:84% It's more sophisticated, more complex because 00:59:45.400 --> 00:59:47.000 align:middle line:90% of these future uncertainties. 00:59:47.000 --> 00:59:49.220 align:middle line:84% That's another project in my lab. 00:59:49.220 --> 00:59:50.810 align:middle line:90% We are doing so many projects. 00:59:50.810 --> 00:59:53.000 align:middle line:84% If you are interested, come to me. 00:59:53.000 --> 00:59:55.510 align:middle line:84% This is all the applied research projects. 00:59:55.510 --> 00:59:58.870 align:middle line:84% Just now I showed this heat pump of the Massachusetts 00:59:58.870 --> 01:00:00.350 align:middle line:90% installation puzzle. 01:00:00.350 --> 01:00:05.590 align:middle line:84% This thing is the electrification uncertainty. 01:00:05.590 --> 01:00:08.400 align:middle line:84% I mean, this is natural gas prices because 01:00:08.400 --> 01:00:10.860 align:middle line:90% of the Ukraine-Russia War. 01:00:10.860 --> 01:00:11.610 align:middle line:90% We don't know. 01:00:11.610 --> 01:00:14.100 align:middle line:84% Maybe the gas will be more and more expensive. 01:00:14.100 --> 01:00:15.930 align:middle line:90% We don't know. 01:00:15.930 --> 01:00:19.650 align:middle line:84% And another thing is the city grid decarbonization 01:00:19.650 --> 01:00:22.590 align:middle line:84% because that's totally out of control, out 01:00:22.590 --> 01:00:23.770 align:middle line:90% of the developer's control. 01:00:23.770 --> 01:00:25.650 align:middle line:84% That's the city mayor's decision. 01:00:25.650 --> 01:00:29.340 align:middle line:84% All the city mayors are now very progressive, say, especially 01:00:29.340 --> 01:00:32.040 align:middle line:90% in this New York City case. 01:00:32.040 --> 01:00:36.210 align:middle line:84% We will decarbonize our grid by which year, for sure, 01:00:36.210 --> 01:00:37.950 align:middle line:90% all new renewables. 01:00:37.950 --> 01:00:40.690 align:middle line:84% But they don't have enough money to do so. 01:00:40.690 --> 01:00:42.810 align:middle line:84% They have limited budget of the city. 01:00:42.810 --> 01:00:47.520 align:middle line:84% City budget's not enough to do this grid decarbonization. 01:00:47.520 --> 01:00:49.680 align:middle line:90% So it's a rumor. 01:00:49.680 --> 01:00:51.750 align:middle line:84% The city's mayor said so, but it's 01:00:51.750 --> 01:00:56.490 align:middle line:84% possible it will be 10 years delayed. 01:00:56.490 --> 01:01:01.230 align:middle line:84% If this city just promised this but couldn't achieve that, 01:01:01.230 --> 01:01:05.670 align:middle line:84% even you as a building become fully electrified, 01:01:05.670 --> 01:01:08.790 align:middle line:84% but you still need to pay the penalty because the electricity 01:01:08.790 --> 01:01:10.230 align:middle line:90% is not clean. 01:01:10.230 --> 01:01:12.400 align:middle line:84% So then you will complain about the mayor. 01:01:12.400 --> 01:01:15.240 align:middle line:84% But the mayor's already gone because the mayor already 01:01:15.240 --> 01:01:17.410 align:middle line:90% retired or stepped down. 01:01:17.410 --> 01:01:21.660 align:middle line:84% So that's a problem because the mayor cannot be in the position 01:01:21.660 --> 01:01:26.470 align:middle line:84% for 10 or 20 years, although they pledged by 2040 net zero. 01:01:26.470 --> 01:01:29.350 align:middle line:84% But the mayor will be gone in three years. 01:01:29.350 --> 01:01:32.190 align:middle line:84% And all this politics is so complicated. 01:01:32.190 --> 01:01:34.000 align:middle line:90% It's very hard to imagine. 01:01:34.000 --> 01:01:37.510 align:middle line:90% 01:01:37.510 --> 01:01:39.370 align:middle line:84% AUDIENCE: What energy sources do you 01:01:39.370 --> 01:01:42.350 align:middle line:84% think we're going to have to rely on for decarbonization? 01:01:42.350 --> 01:01:47.500 align:middle line:84% Because energy consumption rises dramatically 01:01:47.500 --> 01:01:49.983 align:middle line:90% every couple of years. 01:01:49.983 --> 01:01:50.650 align:middle line:90% SIQI ZHENG: Yes. 01:01:50.650 --> 01:01:53.160 align:middle line:84% What's your question, [? Percy? ?] 01:01:53.160 --> 01:01:56.580 align:middle line:84% AUDIENCE: So what kinds of energy-- 01:01:56.580 --> 01:01:57.930 align:middle line:90% like nuclear, gas-- 01:01:57.930 --> 01:01:58.830 align:middle line:90% SIQI ZHENG: OK. 01:01:58.830 --> 01:02:01.470 align:middle line:84% The different cities, they are different. 01:02:01.470 --> 01:02:03.210 align:middle line:84% Yeah, I think now New York City-- 01:02:03.210 --> 01:02:05.700 align:middle line:84% I'm not very familiar with New York City. 01:02:05.700 --> 01:02:06.910 align:middle line:90% I'm not a New Yorker. 01:02:06.910 --> 01:02:09.480 align:middle line:84% But my understanding is part of the city is more 01:02:09.480 --> 01:02:11.020 align:middle line:90% cleaner than the other part. 01:02:11.020 --> 01:02:13.270 align:middle line:90% So they have different grids. 01:02:13.270 --> 01:02:20.310 align:middle line:84% And the dirty part is still on natural gas or oil 01:02:20.310 --> 01:02:21.640 align:middle line:90% to generate electricity. 01:02:21.640 --> 01:02:24.700 align:middle line:84% But they try to switch to renewables. 01:02:24.700 --> 01:02:25.900 align:middle line:90% But what kind of renewable? 01:02:25.900 --> 01:02:28.120 align:middle line:84% Maybe solar or wind, I don't know. 01:02:28.120 --> 01:02:29.430 align:middle line:90% I don't know. 01:02:29.430 --> 01:02:31.990 align:middle line:84% But I don't think there's a lot of nuclear power. 01:02:31.990 --> 01:02:36.130 align:middle line:84% I think it's not favorable, the nuclear power here. 01:02:36.130 --> 01:02:39.670 align:middle line:84% That's why many nuclear professors in MIT, 01:02:39.670 --> 01:02:44.050 align:middle line:84% they are promoting nuclear power because that's green. 01:02:44.050 --> 01:02:46.630 align:middle line:90% They promote. 01:02:46.630 --> 01:02:50.470 align:middle line:84% So then my research team, we run simulations. 01:02:50.470 --> 01:02:54.130 align:middle line:84% We say, OK, future uncertainty's so much, how can we know. 01:02:54.130 --> 01:02:59.590 align:middle line:84% And we run tests on different future scenarios, and we say, 01:02:59.590 --> 01:03:05.050 align:middle line:84% which option will be better off under which case? 01:03:05.050 --> 01:03:08.470 align:middle line:90% Option A, I don't care. 01:03:08.470 --> 01:03:13.680 align:middle line:84% Keep natural gas for all the entire life cycle. 01:03:13.680 --> 01:03:17.830 align:middle line:84% That's option A. Option B, fully electrified-- 01:03:17.830 --> 01:03:21.820 align:middle line:84% option B. Option C, flexibility-- 01:03:21.820 --> 01:03:25.960 align:middle line:84% the point is, how can we know the future? 01:03:25.960 --> 01:03:28.330 align:middle line:84% Now we want to keep the flexibility first 01:03:28.330 --> 01:03:30.430 align:middle line:90% because this is a new building. 01:03:30.430 --> 01:03:36.320 align:middle line:84% Then we keep the facade design OK, for future electrification. 01:03:36.320 --> 01:03:41.300 align:middle line:84% And we make this floor, this equivalent floor, very tall. 01:03:41.300 --> 01:03:44.260 align:middle line:84% But now we don't put in the machines now. 01:03:44.260 --> 01:03:47.450 align:middle line:84% We still lease out as a common area to lease out. 01:03:47.450 --> 01:03:51.640 align:middle line:84% And after 5 or 10 years, when we have better information 01:03:51.640 --> 01:03:58.330 align:middle line:84% of the price and from the grid decarbonization of the city, 01:03:58.330 --> 01:04:00.700 align:middle line:90% then we quickly change. 01:04:00.700 --> 01:04:04.390 align:middle line:90% And we let these tenants go. 01:04:04.390 --> 01:04:05.420 align:middle line:90% Of course, it's a lease. 01:04:05.420 --> 01:04:08.990 align:middle line:84% You can set the lease length of 5 years, 10 years. 01:04:08.990 --> 01:04:10.290 align:middle line:90% The tenants are gone. 01:04:10.290 --> 01:04:11.570 align:middle line:90% Then you put the machines in. 01:04:11.570 --> 01:04:13.310 align:middle line:90% We call it flexibility. 01:04:13.310 --> 01:04:17.990 align:middle line:84% So A, traditional; B, immediately electrification; 01:04:17.990 --> 01:04:22.460 align:middle line:84% C, keep the flexibility, invest in some flexibility, 01:04:22.460 --> 01:04:24.960 align:middle line:90% and wait for the future. 01:04:24.960 --> 01:04:26.490 align:middle line:90% Wait for 5 years, 10 years. 01:04:26.490 --> 01:04:27.770 align:middle line:90% Then you make the decision. 01:04:27.770 --> 01:04:30.680 align:middle line:90% Then we make this-- 01:04:30.680 --> 01:04:36.230 align:middle line:84% all these simulations, we show that always, 01:04:36.230 --> 01:04:39.050 align:middle line:84% the flexibility, option C, always win 01:04:39.050 --> 01:04:40.420 align:middle line:90% in all the kinds of cases. 01:04:40.420 --> 01:04:42.920 align:middle line:84% Of course, you can adjust the parameter of the fuel transfer 01:04:42.920 --> 01:04:44.315 align:middle line:90% and this and that. 01:04:44.315 --> 01:04:48.300 align:middle line:84% But the flexibility-- because it has an option value. 01:04:48.300 --> 01:04:49.970 align:middle line:84% The option value is that you invest, 01:04:49.970 --> 01:04:51.720 align:middle line:84% and then later you figure out more. 01:04:51.720 --> 01:04:53.660 align:middle line:84% Then you decide either yes or no. 01:04:53.660 --> 01:04:54.630 align:middle line:90% And you can wait. 01:04:54.630 --> 01:04:57.360 align:middle line:84% You can wait for a few years, more years, more years. 01:04:57.360 --> 01:04:59.340 align:middle line:90% So that's an option value there. 01:04:59.340 --> 01:05:02.330 align:middle line:84% So that's why the flexibility option always win. 01:05:02.330 --> 01:05:04.910 align:middle line:90% We wrote a paper on this. 01:05:04.910 --> 01:05:07.020 align:middle line:90% OK, that's all about technology. 01:05:07.020 --> 01:05:09.020 align:middle line:84% Actually, when I talk about technology, not just 01:05:09.020 --> 01:05:11.870 align:middle line:84% the technology itself per se, but already 01:05:11.870 --> 01:05:15.110 align:middle line:84% some economics and financial analysis of this-- 01:05:15.110 --> 01:05:20.300 align:middle line:84% but now I want to further emphasize the people side. 01:05:20.300 --> 01:05:21.355 align:middle line:90% You have a question? 01:05:21.355 --> 01:05:21.980 align:middle line:90% AUDIENCE: Yeah. 01:05:21.980 --> 01:05:25.730 align:middle line:84% Actually, before we [? build ?] the passive housing, 01:05:25.730 --> 01:05:32.360 align:middle line:84% always [? lose ?] a lot of money because [INAUDIBLE] [? doing ?] 01:05:32.360 --> 01:05:37.910 align:middle line:84% it because, [? when ?] China builds the passive housing, 01:05:37.910 --> 01:05:42.893 align:middle line:84% it will reduce 80% room [INAUDIBLE]. 01:05:42.893 --> 01:05:43.810 align:middle line:90% SIQI ZHENG: Oh, space. 01:05:43.810 --> 01:05:44.600 align:middle line:90% AUDIENCE: Yeah. 01:05:44.600 --> 01:05:46.642 align:middle line:84% SIQI ZHENG: That's very similar to the heat pump. 01:05:46.642 --> 01:05:47.517 align:middle line:90% It will occupy space. 01:05:47.517 --> 01:05:49.684 align:middle line:84% You are saying if you want to build a passive house, 01:05:49.684 --> 01:05:51.530 align:middle line:84% maybe the wall will be thicker or the window 01:05:51.530 --> 01:05:53.373 align:middle line:90% will have multiple layers. 01:05:53.373 --> 01:05:54.415 align:middle line:90% Then you lose some space. 01:05:54.415 --> 01:05:55.040 align:middle line:90% AUDIENCE: Yeah. 01:05:55.040 --> 01:06:02.160 align:middle line:84% [INAUDIBLE] walls [INAUDIBLE] always [INAUDIBLE] 01:06:02.160 --> 01:06:10.060 align:middle line:84% about the actual [INAUDIBLE] walls above the [INAUDIBLE]. 01:06:10.060 --> 01:06:11.090 align:middle line:90% SIQI ZHENG: Energy loss. 01:06:11.090 --> 01:06:12.610 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:06:12.610 --> 01:06:14.005 align:middle line:90% SIQI ZHENG: Yeah, yeah. 01:06:14.005 --> 01:06:14.880 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:06:14.880 --> 01:06:17.280 align:middle line:84% SIQI ZHENG: There's a lot of critiques on the passive house. 01:06:17.280 --> 01:06:18.113 align:middle line:90% I think that's good. 01:06:18.113 --> 01:06:19.570 align:middle line:90% That's an opportunity for you. 01:06:19.570 --> 01:06:22.350 align:middle line:84% You must visit those passive house projects 01:06:22.350 --> 01:06:25.230 align:middle line:84% and see what's the difference between those projects 01:06:25.230 --> 01:06:27.330 align:middle line:84% with the project you built in China 01:06:27.330 --> 01:06:31.230 align:middle line:84% and compare because climate and conditions 01:06:31.230 --> 01:06:35.100 align:middle line:84% and technology and all those things, they are so different. 01:06:35.100 --> 01:06:38.040 align:middle line:84% OK, let's move on for people side. 01:06:38.040 --> 01:06:40.710 align:middle line:84% We cannot just look at technology, technology, 01:06:40.710 --> 01:06:42.210 align:middle line:90% but look at people. 01:06:42.210 --> 01:06:45.120 align:middle line:84% The people-- now, there's, of course, 01:06:45.120 --> 01:06:46.710 align:middle line:90% so many aspects of people. 01:06:46.710 --> 01:06:51.780 align:middle line:84% Here I want to focus on landlord-and-tenant 01:06:51.780 --> 01:06:52.780 align:middle line:90% relationship. 01:06:52.780 --> 01:06:56.280 align:middle line:84% They're people, two stakeholders, landlord 01:06:56.280 --> 01:06:57.300 align:middle line:90% and tenant. 01:06:57.300 --> 01:07:01.980 align:middle line:84% And I will highlight the problem of this so-called split 01:07:01.980 --> 01:07:07.870 align:middle line:84% incentive that's a market failure because if we ignore 01:07:07.870 --> 01:07:10.270 align:middle line:84% this people side, landlord and tenant, the tension 01:07:10.270 --> 01:07:13.060 align:middle line:84% between these two, even if you have the most advanced 01:07:13.060 --> 01:07:16.236 align:middle line:90% technology, it won't work out. 01:07:16.236 --> 01:07:17.838 align:middle line:90% To think about this-- 01:07:17.838 --> 01:07:19.380 align:middle line:84% actually, we already touched on this. 01:07:19.380 --> 01:07:20.720 align:middle line:90% It's not new. 01:07:20.720 --> 01:07:23.630 align:middle line:84% Last time we talked, the business case 01:07:23.630 --> 01:07:25.400 align:middle line:84% for green buildings, remember, we 01:07:25.400 --> 01:07:30.030 align:middle line:84% talked about this chain from tenant to owners to developers. 01:07:30.030 --> 01:07:32.930 align:middle line:84% So we already talked about the owners and tenants. 01:07:32.930 --> 01:07:37.160 align:middle line:84% At that time, last Thursday, when I talked about this, 01:07:37.160 --> 01:07:39.380 align:middle line:84% it felt like, oh, they are good friends. 01:07:39.380 --> 01:07:41.180 align:middle line:84% Owners and tenants are good friends. 01:07:41.180 --> 01:07:43.590 align:middle line:84% They just become a win-win solution. 01:07:43.590 --> 01:07:45.860 align:middle line:84% And if it's so great for the tenants, 01:07:45.860 --> 01:07:47.990 align:middle line:84% they will be willing to pay higher rent, 01:07:47.990 --> 01:07:51.050 align:middle line:84% and higher rent will become higher income for the owners, 01:07:51.050 --> 01:07:53.480 align:middle line:84% and owners will be very happy, and they are going 01:07:53.480 --> 01:07:55.980 align:middle line:90% to purchase green buildings. 01:07:55.980 --> 01:07:57.990 align:middle line:84% It's kind of, oh, everything is so good. 01:07:57.990 --> 01:07:59.360 align:middle line:90% Everything can work out. 01:07:59.360 --> 01:08:01.670 align:middle line:90% Now we are looking at this. 01:08:01.670 --> 01:08:05.480 align:middle line:84% Performance gap-- if everything can work out, 01:08:05.480 --> 01:08:10.430 align:middle line:84% if these technologies are so good and can reduce energy 01:08:10.430 --> 01:08:11.930 align:middle line:90% consumption-- 01:08:11.930 --> 01:08:14.120 align:middle line:84% because they always have an engineering model. 01:08:14.120 --> 01:08:16.500 align:middle line:84% They have the engineering energy model 01:08:16.500 --> 01:08:18.149 align:middle line:84% that predicts if you install this, 01:08:18.149 --> 01:08:22.090 align:middle line:84% if you do that, you will reduce energy consumption by how much? 01:08:22.090 --> 01:08:25.830 align:middle line:84% We have a very famous professor in this school, Christoph 01:08:25.830 --> 01:08:29.609 align:middle line:84% Reinhart, from the architecture side technology group. 01:08:29.609 --> 01:08:35.100 align:middle line:84% And he is the strongest research group of the energy modeling. 01:08:35.100 --> 01:08:37.350 align:middle line:84% And then, for the engineering modeling, 01:08:37.350 --> 01:08:38.790 align:middle line:90% they have these predictions. 01:08:38.790 --> 01:08:41.729 align:middle line:84% But unfortunately, when [INAUDIBLE] 01:08:41.729 --> 01:08:45.120 align:middle line:84% the building put into use, and then they always found 01:08:45.120 --> 01:08:48.359 align:middle line:84% so-called performance gap or energy efficiency 01:08:48.359 --> 01:08:50.490 align:middle line:84% gap or some terminology like that, 01:08:50.490 --> 01:08:52.350 align:middle line:84% then the actual energy consumption 01:08:52.350 --> 01:08:55.680 align:middle line:84% is far more than-- much higher than projected energy 01:08:55.680 --> 01:08:57.960 align:middle line:84% consumption from the engineering model. 01:08:57.960 --> 01:09:00.149 align:middle line:84% Then I just showed this Christoph Reinhart 01:09:00.149 --> 01:09:01.859 align:middle line:90% saying we must collaborate. 01:09:01.859 --> 01:09:03.990 align:middle line:90% If you only do energy model-- 01:09:03.990 --> 01:09:05.160 align:middle line:90% not that useful. 01:09:05.160 --> 01:09:06.910 align:middle line:90% You must consider people. 01:09:06.910 --> 01:09:09.270 align:middle line:84% If you want to consider people, come to work with Siqi. 01:09:09.270 --> 01:09:11.109 align:middle line:84% No, we start with working together. 01:09:11.109 --> 01:09:12.420 align:middle line:90% So that's the story. 01:09:12.420 --> 01:09:14.399 align:middle line:90% But look at this. 01:09:14.399 --> 01:09:19.649 align:middle line:84% This is the first, the first, this New York City's Bank 01:09:19.649 --> 01:09:24.359 align:middle line:84% of America, this new building, the first high-rise office 01:09:24.359 --> 01:09:27.899 align:middle line:84% building of-- achieved the LEED Platinum, LEED Platinum, 01:09:27.899 --> 01:09:30.840 align:middle line:90% higher-level, not that easy. 01:09:30.840 --> 01:09:35.160 align:middle line:84% However, if you search Google, you will see a lot of stories 01:09:35.160 --> 01:09:38.470 align:middle line:84% saying this is toxic, and this consumes much more energy. 01:09:38.470 --> 01:09:41.700 align:middle line:84% It's even worse than the 80-years-old-- 01:09:41.700 --> 01:09:44.220 align:middle line:90% some old building in-- 01:09:44.220 --> 01:09:47.670 align:middle line:84% it uses more than twice as much energy per square foot 01:09:47.670 --> 01:09:50.550 align:middle line:84% as the 80-years-old Empire State Building. 01:09:50.550 --> 01:09:52.950 align:middle line:90% So bad. 01:09:52.950 --> 01:09:53.890 align:middle line:90% That's so bad. 01:09:53.890 --> 01:09:54.900 align:middle line:90% It's so bad. 01:09:54.900 --> 01:09:56.020 align:middle line:90% What's the reason? 01:09:56.020 --> 01:09:56.978 align:middle line:90% Have you heard of this? 01:09:56.978 --> 01:09:58.062 align:middle line:90% AUDIENCE: Famous Building. 01:09:58.062 --> 01:09:59.390 align:middle line:90% SIQI ZHENG: Famous Building? 01:09:59.390 --> 01:10:00.490 align:middle line:90% You know this building? 01:10:00.490 --> 01:10:02.080 align:middle line:90% You visited this building? 01:10:02.080 --> 01:10:03.580 align:middle line:84% AUDIENCE: It's a brand-new building. 01:10:03.580 --> 01:10:04.288 align:middle line:90% SIQI ZHENG: Yeah. 01:10:04.288 --> 01:10:06.228 align:middle line:84% AUDIENCE: It's One Vanderbilt, right? 01:10:06.228 --> 01:10:07.270 align:middle line:90% SIQI ZHENG: I don't know. 01:10:07.270 --> 01:10:08.430 align:middle line:90% [LAUGHTER] 01:10:08.430 --> 01:10:11.190 align:middle line:84% By the way, this Friday, some of you will go to New York City 01:10:11.190 --> 01:10:12.690 align:middle line:90% to visit the buildings, right? 01:10:12.690 --> 01:10:14.070 align:middle line:90% I will be with you. 01:10:14.070 --> 01:10:16.890 align:middle line:84% I will be with you for the entire day of tour 01:10:16.890 --> 01:10:18.733 align:middle line:84% to visit New York City buildings. 01:10:18.733 --> 01:10:20.650 align:middle line:84% But I don't think we will go to this building. 01:10:20.650 --> 01:10:21.640 align:middle line:90% But this is brand-new. 01:10:21.640 --> 01:10:23.430 align:middle line:90% This is the LEED Platinum. 01:10:23.430 --> 01:10:25.840 align:middle line:84% It said it will be very energy-efficient. 01:10:25.840 --> 01:10:27.010 align:middle line:90% It turned out very bad. 01:10:27.010 --> 01:10:28.080 align:middle line:90% What's the reason? 01:10:28.080 --> 01:10:31.200 align:middle line:90% Have you heard the story? 01:10:31.200 --> 01:10:33.600 align:middle line:84% Because they only-- when they did this, 01:10:33.600 --> 01:10:36.480 align:middle line:84% engineers used a model to predict like that. 01:10:36.480 --> 01:10:42.690 align:middle line:84% But they totally underestimate the machines in this building 01:10:42.690 --> 01:10:46.860 align:middle line:84% because they had several floors of the workstations 01:10:46.860 --> 01:10:51.720 align:middle line:84% with huge computer monitors and desks and-- 01:10:51.720 --> 01:10:55.590 align:middle line:84% not the personal computers and the servers and big machines. 01:10:55.590 --> 01:10:58.890 align:middle line:84% And nobody turned off when they left the building. 01:10:58.890 --> 01:11:01.980 align:middle line:84% It's 22 hours and all the days operating there. 01:11:01.980 --> 01:11:03.480 align:middle line:84% Then they consume a lot of building, 01:11:03.480 --> 01:11:06.480 align:middle line:84% and they make the space very hot. 01:11:06.480 --> 01:11:09.480 align:middle line:90% So that's an example of this. 01:11:09.480 --> 01:11:11.880 align:middle line:84% But overall, [? these ?] other examples, 01:11:11.880 --> 01:11:13.200 align:middle line:90% [? say ?] this [INAUDIBLE]. 01:11:13.200 --> 01:11:16.230 align:middle line:90% It's totally out of the scope. 01:11:16.230 --> 01:11:19.350 align:middle line:90% And the possible reasons-- 01:11:19.350 --> 01:11:20.550 align:middle line:90% we already said. 01:11:20.550 --> 01:11:24.780 align:middle line:84% The engineering model that Professor Christoph Reinhart, 01:11:24.780 --> 01:11:28.090 align:middle line:84% they are doing, they don't consider behaviors. 01:11:28.090 --> 01:11:30.760 align:middle line:84% They don't consider whether people, they turn on, 01:11:30.760 --> 01:11:33.100 align:middle line:84% turn off the lights and computers 01:11:33.100 --> 01:11:34.827 align:middle line:90% and the AC and other things. 01:11:34.827 --> 01:11:35.660 align:middle line:90% They don't consider. 01:11:35.660 --> 01:11:37.800 align:middle line:84% They assume everyone is such a good citizen, 01:11:37.800 --> 01:11:41.920 align:middle line:84% will do whatever they can to reduce energy consumption. 01:11:41.920 --> 01:11:44.530 align:middle line:84% Another thing is construction/operation 01:11:44.530 --> 01:11:46.180 align:middle line:90% practice not follow design. 01:11:46.180 --> 01:11:48.430 align:middle line:84% Designers, they have a good heart. 01:11:48.430 --> 01:11:50.230 align:middle line:84% But the constructors, they just want 01:11:50.230 --> 01:11:52.010 align:middle line:84% to reduce their cost no matter what. 01:11:52.010 --> 01:11:55.300 align:middle line:84% I think you heard this story from the recent Turkey 01:11:55.300 --> 01:11:57.250 align:middle line:90% earthquake. 01:11:57.250 --> 01:12:00.640 align:middle line:84% I mean, the designers also did bad things. 01:12:00.640 --> 01:12:03.070 align:middle line:84% But anyway, they did very bad things, 01:12:03.070 --> 01:12:06.400 align:middle line:84% and they didn't stick to the standard of the construction. 01:12:06.400 --> 01:12:09.675 align:middle line:84% And the designers, even they design a green building, 01:12:09.675 --> 01:12:11.050 align:middle line:84% but the constructors, they didn't 01:12:11.050 --> 01:12:13.630 align:middle line:84% follow that when they built. The last one 01:12:13.630 --> 01:12:18.070 align:middle line:84% is our focus, which is the split incentive between the tenants 01:12:18.070 --> 01:12:19.220 align:middle line:90% and the landlord. 01:12:19.220 --> 01:12:23.970 align:middle line:84% This is very important for us to understand. 01:12:23.970 --> 01:12:27.420 align:middle line:84% But first of all, we need to understand the lease. 01:12:27.420 --> 01:12:33.340 align:middle line:84% Lease structure-- so I have those lease structures. 01:12:33.340 --> 01:12:35.290 align:middle line:84% There are so many types of leases. 01:12:35.290 --> 01:12:39.400 align:middle line:84% But overall, from this side called full service 01:12:39.400 --> 01:12:44.170 align:middle line:84% gross lease, which means the tenants just pay 01:12:44.170 --> 01:12:48.230 align:middle line:84% a lump sum, monthly lease, monthly rent. 01:12:48.230 --> 01:12:51.960 align:middle line:84% Then-- don't need to worry about anything. 01:12:51.960 --> 01:12:56.110 align:middle line:84% All the energy bills, the landlord will pay. 01:12:56.110 --> 01:12:56.950 align:middle line:90% No problem. 01:12:56.950 --> 01:13:03.870 align:middle line:84% Just pay the lump sum, total one number, then nothing to worry. 01:13:03.870 --> 01:13:05.370 align:middle line:90% On the other extreme-- 01:13:05.370 --> 01:13:06.720 align:middle line:90% this is the spectrum. 01:13:06.720 --> 01:13:08.880 align:middle line:84% On the other end of the spectrum, 01:13:08.880 --> 01:13:13.590 align:middle line:84% called triple net lease, which means the tenants only pay 01:13:13.590 --> 01:13:16.380 align:middle line:84% the base rent, and then, for other things, 01:13:16.380 --> 01:13:17.970 align:middle line:90% all the tenants will pay. 01:13:17.970 --> 01:13:21.000 align:middle line:84% All the tenants will pay the bills and the insurance and all 01:13:21.000 --> 01:13:21.870 align:middle line:90% the things-- 01:13:21.870 --> 01:13:23.790 align:middle line:90% so just a base rent. 01:13:23.790 --> 01:13:25.620 align:middle line:84% And then all other things, that's 01:13:25.620 --> 01:13:27.940 align:middle line:90% called net lease, net rent. 01:13:27.940 --> 01:13:29.190 align:middle line:90% This is gross. 01:13:29.190 --> 01:13:31.860 align:middle line:90% So that's our spectrum. 01:13:31.860 --> 01:13:34.240 align:middle line:90% OK, so this is spectrum. 01:13:34.240 --> 01:13:36.640 align:middle line:84% Then in the middle is some combinations of this and that. 01:13:36.640 --> 01:13:37.660 align:middle line:90% Who will pay what? 01:13:37.660 --> 01:13:41.520 align:middle line:84% That's a negotiation between the landlord and tenant. 01:13:41.520 --> 01:13:43.860 align:middle line:84% Negotiation-- you will pay this, you will pay that, 01:13:43.860 --> 01:13:45.720 align:middle line:90% and I will pay this. 01:13:45.720 --> 01:13:48.060 align:middle line:90% Then it's too complicated. 01:13:48.060 --> 01:13:52.320 align:middle line:84% Let's only look at the two ends of this spectrum. 01:13:52.320 --> 01:13:55.000 align:middle line:90% One is gross lease-- 01:13:55.000 --> 01:13:57.450 align:middle line:84% you'll pay one amount, don't need 01:13:57.450 --> 01:13:58.870 align:middle line:90% to worry about other things-- 01:13:58.870 --> 01:14:01.600 align:middle line:84% or the triple net, which means you only 01:14:01.600 --> 01:14:04.340 align:middle line:84% pay a net lease, net rent, then you pay other bills-- 01:14:04.340 --> 01:14:05.660 align:middle line:90% I mean, the tenants. 01:14:05.660 --> 01:14:10.500 align:middle line:84% For these two, think about-- imagine it's an office building. 01:14:10.500 --> 01:14:12.710 align:middle line:90% It's an old office building. 01:14:12.710 --> 01:14:13.800 align:middle line:90% It's not a new building. 01:14:13.800 --> 01:14:15.270 align:middle line:90% It's an old office building. 01:14:15.270 --> 01:14:17.420 align:middle line:90% It's not energy-efficient. 01:14:17.420 --> 01:14:22.160 align:middle line:84% And the landlord is considering whether to retrofit 01:14:22.160 --> 01:14:26.090 align:middle line:84% the building, to make this deep retrofit, become greener. 01:14:26.090 --> 01:14:29.780 align:middle line:84% Then, under these two scenarios, what 01:14:29.780 --> 01:14:32.737 align:middle line:84% do you think will be the challenge? 01:14:32.737 --> 01:14:34.320 align:middle line:84% AUDIENCE: In the triple net situation, 01:14:34.320 --> 01:14:37.170 align:middle line:84% the landlord isn't covering the utilities. 01:14:37.170 --> 01:14:39.890 align:middle line:84% And so they're going to fit the bill for the retrofit, 01:14:39.890 --> 01:14:42.650 align:middle line:84% but they're not going to recoup the savings from the utility 01:14:42.650 --> 01:14:43.640 align:middle line:90% costs. 01:14:43.640 --> 01:14:45.722 align:middle line:84% And so they're less likely to do it. 01:14:45.722 --> 01:14:46.430 align:middle line:90% SIQI ZHENG: Yeah. 01:14:46.430 --> 01:14:47.330 align:middle line:90% Very good. 01:14:47.330 --> 01:14:49.280 align:middle line:90% That's another point. 01:14:49.280 --> 01:14:51.980 align:middle line:90% The other end? 01:14:51.980 --> 01:14:53.570 align:middle line:90% Any thoughts? 01:14:53.570 --> 01:14:56.270 align:middle line:84% Will this be a perfect lease structure 01:14:56.270 --> 01:15:01.860 align:middle line:84% so that the building will get greener, will get retrofitted? 01:15:01.860 --> 01:15:03.478 align:middle line:90% Again, please. 01:15:03.478 --> 01:15:05.520 align:middle line:84% AUDIENCE: The tenants are covering the utilities, 01:15:05.520 --> 01:15:07.380 align:middle line:84% so they have no incentive to operate 01:15:07.380 --> 01:15:09.550 align:middle line:90% the building in a green way. 01:15:09.550 --> 01:15:10.355 align:middle line:90% So they don't care. 01:15:10.355 --> 01:15:12.480 align:middle line:84% They can leave the lights on, leave the AC running, 01:15:12.480 --> 01:15:13.680 align:middle line:90% all that stuff. 01:15:13.680 --> 01:15:14.400 align:middle line:90% SIQI ZHENG: Yes. 01:15:14.400 --> 01:15:14.980 align:middle line:90% Very good. 01:15:14.980 --> 01:15:17.400 align:middle line:90% I think you are expert on this. 01:15:17.400 --> 01:15:19.657 align:middle line:84% Have you studied this split incentive? 01:15:19.657 --> 01:15:21.490 align:middle line:84% AUDIENCE: No, it was just from the readings. 01:15:21.490 --> 01:15:22.600 align:middle line:90% SIQI ZHENG: OK, good. 01:15:22.600 --> 01:15:24.210 align:middle line:90% See, you must read. 01:15:24.210 --> 01:15:27.240 align:middle line:84% If you read, you answer my questions. 01:15:27.240 --> 01:15:28.050 align:middle line:90% OK. 01:15:28.050 --> 01:15:31.290 align:middle line:90% That's a dilemma. 01:15:31.290 --> 01:15:32.900 align:middle line:90% The dilemma is the following. 01:15:32.900 --> 01:15:34.800 align:middle line:90% Either way is not perfect. 01:15:34.800 --> 01:15:39.120 align:middle line:84% Think about the net lease, the triple net lease. 01:15:39.120 --> 01:15:43.590 align:middle line:84% So the owner, if the owner invests money to retrofit 01:15:43.590 --> 01:15:48.090 align:middle line:84% the building, however, the owner cannot recoup the benefit 01:15:48.090 --> 01:15:51.710 align:middle line:84% because the tenants are paying energy bills-- 01:15:51.710 --> 01:15:53.390 align:middle line:84% the tenant will be, oh, so great. 01:15:53.390 --> 01:15:55.560 align:middle line:84% And then, next month, I have so little, so, 01:15:55.560 --> 01:15:57.610 align:middle line:90% so low electricity bill. 01:15:57.610 --> 01:15:59.580 align:middle line:84% Maybe they even didn't understand why. 01:15:59.580 --> 01:16:02.430 align:middle line:84% But the tenants just suddenly got some good luck 01:16:02.430 --> 01:16:06.270 align:middle line:84% and got very low energy bill because the owner invests money 01:16:06.270 --> 01:16:07.750 align:middle line:90% to retrofit the building. 01:16:07.750 --> 01:16:10.960 align:middle line:84% But the owner says, why I'm going to do this? 01:16:10.960 --> 01:16:11.940 align:middle line:90% So stupid. 01:16:11.940 --> 01:16:13.360 align:middle line:90% I'm not going to do this. 01:16:13.360 --> 01:16:15.760 align:middle line:84% I only invest, but I cannot get the benefit. 01:16:15.760 --> 01:16:16.500 align:middle line:90% So stupid. 01:16:16.500 --> 01:16:17.290 align:middle line:90% Don't do it. 01:16:17.290 --> 01:16:19.590 align:middle line:84% So the owner will lose the incentive 01:16:19.590 --> 01:16:23.520 align:middle line:84% to do so, because the tenants will just benefit. 01:16:23.520 --> 01:16:28.740 align:middle line:84% But if you go to the gross lease problem, yes, the owner invests. 01:16:28.740 --> 01:16:32.200 align:middle line:84% The owner benefits because the owner will pay the energy bills, 01:16:32.200 --> 01:16:34.570 align:middle line:84% then invest and then later lower energy bill. 01:16:34.570 --> 01:16:35.200 align:middle line:90% Good. 01:16:35.200 --> 01:16:37.790 align:middle line:84% Then the tenant says, this has nothing to do with me. 01:16:37.790 --> 01:16:40.190 align:middle line:84% I don't care, because I don't need to pay the bill. 01:16:40.190 --> 01:16:41.210 align:middle line:90% Why I need to care? 01:16:41.210 --> 01:16:44.110 align:middle line:84% I still leave the light on, all the things. 01:16:44.110 --> 01:16:45.710 align:middle line:90% I don't need to save energy. 01:16:45.710 --> 01:16:48.130 align:middle line:84% I just make myself very comfortable. 01:16:48.130 --> 01:16:51.650 align:middle line:84% So there will be a lot of waste of the energy. 01:16:51.650 --> 01:16:53.510 align:middle line:90% So either way is not perfect. 01:16:53.510 --> 01:16:56.800 align:middle line:84% So that's why we need some design. 01:16:56.800 --> 01:16:58.150 align:middle line:90% That's how the people-- 01:16:58.150 --> 01:17:02.620 align:middle line:84% you can install energy, install technology, game over, 01:17:02.620 --> 01:17:04.270 align:middle line:90% everything will go perfect. 01:17:04.270 --> 01:17:05.410 align:middle line:90% No. 01:17:05.410 --> 01:17:08.110 align:middle line:84% People, people, people, and how you 01:17:08.110 --> 01:17:11.650 align:middle line:84% can make these two become friends instead of they 01:17:11.650 --> 01:17:12.940 align:middle line:90% don't care each other. 01:17:12.940 --> 01:17:15.680 align:middle line:90% OK. 01:17:15.680 --> 01:17:17.960 align:middle line:84% So I didn't ask you to read this case. 01:17:17.960 --> 01:17:19.090 align:middle line:90% This is the HBS case. 01:17:19.090 --> 01:17:22.450 align:middle line:84% But after class, we will upload because it's a very long case, 01:17:22.450 --> 01:17:25.400 align:middle line:84% and I only use a little bit at the beginning of that. 01:17:25.400 --> 01:17:27.820 align:middle line:90% So I don't want to burden you. 01:17:27.820 --> 01:17:29.800 align:middle line:84% But if you are interested in this case, 01:17:29.800 --> 01:17:32.920 align:middle line:84% it's a very good case of the energy efficiency finance 01:17:32.920 --> 01:17:34.420 align:middle line:90% in commercial real estate. 01:17:34.420 --> 01:17:38.470 align:middle line:84% But the basic story I want to use for now on this point 01:17:38.470 --> 01:17:40.990 align:middle line:90% is the following. 01:17:40.990 --> 01:17:43.670 align:middle line:84% This is Rockville City in Maryland. 01:17:43.670 --> 01:17:49.120 align:middle line:84% And this guy, this Lundberg guy, he 01:17:49.120 --> 01:17:51.940 align:middle line:84% is the owner of a commercial real estate building 01:17:51.940 --> 01:17:55.000 align:middle line:90% in this Rockville town. 01:17:55.000 --> 01:17:57.170 align:middle line:90% And that is an old building. 01:17:57.170 --> 01:17:58.630 align:middle line:90% And he leased to some tenants. 01:17:58.630 --> 01:17:59.630 align:middle line:90% It's not a big building. 01:17:59.630 --> 01:18:02.140 align:middle line:90% It's medium-sized. 01:18:02.140 --> 01:18:03.940 align:middle line:84% I think this is a medium-sized building, 01:18:03.940 --> 01:18:08.943 align:middle line:84% a 200-square-feet building, all the building. 01:18:08.943 --> 01:18:10.360 align:middle line:84% But this is a commercial building. 01:18:10.360 --> 01:18:12.970 align:middle line:84% For example, there are some shops and some restaurants 01:18:12.970 --> 01:18:16.900 align:middle line:90% and some tenants in that. 01:18:16.900 --> 01:18:21.370 align:middle line:84% And he has someone audit the building and found it's too not 01:18:21.370 --> 01:18:23.680 align:middle line:90% energy-efficient, too old-- 01:18:23.680 --> 01:18:25.450 align:middle line:90% really need to retrofit. 01:18:25.450 --> 01:18:28.900 align:middle line:84% If you retrofit, very clear benefit of energy 01:18:28.900 --> 01:18:31.330 align:middle line:90% saving because it's too old. 01:18:31.330 --> 01:18:34.740 align:middle line:84% And whether he will go for it, that's a question. 01:18:34.740 --> 01:18:35.990 align:middle line:90% So that's basically this case. 01:18:35.990 --> 01:18:38.170 align:middle line:90% HBS case is about whether-- 01:18:38.170 --> 01:18:40.130 align:middle line:84% this case talk about whether to do it or not 01:18:40.130 --> 01:18:41.230 align:middle line:90% and also the financing. 01:18:41.230 --> 01:18:43.355 align:middle line:84% Today, we are not going to touch on the financing-- 01:18:43.355 --> 01:18:44.510 align:middle line:90% that's for later-- 01:18:44.510 --> 01:18:46.610 align:middle line:90% but whether to do this. 01:18:46.610 --> 01:18:49.250 align:middle line:90% So this case is the following. 01:18:49.250 --> 01:18:50.910 align:middle line:90% Then he made some estimate. 01:18:50.910 --> 01:18:51.930 align:middle line:90% He has a team. 01:18:51.930 --> 01:18:53.160 align:middle line:90% He made some estimate. 01:18:53.160 --> 01:18:57.625 align:middle line:84% The case is cost of square feet, $4 to $8. 01:18:57.625 --> 01:18:59.000 align:middle line:84% If we use median value, that will 01:18:59.000 --> 01:19:03.080 align:middle line:84% be $6 per square feet of the initial cost of this retrofit, 01:19:03.080 --> 01:19:04.520 align:middle line:90% and then the benefit-- 01:19:04.520 --> 01:19:06.600 align:middle line:90% about 30% of energy saving. 01:19:06.600 --> 01:19:09.110 align:middle line:90% That's very reasonable, right? 01:19:09.110 --> 01:19:14.210 align:middle line:84% Because you need to invest in this weatherization, insulation 01:19:14.210 --> 01:19:19.310 align:middle line:84% thing, actually replace the old HVAC and lighting and all kinds 01:19:19.310 --> 01:19:21.080 align:middle line:90% of things-- cost, benefit. 01:19:21.080 --> 01:19:24.210 align:middle line:84% Then they say, OK, these are the parameters. 01:19:24.210 --> 01:19:28.490 align:middle line:84% These are all about technology, technology. 01:19:28.490 --> 01:19:31.080 align:middle line:90% Then they did this calculation. 01:19:31.080 --> 01:19:34.970 align:middle line:84% This is some parameters of this pro forma. 01:19:34.970 --> 01:19:38.040 align:middle line:84% Baseline pro forma is too small for you to see. 01:19:38.040 --> 01:19:40.410 align:middle line:84% What I want to highlight is the following. 01:19:40.410 --> 01:19:42.410 align:middle line:90% This is without retrofit. 01:19:42.410 --> 01:19:46.040 align:middle line:84% Without retrofit, look at 10-year horizon. 01:19:46.040 --> 01:19:52.880 align:middle line:84% Then use 8% of the discount rate without any retrofit-- business 01:19:52.880 --> 01:19:53.700 align:middle line:90% as usual. 01:19:53.700 --> 01:19:57.770 align:middle line:90% This building is worth 100-- 01:19:57.770 --> 01:20:00.810 align:middle line:84% they say it's 100 million US dollars. 01:20:00.810 --> 01:20:06.150 align:middle line:84% That's the value if you do this pro forma. 01:20:06.150 --> 01:20:08.430 align:middle line:84% Then let's look at, OK, retrofit. 01:20:08.430 --> 01:20:09.420 align:middle line:90% Good opportunity. 01:20:09.420 --> 01:20:11.070 align:middle line:90% Retrofit. 01:20:11.070 --> 01:20:15.160 align:middle line:84% And then now we don't think about the tenants and landlords. 01:20:15.160 --> 01:20:18.210 align:middle line:84% Are we saying they are a family, all together, a family? 01:20:18.210 --> 01:20:21.420 align:middle line:84% If you think about the family, very good, 01:20:21.420 --> 01:20:26.220 align:middle line:84% because you will have energy savings, energy savings, 01:20:26.220 --> 01:20:29.970 align:middle line:84% an investment of $6 per square foot, and each year 01:20:29.970 --> 01:20:33.030 align:middle line:84% you will have energy bill savings, this 30%, 01:20:33.030 --> 01:20:35.280 align:middle line:90% then this is incremental. 01:20:35.280 --> 01:20:38.490 align:middle line:84% This is incremental cost, incremental benefit. 01:20:38.490 --> 01:20:40.440 align:middle line:84% That's on top of the baseline-- on top 01:20:40.440 --> 01:20:42.970 align:middle line:84% of baseline, incremental cost, incremental benefit. 01:20:42.970 --> 01:20:49.350 align:middle line:84% Then you say, OK, positive NPV, positive NPV is $40,000. 01:20:49.350 --> 01:20:50.010 align:middle line:90% Do it. 01:20:50.010 --> 01:20:50.850 align:middle line:90% Green retrofit. 01:20:50.850 --> 01:20:51.990 align:middle line:90% So good. 01:20:51.990 --> 01:20:54.480 align:middle line:84% By the way, if some of you didn't take the real estate 01:20:54.480 --> 01:20:56.280 align:middle line:84% finance class, you are not very familiar 01:20:56.280 --> 01:20:58.110 align:middle line:84% with pro forma and the financial. 01:20:58.110 --> 01:21:04.200 align:middle line:84% Tomorrow, Ankrisht's recitation will cover that. 01:21:04.200 --> 01:21:06.400 align:middle line:84% And tomorrow we will have pizza, right? 01:21:06.400 --> 01:21:06.900 align:middle line:90% Sanjana? 01:21:06.900 --> 01:21:08.910 align:middle line:84% Yeah, we will have pizza for you. 01:21:08.910 --> 01:21:13.350 align:middle line:84% It's optional, but for the pizza and for the knowledge, come. 01:21:13.350 --> 01:21:15.420 align:middle line:84% But this missed something, right? 01:21:15.420 --> 01:21:19.320 align:middle line:84% Do you think-- overall, as a family, so good. 01:21:19.320 --> 01:21:20.350 align:middle line:90% Go for it. 01:21:20.350 --> 01:21:23.260 align:middle line:90% But it missed something. 01:21:23.260 --> 01:21:25.480 align:middle line:90% You [INAUDIBLE]. 01:21:25.480 --> 01:21:28.360 align:middle line:84% AUDIENCE: [INAUDIBLE] to this point, human behavior, 01:21:28.360 --> 01:21:32.020 align:middle line:84% we're not sure how the tenants will operate, if they're 01:21:32.020 --> 01:21:34.750 align:middle line:84% going to turn on the light or turn off the light, 01:21:34.750 --> 01:21:37.840 align:middle line:84% unless they use the occupancy sensors, and then [INAUDIBLE]. 01:21:37.840 --> 01:21:40.220 align:middle line:84% SIQI ZHENG: Oh, I think I missed something. 01:21:40.220 --> 01:21:42.550 align:middle line:84% I need to say this is a triple net lease. 01:21:42.550 --> 01:21:46.030 align:middle line:84% This triple net lease means the tenants pay the energy bill. 01:21:46.030 --> 01:21:47.985 align:middle line:84% In that case, what do we think is the problem? 01:21:47.985 --> 01:21:51.098 align:middle line:90% 01:21:51.098 --> 01:21:52.930 align:middle line:90% AUDIENCE: The [INAUDIBLE]. 01:21:52.930 --> 01:21:55.030 align:middle line:90% SIQI ZHENG: Right. 01:21:55.030 --> 01:21:56.270 align:middle line:90% Yes, yes. 01:21:56.270 --> 01:22:00.850 align:middle line:84% So basically, triple net lease, and the tenants 01:22:00.850 --> 01:22:02.090 align:middle line:90% get all the benefits. 01:22:02.090 --> 01:22:04.000 align:middle line:90% The owners bear all the cost. 01:22:04.000 --> 01:22:04.960 align:middle line:90% It's a mismatch. 01:22:04.960 --> 01:22:06.670 align:middle line:90% How can this happen? 01:22:06.670 --> 01:22:08.440 align:middle line:90% This guy is not-- 01:22:08.440 --> 01:22:10.420 align:middle line:90% this investor won't do that. 01:22:10.420 --> 01:22:13.570 align:middle line:90% So if-- we are not a family. 01:22:13.570 --> 01:22:15.760 align:middle line:90% We are not a family. 01:22:15.760 --> 01:22:16.870 align:middle line:90% We are separate. 01:22:16.870 --> 01:22:18.660 align:middle line:90% We are separate, two groups. 01:22:18.660 --> 01:22:21.700 align:middle line:90% Now, owner, OK, problem-- 01:22:21.700 --> 01:22:24.200 align:middle line:84% owners see energy saving only 10%-- 01:22:24.200 --> 01:22:27.680 align:middle line:84% common area, lobby and elevators, something like that, 01:22:27.680 --> 01:22:28.270 align:middle line:90% 10%. 01:22:28.270 --> 01:22:32.890 align:middle line:84% 90% of the saving will go to tenants. 01:22:32.890 --> 01:22:35.890 align:middle line:84% And tenants has zero investment-- free lunch. 01:22:35.890 --> 01:22:39.280 align:middle line:90% Zero investment get 90% saving. 01:22:39.280 --> 01:22:40.510 align:middle line:90% So good. 01:22:40.510 --> 01:22:42.280 align:middle line:90% And tenants lose money-- 01:22:42.280 --> 01:22:46.540 align:middle line:84% the owner lose money so much because investment, but only 10% 01:22:46.540 --> 01:22:49.330 align:middle line:90% of the energy saving got there. 01:22:49.330 --> 01:22:51.460 align:middle line:90% So that's the situation. 01:22:51.460 --> 01:22:53.610 align:middle line:90% I call it the win and lose-- 01:22:53.610 --> 01:22:55.000 align:middle line:90% win-lose. 01:22:55.000 --> 01:23:00.130 align:middle line:84% The tenant's so happy, the landlord quiet 01:23:00.130 --> 01:23:02.970 align:middle line:90% because this is bad, right? 01:23:02.970 --> 01:23:04.780 align:middle line:84% Negative NPV, who are going to do this? 01:23:04.780 --> 01:23:09.770 align:middle line:84% Negative NVP, it's against our investment criteria. 01:23:09.770 --> 01:23:11.870 align:middle line:90% So not good. 01:23:11.870 --> 01:23:13.200 align:middle line:90% Any solution? 01:23:13.200 --> 01:23:16.730 align:middle line:84% Give you the last chance to say if there is any solution to this 01:23:16.730 --> 01:23:19.045 align:middle line:90% if we still stick to triple net. 01:23:19.045 --> 01:23:20.810 align:middle line:90% AUDIENCE: Increase the rent. 01:23:20.810 --> 01:23:22.060 align:middle line:90% SIQI ZHENG: Increase the rent. 01:23:22.060 --> 01:23:22.590 align:middle line:90% What's the rationale? 01:23:22.590 --> 01:23:25.257 align:middle line:84% If you go to the tenant and say, I'm going to increase the rent? 01:23:25.257 --> 01:23:27.170 align:middle line:90% AUDIENCE: I would [INAUDIBLE]. 01:23:27.170 --> 01:23:28.760 align:middle line:90% SIQI ZHENG: OK, show them this. 01:23:28.760 --> 01:23:31.790 align:middle line:84% Yes, that's basically to share the benefit. 01:23:31.790 --> 01:23:33.540 align:middle line:84% The point is to share the benefit. 01:23:33.540 --> 01:23:37.150 align:middle line:84% AUDIENCE: Make tenants share the cost. 01:23:37.150 --> 01:23:38.920 align:middle line:90% SIQI ZHENG: Yes, yes. 01:23:38.920 --> 01:23:42.010 align:middle line:84% That's also to share the cost and to share the benefit. 01:23:42.010 --> 01:23:47.000 align:middle line:84% So in this, we have this new thing called green lease. 01:23:47.000 --> 01:23:48.760 align:middle line:84% There's many, many green lease right now 01:23:48.760 --> 01:23:51.010 align:middle line:90% if you search green lease. 01:23:51.010 --> 01:23:53.450 align:middle line:84% Green lease-- so many types of green lease. 01:23:53.450 --> 01:23:55.540 align:middle line:84% But the basic point of the green list 01:23:55.540 --> 01:24:00.535 align:middle line:84% is cost pass through or cost recovery, which means, 01:24:00.535 --> 01:24:04.900 align:middle line:84% oh, yes, the tenant's benefit is so much. 01:24:04.900 --> 01:24:06.340 align:middle line:90% Lower the cost, right? 01:24:06.340 --> 01:24:07.820 align:middle line:90% Lower so much cost. 01:24:07.820 --> 01:24:11.240 align:middle line:84% 90% of the energy saving go to the tenants. 01:24:11.240 --> 01:24:13.400 align:middle line:90% Don't be so selfish. 01:24:13.400 --> 01:24:14.380 align:middle line:90% Be generous. 01:24:14.380 --> 01:24:17.230 align:middle line:90% Be generous, and share that. 01:24:17.230 --> 01:24:19.970 align:middle line:84% It's not just to share, but-- not generous, 01:24:19.970 --> 01:24:23.410 align:middle line:84% but we define that in the lease that if you have this energy 01:24:23.410 --> 01:24:27.370 align:middle line:84% saving, we share with the owner, share this benefit 01:24:27.370 --> 01:24:31.000 align:middle line:84% to the owner in term of higher effective rent 01:24:31.000 --> 01:24:33.520 align:middle line:84% so that the benefit can be shared 01:24:33.520 --> 01:24:37.270 align:middle line:84% by the owner and the tenants in this way to incentivize 01:24:37.270 --> 01:24:39.490 align:middle line:90% the owners to do so. 01:24:39.490 --> 01:24:42.910 align:middle line:84% In this case, this Rockville case, 01:24:42.910 --> 01:24:50.740 align:middle line:84% if they share and have the rent increase of this 2.7% as a way 01:24:50.740 --> 01:24:54.130 align:middle line:84% to recover the cost, then it will turn around, 01:24:54.130 --> 01:24:58.180 align:middle line:84% and the owner's NPV will become positive. 01:24:58.180 --> 01:25:00.640 align:middle line:84% Both are smiling and the win-win. 01:25:00.640 --> 01:25:02.450 align:middle line:90% Of course, this is hypothetical. 01:25:02.450 --> 01:25:05.470 align:middle line:84% We say, OK, 2.7% increase of the rent 01:25:05.470 --> 01:25:08.620 align:middle line:84% will turn this around and have a very good NPV-- 01:25:08.620 --> 01:25:09.280 align:middle line:90% all happy. 01:25:09.280 --> 01:25:11.440 align:middle line:90% Do this. 01:25:11.440 --> 01:25:12.790 align:middle line:90% Final question. 01:25:12.790 --> 01:25:16.660 align:middle line:84% AUDIENCE: Have you seen a lot of general renegotiation 01:25:16.660 --> 01:25:20.160 align:middle line:84% of the previous lease [INAUDIBLE] share [INAUDIBLE]? 01:25:20.160 --> 01:25:21.210 align:middle line:90% SIQI ZHENG: Good point. 01:25:21.210 --> 01:25:23.190 align:middle line:90% So I will upload this. 01:25:23.190 --> 01:25:24.640 align:middle line:90% There is small mini-cases. 01:25:24.640 --> 01:25:26.370 align:middle line:90% It's not big cases. 01:25:26.370 --> 01:25:27.480 align:middle line:90% HBS is a long case. 01:25:27.480 --> 01:25:31.680 align:middle line:84% But there is small mini-cases-- green lease mini-case 1, 2, 3. 01:25:31.680 --> 01:25:34.830 align:middle line:84% And you will find it on our Canvas. 01:25:34.830 --> 01:25:38.830 align:middle line:84% The way is they have different strategies to share the cost. 01:25:38.830 --> 01:25:40.620 align:middle line:84% But the point is first you need to show-- 01:25:40.620 --> 01:25:42.100 align:middle line:90% the landlord cannot just cheat. 01:25:42.100 --> 01:25:42.990 align:middle line:90% They need to show. 01:25:42.990 --> 01:25:46.350 align:middle line:84% They have these meters very, very small meters, 01:25:46.350 --> 01:25:47.770 align:middle line:90% decentralized meters. 01:25:47.770 --> 01:25:51.315 align:middle line:84% They really record and make the show to the tenant, 01:25:51.315 --> 01:25:54.360 align:middle line:84% oh, you see your energy meter reduced by what? 01:25:54.360 --> 01:25:58.320 align:middle line:90% Then you share as a percentage. 01:25:58.320 --> 01:26:01.890 align:middle line:84% And this one, they work with the energy company 01:26:01.890 --> 01:26:03.040 align:middle line:90% and use renewables. 01:26:03.040 --> 01:26:06.780 align:middle line:84% And then they told the tenants, you must purchase the energy 01:26:06.780 --> 01:26:08.010 align:middle line:90% from this energy company. 01:26:08.010 --> 01:26:10.770 align:middle line:84% Because we work together to generate the renewable company 01:26:10.770 --> 01:26:13.710 align:middle line:84% from the building, then you must use their energy. 01:26:13.710 --> 01:26:15.810 align:middle line:90% That's already put in the lease. 01:26:15.810 --> 01:26:18.040 align:middle line:90% So that's several green leases. 01:26:18.040 --> 01:26:22.720 align:middle line:84% And with this-- with this, I'm going to conclude today's class. 01:26:22.720 --> 01:26:26.790 align:middle line:84% But now you understand, after class, go to Canvas. 01:26:26.790 --> 01:26:30.300 align:middle line:84% You find these green lease structures and also 01:26:30.300 --> 01:26:31.660 align:middle line:90% that HBS case. 01:26:31.660 --> 01:26:35.430 align:middle line:84% Last year, after I talked about this green leasing, one 01:26:35.430 --> 01:26:36.240 align:middle line:90% of the students-- 01:26:36.240 --> 01:26:40.500 align:middle line:84% MSRED student, he had family business back to India. 01:26:40.500 --> 01:26:43.410 align:middle line:84% And he learned this, and he started 01:26:43.410 --> 01:26:46.560 align:middle line:84% to use green lease for his business in the India office 01:26:46.560 --> 01:26:49.680 align:middle line:84% market and got some good success. 01:26:49.680 --> 01:26:54.360 align:middle line:84% So that's a thing that you can-- if you have some internship 01:26:54.360 --> 01:26:54.870 align:middle line:90% and-- 01:26:54.870 --> 01:26:58.260 align:middle line:84% your own business, you can think about this and how to design 01:26:58.260 --> 01:27:01.020 align:middle line:84% a real good green lease-- there's so many types-- 01:27:01.020 --> 01:27:03.630 align:middle line:84% to share [? the ?] cost recovery. 01:27:03.630 --> 01:27:09.090 align:middle line:84% OK, thank you, and see you on Thursday for the teaching case, 01:27:09.090 --> 01:27:11.960 align:middle line:90% and read that beforehand. 01:27:11.960 --> 01:27:36.000 align:middle line:90%