The growth of sustainable investing and climate regulations has created a pivotal moment for the US commercial real estate sector. Environmental, social, and governance (ESG) investment criteria are reaching new levels of importance: one major financial survey found that over half of a typical investor’s portfolio is with ESG-focused companies and funds.1 Tenant companies are demanding more concrete actions on sustainability from commercial asset managers and owners — with good reason. Economic and reputational risks are mounting for climate laggards; meanwhile, fossil fuel price volatility reached an alltime high during the pandemic.2 While there are far fewer commercial than residential buildings (approximately 5.6 million compared to 140 million), most of these properties are large: over 80% of commercial floor space in the US is in buildings larger than 10,000 square feet, whereas the average new single-family home in 2021 was 2,561 square feet according to NAHB analysis.3 Commercial properties are more likely than residential buildings to be owned as part of a portfolio, providing more ability to replicate solutions. Therefore, changes to the comparatively small number of large commercial buildings can have an outsized impact on the overall buildings market.

One of the key changes necessary to address climate change is for all buildings to decarbonize their operations (i.e., stop burning fossil fuels on site). In the interest of scaling viable decarbonization solutions for the commercial sector, this report from RMI analyzes electrification conditions for a type of heating, ventilation, and air conditioning (HVAC) system that is ubiquitous in commercial buildings: the rooftop unit (RTU). Currently, heating in conventional RTUs is provided by combusting methane gas, commonly referred to by the fossil fuel industry as natural gas, hereafter referred to as gas. Commercial electrification using 1:1 swap-outs of gas-fired RTUs for heat-pump RTUs is poised to electrify a vast pool of existing buildings that already use these systems, with limited upfront cost and technical complexity.

RMI analyzed the technical, economic, and environmental implications of retrofitting fossil-gas-fired space heating and domestic hot water systems in a prototypical 50,000 square foot office building (considered medium sized). We compared a range of system decarbonization scenarios to a conventional gas-fired system replacement. Domestic hot water was electrified using a tanked heat pump water heater. For space heating, a range of scenarios were tested, including partially and fully electrified heat-pump RTUs. Finally, a combination of energy recovery ventilation (ERV), peak heating demand management, and on-site solar photovoltaics (PV) were analyzed in combination with an all-electric heat pump to understand the implications of streamlined, packaged decarbonization retrofits.

Our results show that regional climate conditions and gas utility rates are primary drivers of the economics of decarbonization retrofits in the commercial sector. Medium-size commercial electrification retrofits can be cost-effective when paired with a suite of other energy retrofit measures and are likely to become more economical with increased policy changes across states and at the federal level.