A good energy management strategy has been proven to reduce operating expenses and add value to commercial real estate assets. However, asset managers are often hesitant to invest in energy efficiency measures due to three common misconceptions:
- Owners pay and tenants benefit
- Energy management is slow to realize profits
- Older buildings will not have a significant return
The fact is that all three of these are incorrect. In an investment property, owners can see significant value added to your property with an energy management strategy – especially if you price the asset correctly – regardless of lease type.
How Energy Management Systems Increase Asset Value
Investing in energy management can yield a quick return on investment. With the right insights, an asset manager can make a few simple low- and no-cost adjustments to building operations that can make energy use significantly more efficient. At Aquicore, we’ve seen building acquisitions that made a significant impact on their energy use and bills with just a few changes.
Quick tricks like optimizing building schedules, avoiding coincident runs, and lowering a building’s base load can drastically reduce energy consumption without any capital investment. An energy monitoring system can identify the areas of greatest inefficiency to help building managers realize the highest return on these efforts. For example, replacing an inefficient HVAC system might be a costly endeavor, but the return on this initiative could be higher than cheaper initial investments.
Regardless of the type of adjustments asset managers make to their buildings, green buildings are proven to boost your bottom line.
Energy management strategies allows asset managers to quickly reduce operating expenses, thereby increasing net operating income (NOI). Depending on a building’s leasing structure, this provides several options for the best way to increase profits while creating a more appealing space for tenants.
Increase NOI With A Base Stop Structure
In a base stop situation (a.k.a. full gross lease or single net lease), the advantage of an energy management system is clear. As outlined above, energy management systems can identify areas of inefficiency so that asset managers can make necessary improvements. This will reduce operating expenses and give landlords a competitive advantage in the market.
Take the following example:
Here, Landlord A (let’s call her Anna) implemented an energy management system for her investment property. After making a few low- to no-cost adjustments, Anna reduced her operating expenses to $9/square foot (SF) from $11/SF. This $2/SF saving allows Anna to have a higher NOI/SF. With the cards in her hands, she can charge tenants $54/SF in rent roll ($1/SF less than her competitors) but still increase her NOI.
She now has a great competitive advantage over the rest of the market; not only is she charging less than the market average of $55/SF, but also Anna has increased her profits with $1/SF NOI. By implementing an energy management system that has a 6-month payback, Anna increased her NOI while reducing her rent roll and upped her market competitiveness. As a result of the more appealing price option, tenants are also more likely to fill her building, further increasing her profits from this simple investment.
Triple Net Leases (NNN) Can Add Value, Too
Triple net leases actually provide the landlord with more flexibility to gain the greatest advantage. Similar to Anna’s situation above, we have three landlords – Alec, Brooke, and Caroline – who have chosen different ways to transform their commercial investment property. All tenants have triple net leases, which means the responsibility for utility payments, taxes, etc. falls on the tenants and is not included in the rent. So, total tenant burden is the amount the tenant pays per month (rent + other NNN expenses).
Here, Landlord A (Alec) wants to make the greatest profit. With the energy management system Alec implemented, his tenants’ average operating expense is $9/SF, which is $2/SF less than the market average. The market average for rent is $55/SF per month, but with lower NNN expenses, Alec can charge his tenants $57/SF and still be on-par with the tenant burden average of $66/SF. This means Alec can increase his NOI by $2/SF while his tenants pay the market average tenant burden.
Landlord B (Brooke) wants to have a competitive rate to draw more tenants to her building. She implemented the same energy management system as Alec, which reduced her tenants’ average NNN expenses to $9/SF. To lighten the tenant burden, she charges tenants $56/SF, which is less than the market average. However, this still increases her NOI to $1/SF higher than the market average. This means that Brooke increases her NOI by $1/SF while her tenant burden is lower than the market average.
Landlord C (Caroline) did not implement an energy management system, and thus charges the market average rent of $55/SF. To remain competitive on the market, her tenant burden is still $66/SF, but Caroline is missing out on additional profits for the same tenant burden. So, Caroline is instead watching Alec and Brooke enjoy their higher NOI while her tenants pay the same amount as theirs.
The moral of the story? By lowering operating expenses with an energy management system, asset managers end up ahead. The initial capital investment is significantly outweighed by the immediate and ongoing value-add of an energy management system.
By strategically leasing your spaces, you can maximize your NOI for a bigger return even though your tenants pay a market-competitive rate. Now that’s a win-win situation.