That an energy management system provides key leverage for an asset manager looking to increase net operating income (NOI) on an investment property. However, the low-hanging fruit of energy savings doesn’t end there; by lowering operating expenses, an asset manager can also increase the value of the property over time.
On average, energy costs are $2.29/square foot (SF); that’s about 30% of total operating expenses (OpEx). Considering that 30% of building energy consumption is wasted, it pays to increase energy efficiency in any property. Investment assets can particularly profit from energy management because investors are looking for quick solutions to increase asset value. Plus, a good energy management solution can continuously add value over time.
Reduce OpEx To Increase NOI
Energy management systems provide a quick return on investment (ROI) by offering real-time energy insights to help asset managers make smart decisions on their operational and energy efficiency efforts. Many of these adjustments can be low or no cost changes to operations, like optimizing building schedules, avoiding coincident runs, and lowering your baseload. Identifying the areas of highest energy impact will maximize the ROI for these energy efforts. Green buildings are proven to help your bottom line, regardless of the type of effort you put in.
Let’s look at an example to truly understand the benefits of an energy management system.
Here’s an oversimplified look at operating expenses within a property. Here, the market average for operating expenses per square foot is $9.52. Therefore, in a building that is 500,000 SF, a landlord is responsible for a total of $4.76M in operating expenses per bill period. This is a huge expense for property managers, but many don’t realize there is a better way to manage utilities. An energy management system can drastically reduce operating expenses, thereby helping out landlords even further.
How, you may ask? Real-time energy monitoring provides insights into energy consumption so property mangers can identify where and when electricity, water, and gas are used in a building. Often, buildings are turned “on” (i.e. the HVAC, lights, etc. are running) when the building is not occupied during the early mornings, late nights, and weekends. With two simple, no-cost scheduling adjustments, one of our users saved $91,000 on utility bills. Other measures, such as automated tenant billing, can drastically reduce the amount of time property managers and engineers spend doing manual labor and calculations, as well as cut back on overhead administration costs. One property manager said automated tenant billing took her invoicing process from “two days to two minutes,” allowing her to redirect her team to work on more value-add projects instead of manually reading meters and individually invoicing tenants.
Identifying the Tenant Burden In A Gross Modified Lease
Our landlord in this example, Lauren, signed a modified gross lease with all of her tenants. This means her tenants agreed to pay a certain amount of the utility expenses set soon after signing the lease. Often, a landlord loses more money over time because the rate of utility expenses increases even though tenants’ base stop has not changed since they agreed to the specified rate.
Here, we can see the pre-negotiated rate that each tenant pays per square foot. The total square foot for each tenant is multiplied by the pre-negotiated base stop payment to identify the total amount that a tenant pays in operating expenses to the landlord. When comparing this sum to the total operating expenses of the building, there is a gap of $382K.
Operating Expenses: The Landlord’s Responsibility
The landlord of this investment asset, Lauren, is now in quite the pickle. Somehow, she has to make up $382,000 in operating expenses to avoid losing money on her investment. In a traditional asset, she would simply pay out for the tenants whose base stop is less than the amount she owes utilities. (Can’t visualize this? Download the calculations spreadsheet.)
With an energy management system, though, Lauren can gain the upper hand over her utility bills. By taking a number of actions to reduce her operating expenses, she lowers the average OpEx/SF to $8.75. On all of the tenants who pay more than $8.75 in their base stop agreement, Lauren actually has a margin of profit that offsets her debt from the tenants whose base stop payments are less than the OpEx/SF.
In this way, Lauren has managed to increase her NOI by $385,000 with the $382,000 utility debt she has offset with her energy management platform. Now, she can pocket $3,000 instead of fixing a nearly $400K deficit.
Energy Management System Value Add Over Time
Over time, landlords like Lauren will throw hundreds of thousands of dollars away unnecessarily on inefficient operations. With easy operational adjustments, Lauren was able to significantly reduce her cash burn to increase her NOI. This short payback time gave her a fast ROI that she realized soon after initial capital investment.
The value in this energy management system will increase even further over time. Existing tenants with high base stop rates will continue to be a source of increased NOI for landlords like Lauren. As tenants sign onto new leases, the base stop of their utility payment will be lower than the market average, making your asset more competitive. Asset managers can save even more when they automate tenant invoicing to cut back on unnecessary manual labor and redirect time and money to other value-add projects.
To be clear, not every asset manager will be able to reduce his or her operating expenses as drastically as Lauren did. Thus, over time, an energy management system would help asset managers reduce the amount they spend on utilities until they have a positive cashflow. The timeline on every investment will range greatly, dependent on factors like building use, efficiency of equipment, type of tenants, current OpEx, etc.
A building with real-time energy monitoring is a living, well-oiled machine: adjustments can be continuously made to improve the efficiency of the building to realize even greater energy savings. Energy management allows asset managers to make a few quick adjustments and realize the benefits of these efforts quickly with a high NOI.