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Reduce Risk of Downturn Exposure by Focusing on the Expense You Can Control: Energy

Reduce Risk of Downturn Exposure by Focusing on the Expense You Can Control: Energy

Times are great in commercial real estate. Rents and occupancies in core markets like New York City and San Francisco have hit historic highs, and popular metros like Dallas, Denver, Miami and Washington D.C. have been riding their own steady rise in fundamentals since the economic recovery started seven years ago. In San Francisco alone, CBRE Group reported that the average rent per sq. ft. for office space experienced a year-over-year growth of 14.0 percent, climbing to $72.26 in the fourth quarter of 2015; comparatively, in Manhattan, this figure saw a 7.0 percent year-over-year increase, hitting $71.85 per sq. ft.

Observers of the historically cyclical nature of commercial real estate may wonder if the current run is approaching an inevitable plateau or, if interest rates rise, something even worse. Throw an election year on top of investor uncertainty and most veteran owners and managers of office, hotel and retail portfolios are taking a harder look at P&Ls and trying to figure out how to keep driving dollars to the bottom line. The rise and fall of the economy and the real estate market is, generally, not under the control of building owners. However, it is possible to exercise a degree of control over one expense in building operations—energy usage.

Improving the energy efficiency of real estate assets has become a compelling strategy to help recoup costs and reduce operating risk, regardless of where commercial real estate might be in the cycle. For example, large institutional investors like CalPERS and CalSTRS have required property managers to track and report on overall building energy consumption, which helps attract and retain tenants.

As a result, CalPERS has reduced energy consumption in its real estate portfolio by nearly 23.0 percent in the last five years. Indeed, over the last half-decade, many high-profile REITs have doubled down on energy management software (EMS) investments as one of the only cost-effective ways to avoid NOI surprises, to differentiate for investors and to add value in a challenging marketplace.

Still, some commercial property owners and managers continue to take the wait-and-see approach to implementing a sustainability program or adopting energy management systems.

But there are solutions, and overcoming this hesitation can help shrewd operators outperform their peers and save 5.0 to 10.0 percent or more (see this independent report here) on energy costs, resulting in an ROI that can approach 60x.

Here’s a look at the top hesitations commercial real estate professionals face in adopting energy management, and how to overcome them:

Hesitation #1: “I spent hundreds of thousands on earlier capital projects and I didn’t see a return.”

Unlike capital-intensive installations like building management systems (BMS) and other efficiency measures, EMS is a low-cost, easy-to-implement investment in operational visibility and analytics. EMS-enabled tools help building owners and operators use existing equipment more efficiently, identify high-cost energy spikes and eliminate superfluous energy expenditures, like early-morning and late-night electricity usage.

Hesitation #2: “I’m going to sell the building in two years.”

Let’s face it, hold times in any real estate sector vary widely, particularly at inflection points in any given cycle, but a focused EMS program can provide near-term impact on net operating income and improve any sellers’ asking price relative to cap rates. In addition to creating asset value by decreasing energy and utility expenses, energy management systems can provide sellers with a cohesive, data-backed diligence report that highlights building performance and automates reporting and energy forecasting for interested buyers.

Hesitation #3: “I don’t know what to do to save money.”

Modern energy management systems aren’t just another tracker and repository of vast amounts of billing data and benchmarks. They’ve evolved instead to use thousands of data points to inform property managers and engineers of actionable initiatives they can take to reduce energy costs. A good energy management solution won’t just tell you what’s happening—it’ll give you clear and simple directions on what to do, and provide visibility on how selecting those options will help optimize your energy consumption and reduce costs.

Hesitation #4: “I want my team talking to tenants, not sitting behind a computer.”

Mobile functionality is the number one question we face when working with commercial real estate professionals looking to adopt an EMS. Believe it or not, the days of engineering and property management teams collecting sub-meter data with clipboards and spending time on manual data entry are quickly coming to a close. The ubiquitous smartphone has arrived in commercial real estate, and energy management systems have likewise moved to the mobile arena, offering users the option of both apps and responsively-designed web interfaces that adjust to a wide range of devices.

Hesitation #5: “I don’t want my team to be involved in a long set-up process.”

A growing emphasis on user experience over the past several years hasn’t been lost on real estate technology firms, and out-of-the-box functionality and results are now a normal expectation of most adopters. On the EMS side, building owners and operators can often make immediate use of data available from utilities to circumvent challenges and identify energy-use issues. The best user interfaces make data easy to understand, share and communicate and suggest actionable initiatives based on the insights this data offers.

As is the case in most real estate boom cycles, many investors and their partners are just waiting for the price of assets to continue to rise. Regardless of the direction this cycle takes, there are other ways to gain returns and increase the value of your assets. Energy management provides two lasting opportunities for commercial real estate: 1) the opportunity to increase NOI through cost savings, thereby attracting and retaining tenants, and 2) the opportunity to create underlying asset value by improving property fundamentals across the long term.

Jon Moeller is the CEO of MACH Energy and an ULI council member for both the National and San Francisco Sustainable Development Councils. He has presented at numerous BOMA, ULI and NAREIT events.

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