How Commercial Energy Works for Property Management
In commercial apartment and multi-family buildings, property managers can take advantage of the aggregated volumes of their tenants to qualify for lower energy rates. Traditionally, residential usage is priced at generic rates, not accounting for load shape, load factor, or peak demand contribution. Property managers can elect to have utility companies sub-meter their tenants, where bills are issued for each occupant, or they can master meter the building and reissue utility invoices to renters. Due to aggregate consumption, building owners and managers can typically qualify for lower fixed electricity rates, which can, in turn, reduce costs or provide a profit center. Next, let’s dive into how energy costs affect NOI and cap rates.
Why Energy Is a Critical NOI Driver
Energy is an obviously controllable OpEx line item, besides maintenance and labor costs. For owners assuming utility costs, these expenses directly impact NOI. For example, if you own an apartment building and include electricity in your rent costs, reducing these expenses can lower operating costs and increase net income. Even if you are passing through utilities to tenants, reducing common area expenses (elevator, hallway lights, parking lights, etc.) will have a positive impact on NOI. Furthermore, improving energy efficiency in your buildings can help to attract better tenants. If you can prove that usage per square foot is less in your building due to HVAC upgrades or energy efficiency, tenants will see it as a positive when evaluating lease options.
Core Energy Strategies for Property Managers
Energy costs come down to two main components: consumption and cost per unit. Here are several effective energy strategies for property managers to reduce costs, attract better tenants, and improve NOI.
Portfolio Procurement
First, you should evaluate your energy procurement strategy. Are you aggregating multiple meters to increase purchasing power? Are you allowing utilities to sub-meter your tenants individually? Are you considering turning electricity supply into a profit center? These are all questions that need to be considered when developing your procurement plan. If you are able to aggregate usage in the building, or across multiple properties in the same utility, you may be able to negotiate more favorable electricity rates from third-party suppliers.
Rate Structures and Plan Types
Next, it’s important to consider fixed rates vs. index rates, or a blend of the two. Fixed energy plans are administered by utilizing futures markets to fix costs over a long period of time (12-60 months). While most energy suppliers charge a premium for market risk, these are great ways to set predictable costs and even lock in when prices are low. Energy index rates, on the other hand, follow the ebbs and flows of the market. One strategy to consider is a blend of the two, utilizing time-of-use (TOU) plans that allow you to fix costs during high-priced hours, and float volumes on the index market during off-peak periods.
Peak Demand Management
Peak demand, the measure of your kilowatt (kW) demand during peak periods, directly impacts your energy spend. In states such as Massachusetts, New York, New Jersey, Pennsylvania, Ohio, Maryland, and Illinois, peak demand readings in the summer months determine your capacity costs, a large component of your electricity supply price. Capacity costs have increased by over 500% on the PJM grid in the last few years, creating higher costs for commercial customers. One way to combat these rising costs is through peak demand management, such as load shifting, peak shaving, or the scheduling of high-draw equipment during off-peak hours. Demand response is a formal program that allows you to automatically curtail peak demand in exchange for cash incentives.
Building Energy Management Systems (BEMS)
Building Energy Management Systems (BEMS) are automated systems that monitor and control heavy-use equipment, HVAC, lighting, etc. These systems allow building managers to monitor energy consumption in real-time, set automated scheduling, and even forecast energy usage based on weather patterns. Today, having a BEMS system in your building is a “must-have” to execute an effective energy strategy. This technology allows property managers to conserve energy at one property, or across a portfolio of assets.
High-ROI Energy Efficiency Upgrades
Here are some energy efficiency upgrades that can have an immediate impact on your property’s energy spend:
| Upgrade | Financial Impact | ROI |
|---|---|---|
| LED Lighting | High | 1-3 Years |
| HVAC Controls | High | 3-7 Years |
| Smart Thermostats | High | 1-2 Years |
Tenant Engagement
When buildings are master-metered, the owner pays for utilities, tenant behavior directly impacts total costs. Implementing incentive-based programs can lead to better behavior and reduced energy consumption. Furthermore, implementing some sort of master controls through a BEMS can help to curtail tenant usage by keeping them within range. Many building owners elect to sub-meter properties for this reason alone, which puts the cost of utilities on the tenant, and changes incentives completely.
Implementation Framework
To achieve better energy costs within your multi-family property, here is an actionable plan to implement:
Analyze Data: Collect and review the past 24-36 months of electricity usage data. You can gather this information from your local utility provider. The more detailed the data (interval), the better. This will allow you to identify consumption patterns, peak demand figures, and overall usage.
Set Targets: Next, define specific cost reduction targets to be achieved and reverse engineer the numbers. If you are spending $1,000,000 per year on electricity and use 10,000,000 annual kWh, reducing electricity rates by 1¢ per kWh will save you $100,000 annually. On the other hand, reducing usage can also have a similar impact.
Procurement: Engage an advisor or energy broker to help you develop an effective energy procurement strategy based on your consumption patterns and price targets. A good energy broker can monitor futures markets and help you layer fixed positions to reach your goals.
Deployment: Next, focus on controlling usage by implementing energy efficiency upgrades. Start with the low-hanging fruit, such as LED lighting retrofits, and move on to larger systems (HVAC). Consider enrolling in a demand response program to achieve further incentives for these reductions.
Monitor: Finally, it’s imperative that you track performance against targets regularly. Implementing a BEMS system can help you to understand real-time usage so you can make adjustments along the way. Furthermore, it’s important to keep an eye on the energy commodities market and refine your market procurement strategy as conditions change.
Property Management Energy FAQs
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Energy decisions made at the portfolio level have a direct and lasting impact on NOI and asset value. Diversegy’s team of commercial energy experts specializes in helping property managers develop smarter procurement strategies, reduce operating costs, and build long-term energy plans that perform. Contact our team of energy market experts today for a complimentary portfolio energy review.
