Financing Focus

Cool Down Costs

Energy management strategies can streamline property expenses.

While occupancy, maintenance, and zoning matters consume a great deal of property owners and managers’ time, these professionals also must consider other important business components, such as energy costs, to remain competitive. When left unmonitored, energy costs can become a large drain on an individual property’s net operating income as well as an entire portfolio’s profitability. However, there are numerous solutions and strategies that commercial real estate professionals can use to reduce energy costs and there-by increase a property’s or portfolio’s value.

Monitoring Strategies

Since many companies plan their fiscal year in the summer or fall, it is wise to monitor energy usage to know how much money is being spent at various times of the year. This practice can help owners and managers project costs and prepare accurate budgets for the coming year. However, property owners shouldn’t solely rely on historical data to project expenses.

Understanding a property’s local energy supply market is another way to curtail excess expenses. For instance, in a deregulated market, property owners are not tied to the state’s contracted utility supplier’s fixed rate and can comparison shop for better electricity rates from third-party suppliers. This can save as much as 1 cent per kilowatt of energy use. Currently, Illinois, Texas, Maryland, Massachusetts, Connecticut, New Jersey, and New York are the only states that have active deregulated markets. In regulated markets, property owners are bound to the state’s contracted energy provider’s rates.

To gain a sense of how much energy a property or portfolio is consuming, property owners can assess the number of kilowatts each property uses. For example, if an owner has a 50-building portfolio and uses 60,000 kilowatts across the portfolio, the savings can turn out to be surprisingly high — as much as $30,000 a year. On average, cost savings can range from a few percentage points up to 10 percent, depending on factors such as geographical location and facility type, among others.

A cost-reducing option for property owners with holdings in deregulated markets is to sign an index-rate contract. An index rate works the same way as an adjustable-rate home mortgage, tying the property’s utility rate to market fluctuations. Property owners whose budgets can absorb the cost of rate increases should consider engaging in an index-rate contract when utility rates are low. Index-rate contracts generally are cheaper than fixed-price contracts, but drawbacks are lack of budget certainty and more exposure to market volatility.

Since commercial properties in regulated markets are tied to the state utility’s rate, those owners have to use more-creative methods to lower energy costs. In these markets, owners may decrease energy use by auditing their monthly utility bills and honing in on their current rate to determine if it best suits their business profile.

For example, if a building has 24-hour operations or day and evening hours, the utility might offer hybrid peak and off-peak rates. Conse-quently, if the property experiences higher foot traffic during the week or on weekends, the utility provider may be able to offer a flexible rate to accommodate those needs, thereby providing a more cost-efficient solution.

Practicing Wise Usage

Once property owners understand the available utility options within their markets, they also can implement cost-saving strategies into daily operations that yield immediate results.

One important option for property owners is to make sure they are familiar with their properties’ operations. Most buildings have operational manuals, which may provide energy-efficient strategies for lighting systems and heating, ventilating, and air-conditioning systems. However, owners and managers can take steps on their own as well. A common strategy is to lower the thermostat two degrees, which, when applied across a portfolio, can save thousands in utility expenses.

Using energy management systems also can help conserve kilowatt use by adjusting operating hours and cycling equipment. These systems can range from simple on/off timers to highly sophisticated computerized technology to control all the energy-consuming systems in a building or portfolio, from lighting to HVAC systems.

Single-function EMS units start around $100, while more intricate systems can cost $100,000 or more. These systems generally reduce energy costs by 10 percent to 30 percent, and because there is such a range of EMS offerings, there are solutions for small buildings as well as large portfolios.

Seeking Assistance

Since gauging market changes can be difficult, property owners may want to consider aligning with energy consultants who have broader market knowledge and can help project future changes.

Consultants can help property owners and managers forecast budgets in deregulated and regulated markets by incorporating projected rate increases. The projections are based on historical data that illustrate increases and decreases during the year. These energy managers also can pinpoint market volatility to predict rate decreases and increases in deregulated markets.

By outsourcing the research, owners can maximize their energy savings and improve their bottom lines. Energy managers have the tools, experience, and industry contacts to help make a dent in a portfolio’s energy costs. Through analyzing electricity data, procuring the best rates in deregulated markets, and identifying the optimal utility rate in a regulated market, consultants can help owners to examine usage history and evaluate which properties in a portfolio consume the most electricity. Consultants and owners then can assess how a property’s energy usage matches with the hours of operation, how efficient the energy equipment is, and how sophisticated its EMS should be.

While some property owners prefer to attempt to reduce energy costs on their own, they often forget that the process can be a challenging task. Using an energy consultant can help owners and managers to fully understand the utility business and how it can affect costs, as well as be the key component in successful budget projections.

While many factors contribute to commercial properties’ energy usage, owners and managers who implement best practices, conservation strategies, and the most advanced HVAC and lighting systems into their daily routines will be able to defray their energy costs and save money.

Mark Robbins

Mark Robbins is senior director of client relations for Cadence Network in Cincinnati. Contact him at (866) 223-3623 or [email protected]

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