Plugging In

Real estate managers are continuing to seek ways to make dealings with utilities as efficient and effective as possible. Recent studies suggest that aggressive steps by owners of multiple commercial building types, and sometimes by tenants, are helping to keep utility costs down.

Handling Utilities Requires Multi-Pronged Approach

By Paul Rosta

A signature building at Mesa del Sol, a master-planned development in Albuquerque, N.M., is the Aperture Center, designed by the distinguished architect Antoine Predock. Besides attracting office and retail tenants with sleek modern lines, the 78,000-square-foot building also offers a glimpse into the future of commercial buildings and the utilities that serve them.

The building is the subject of a four-year pilot project that integrates a solar power storage unit into the power grid operated by PNM, the local electric utility. When the pilot program wraps in 2014, the Center for Emerging Energy Technologies at the University of New Mexico will take custody of the project and use it for continued
research and development.

For all its promise, the renewable smart-grid technology being tested at the Aperture Center is years away from becoming a daily fact of life for most property managers and owners. In the meantime, real estate managers are continuing to seek ways to make dealings with utilities as efficient and effective as possible. Recent studies suggest that aggressive steps by owners of multiple commercial building types, and sometimes by tenants, are helping to keep utility costs down.

As with other operations and capital markets issues, federal and state policy will influence the level of investment in utility-related upgrades for the rest of the decade. The Obama Administration advocates tax credits and low-interest loans to promote capital upgrades that cut utility consumption and costs. Whether these incentives figure into Congress’s deficit-cutting plans is uncertain, however. The central issue is whether there is “a majority in both chambers to do that, and I don’t really think that’s clear right now,” said Charles Achilles, chief of the Institute of Real Estate Management’s legislative and research office.

Because some incentives may have a limited shelf life, owners and property managers planning on upgrading properties soon should stay current on programs. The Database of State Incentives for Renewables and Efficiency, a Web site funded by the U.S. Department of Energy, offers a menu of more than 1,100 rebates, 200-plus loan programs and 52 grant awards nationwide. Stakeholders provide an additional 543 rebates for investing in renewable upgrades.

(A summary of programs offered by utilities and government agencies is available on www.dsire.org.) Through at least the end of the calendar year, Southern California Gas Co., the nation’s largest gas distribution company, will offer commercial customers as much as $200,000 in rebates to help defray the cost of energy-efficient equipment. Purchase of a boiler or water heater that meets efficiency requirements can earn a $25,000 reward.

Other incentives may seem to have a less dramatic impact on the bottom line but still deserve notice from owners and managers. By January 2013, multi-family properties in California must comply with a new state requirement to install carbon monoxide detectors. Owners must bear the cost of purchasing the devices, but Southern California Gas is offering complementary installation. That is noteworthy because the gas company is also assuming liability for the installation—a step that lightens an owner’s share of risk, noted Nicholas Dunlap, vice president with Fullerton, Calif.-based Dunlap Property Group.

Judging by historic patterns, in areas where an improving economy is nudging demand, utility costs will likely tick up. During the past several years, pricing has remained fairly stable, so figures from recent years tend to be suggestive of general pricing trends. According to an annual study released last October by the Building Owners and Managers Association and Kingsley Associates, median utility costs for office buildings dipped 11 cents per square foot between 2009 and 2010. Government buildings led the way, reducing their energy costs 7.7 percent year-over-year, compared to 4.6 percent for all private-sector buildings. Corporate office properties beat the private-sector average by trimming utility costs 5.3 percent. Even so, utility costs in the corporate category remained elevated 9.8 percent above the national average for private-sector office buildings, the BOMA/Kingsley analysis shows.

Where utility costs fit into the budget varies widely by asset category. In Downtown office properties, for example, utilities eat up 21 percent of the budget on average, according to the Institute of Real Estate Management’s 2011 survey. By contrast, only 8 percent of operating costs at retail centers go toward utilities. For garden apartments, median water and sewer costs averaged about 46 cents per square foot in 2010, the most recent year for which figures are available, and electricity costs hit about 19 cents per square foot. In the office sector, median costs for suburban office properties are comparable to expenses at their downtown counterparts. In both categories, electricity runs about $1.80 per square foot per year and water costs about 14 cents per square foot. And for strip malls and other types of non-enclosed retail centers, electricity costs were 20 cents per square foot—only slightly higher than the 18 cents-per-square-foot cost of water.

As with much else related to resources today, favored strategies for managing utility contracts combine innovation with tried-and-true methods. Mark Peternell, vice president for sustainability at Regency Centers Inc., strongly recommends asking your utility to assign an account manager. Developing a working relationship with someone at the utility can yield multiple benefits. An individual who is familiar with the owner’s account can advise the customer on choice of rate structures, metering strategies and other issues.

Streamlined Payments

Several years ago, Regency Centers Inc. set out to streamline the cumbersome job of paying its utility bills at its 300-plus neighborhood and grocery-anchored retail centers. First, invoices would arrive at the REIT’s headquarters in Jacksonville, Fla., where the accounts payable department would scan them into the system. Next, the corporate office would forward them to the on-site managers at each center for review. The local managers would then sign off and return the invoices to Jacksonville, where the accounts payable team could finally cut a check and mail it. By the time utilities received Regency’s payments, they were often past due. “We found that we were spending a lot of money on late fees,” recalled Mark Peternell, Regency’s vice president for sustainability.

To remedy the situation, Regency brought in Advantage IQ, which merged with Ecos to form Ecova last fall, to handle its utility payments. Besides consolidating the process, the consultant takes care of utility auditing tasks such as checking meters to see that they are working properly and reviewing bills for potential errors. Determining how much Regency saves by outsourcing its utilities payments is tricky because so many variables are in play. Yet Regency is confident that outsourcing the task is no worse than a break-even deal, even with the added cost of retaining a consultant. “The higher the volume of utility bills you have, and the higher the expenses you have, the more it begins to make sense,” Peternell said.

Individual metering is a widely accepted tool for encouraging conservation and trimming usage. For new construction, individual meters are becoming routine. A frequently cited rule of thumb in property management is that residents reduce water consumption 20 to 30 percent when their building switches from master metering to submetering.

That can certainly improve the bottom line, especially for a large portfolio, but some owners suggest that there are caveats as well as benefits. “We aren’t using submetering, but some owners are,” reported Dunlap. “The devil is in the details, and it takes a lot to do it the right way.” To begin with, accuracy is an issue. Dunlap points to a failure rate that some estimates place as high as 10 percent. In the absence of sub-metering, Dunlap Property bases the resident’s pro-rata share of water charges on the number of bedrooms in the unit.

For owners of master-metered buildings, making the decision to turn to sub-metering is complex. The expected hold time, the size and age of the property, and the technical complexity of the process all influence the return on investment. Adding individual meters to an existing residential building usually requires rewiring that can cost thousands of dollars per unit.

Going forward, a variety of issues willl influence best practices for managing utilities. A handful of major cities are rolling out mandatory utility benchmarking programs. A case in point: New York City, which recently started requiring owners to track and report their properties’ performance. As of May 2011, all commercial buildings 50,000 square feet or larger must undergo annual benchmarking for energy efficiency.

A related regulation that took effect last September requires owners to make energy ratings publicly available on the Web. By their success or failure, programs like New York City’s will influence how owners and managers approach utilities. In the words of Jesse Holland, president of Albany, N.Y.-based Sunrise Management & Consulting, “I wouldn’t be surprised if other people are watching to see how it works.”