Office property values are plummeting at record levels. Is energy efficiency the secret to boosting NOI in a tough economic climate?
Commercial real estate asset management leaders are likely feeling the effects of the current market conditions on your bottom line and corresponding pressure to deliver more with less. In fact, many owners are looking to dispose of their office buildings. Office property values, particularly in cities and their downtown business districts, have plummeted to levels not seen in history in what’s been deemed the “real estate apocalypse.” So even if a buyer can be found, most office buildings are going to be selling at a significant loss for the owner.
With budget freezes and intense scrutiny on spending, finding ways to increase the net operating income (NOI) is more important than ever before.
In this environment, the only thing that owners can control, at least partially, is the NOI of the building.
Increasing NOI (by decreasing costs) is especially crucial in the current moment because:
- It makes the building more attractive to potential buyers.
- In the event that the building can’t be sold, it becomes more attractive to tenants— especially if the energy costs are lower due to improved efficiency (sustainability).
Let’s take a look at a scenario.
- Imagine a building with a value of $62,500,000 and an NOI of $5,000,000, resulting in an 8% cap rate.
- If the owner spends $10,000 a year on a product or service that saves their building $60,000 a year, the new NOI is $5,050,000.
- At an 8% cap rate, every $1,000 saved results in $12,500 in value for the building. This means that the new value of the building would be $63,125,000.
When faced with budget freezes and the need to sell buildings at a higher price, the question for real estate owners becomes: how can you quickly increase NOI to command a higher price for your building?
One of the most obvious opportunities to increase NOI is through energy efficiency. By reducing energy consumption and related costs, you can lower your building’s operating expenses and increase NOI.
So how are your peers putting energy efficiency to work to boost NOI?
Here are just a few examples.
1. One way to increase NOI is through data-driven decision-making. By analyzing data on energy consumption, building operations, and other factors, your teams can more easily identify areas to reduce costs. For example, if building engineers can be notified when areas of the building are consistently consuming energy on weekends when occupancy is low (or nonexistent), they’re able to make a data-driven call to adjust HVAC and lighting systems accordingly. Any efficiency gained impacts tenants’ financial bottom line, and ultimately enhances their quality of life while residing in the building.
That’s why the building team at the iconic Gemdale-owned, CBRE-managed 350 Bush property in San Francisco, deployed Gridium analytics to advance its already fine-tuned energy management strategy. Even at a relatively new, well-tuned building kept up by an extremely vigilant chief engineer, drift is inevitable, and easy access to building performance helps the 350 Bush team stay on track.
“Gridium helps our building teams minimize energy costs and continue to keep our assets fine-tuned,” says Darren Cohen, Executive Director of Asset Management, Gemdale USA, “so we’re best-positioned to capture the highest possible savings and improve asset value.” Read CBRE-Gemdale’s full case study here.
2. Upgrading to energy-efficient lighting, HVAC systems, and building controls can also significantly reduce energy consumption and costs, resulting in a dependable return on investment. The Rubicon Point Partners team recently partnered with Gridium to help navigate PG&E’s On-Bill Financing Program in order to push through $1.5M in building improvements with zero capital expenditure.
“Gridium has helped us demonstrate that we’re an environmentally conscious company trying to reduce our carbon footprint while saving on the bottom line,” explained Rubicon’s Roland Pan, Senior Managing Director of Innovation, Research & Strategy. Read Rubicon’s full story here.
So while budget freezes and plummeting property values may seem like insurmountable challenges, there are still opportunities to increase NOI and command a higher price for your building. By focusing on energy efficiency and data-driven decision-making, you can quickly improve your building’s financial performance and create a more valuable asset.
Interested in evaluating your portfolio’s savings potential with Gridium? Let’s continue the conversation.
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