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Worried About NOI During A CRE Downturn? Look Into High-Performance Building Upgrades

Downtown Los Angeles

projected downturn in the market has commercial real estate professionals hunkering down. After a cycle that has exceeded the average six- or seven-year growth period and raised prices across all asset classes by 104%, a correction seems imminent. In preparation, building owners have looked to cut operating costs to bolster net operating income. 

The proliferation of energy and water efficiency benchmarking standards has worried some landlords who see high-performance improvements as costly and detrimental to leaner operations. In reality, water- and energy-efficient buildings have fared better during previous market downturns, and improvements in building data quality may magnify the impact in the next downturn, Enovity Director of Operations and Maintenance Bob Pellegrino said. 

Enovity, a division of Veolia, is a team of engineers that operate, maintain and optimize sustainability across facilities. Pellegrino works with building owners to navigate applicable standards and benchmarks and identify the most cost-effective upgrades for their properties.

In Los Angeles, the city’s Existing Buildings Energy and Water Efficiency Ordinance took effect on Dec. 1. It requires privately owned buildings that are over 20K SF to be benchmarked, and owners must disclose annual energy and water consumption. By 2019, building owners must also demonstrate that their buildings are energy and water efficient or on a pathway to efficiency.

The regulations will create a minimum investment threshold in efficiency upgrades for owners. While the initial cost might make some owners nervous, others are not waiting for regulation to see the value in efficiency improvements. In the San Francisco and San Diego markets, a leading commercial real estate investment trust is working with Enovity to develop strategies for improving water consumption savings across its properties. 

California has had significant water issues recently, which means property managers in Southern California have a reason to prepare themselves. With new state policy in the pipeline, these developers have an opportunity to become industry leaders on how water management evolves, company officials said. 

For this real estate trust, which manages properties across Los Angeles, it is about being part of the solution, as opposed to catching up to the problem.  

San Francisco

The company is working to install water submetering systems throughout its facilities. The system will not only track water consumption across tenants but will also help identify, target and fix pipe-to-pipe leaks that would otherwise go unnoticed. An estimated 20% to 30% of monthly water bills are thought to come from these leaks, company officials said. Submetering systems allow landlords to communicate with tenants about usage and work together on conservation initiatives. 

As water prices continue to rise, installing these systems will prevent higher operating costs in the near future.

Water is fairly inexpensive right now, but experts predict a 100% increase for each of the next three years, company officials said. The trend is twofold: Tenants pay for the water they consume and then most water ends up in a waste stream, where they also pay for it.

Cheaper operating costs result in happier tenants that are more likely to renew their leases, ensuring a steady rent roll in the event of a downturn, Pellegrino said. Enovity’s client works mostly with life science companies, which must closely monitor costs. The ability for the life science companies to cut back on operating expenses results in cheaper rent, which allows more money to be allocated to research, company officials said.

The value owners build in their assets will pay off in the long run. More owners are realizing that energy and water are the pillars of sustainability and customer health. Energy and water efficiency have become long-term strategies that allow owners to reap economic benefits. 

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