In the green

Cost efficiency is one of the key benefits of sustainable operations and management. From the earliest days of the effort to make real estate more sustainable, asset and property managers and their sustainability teams have built their business cases for resource efficiency projects around higher net operating income (NOI) resulting from expense reduction. 

Utility and maintenance cost reductions resulting from efficiency improvements are often cited in proposals. However, efficiency improvements often take a back seat to other projects and property needs. To advance resource efficiency, property and asset managers need an entire tool belt of impacts the improvements can make.

Consider a proposed LED retrofit in a shopping center parking lot. The management team examines the benefits of the retrofit from all angles.

• The efficiency and longevity of LED lighting will reduce electricity and maintenance costs. The ROI calculation includes these cost reductions as well as incentives from utility providers.
• With conventional lamping, the shopping center must rent a cherry picker truck so that maintenance workers can reach the bulbs for replacement. Because the LEDs last much longer, they will need to rent the truck much less frequently, and equipment rental expenses will be reduced. The ROI includes these projected cost reductions.
• The LED project neutralizes the impact of electricity rate increases. These avoided costs, often called neutral costs, are also included in the ROI calculation. 

The team ties the improved NOI from these elements to the value of the real estate to strengthen their business case and request funding for the project. 

What other opportunities are there for building business cases and gaining a better understanding of how sustainability is impacting your portfolio’s NOI? 

Use a broad array of financial benchmarks

Comparing energy, water, and waste within a portfolio or against industry averages, like those available in ENERGY STAR^® Portfolio Manager^®, is a bedrock sustainability best practice. Financial benchmarks for property budgets can link operational efficiencies to specific line items in the budget. You can do this within your portfolio by comparing properties. You can also make comparisons using industry benchmarks, including national or market averages, available in IREM Income/Expense IQ benchmark reports.

Here’s a series of questions that you could answer with financial benchmarking:

• After improving the run times on a property’s building automation system, how much did energy expenses decrease?
• How do landscaping costs at properties with native or drought-resistant vegetation compare to those with conventional landscaping? 
• After installing smart water meters, how much water has been conserved? How much were expenses reduced?
• How do elevator maintenance and repair costs for properties with efficient elevators compare to industry averages?
• Have painting costs gone up for your properties with the switch to low-VOC interior paint?
• How do the rents of your green-certified properties compare to the average rents in the same markets? 

There may be other reasons for moving forward with a sustainable alternative to a conventional product or system. Preparing for future regulations and meeting tenant demand are just two examples. However, intangible benefits aren’t always enough to move a project forward. A tangible benefit like cost efficiency is often necessary to make the business case for a sustainability project. Cost reduction, both at the property and compared to other properties in the market, is still a powerful argument for project approval. If there are trends across a portfolio, cost reduction benefits may justify sustainability projects at scale, meaning the carbon reduction benefits from those projects will accrue toward portfolio goals.  

Put financial costs to the risk

Risk management is a core responsibility of property managers. However, risk is more complicated to quantify than other areas of property operations. There are certainly costs associated with given risks. You can estimate the legal expenses from a slip-and-fall accident or the costs of responding to a cybersecurity incident. You can also calculate the expenses for training your team to prevent accidents and engage cybersecurity experts. Risk management experts also account for the probability of the incidents occurring. So traditional risk can be quantified.

But how do you assess the unpredictable impact of future climate regulation on a property budget or other risks associated with climate change’s impacts? One area to investigate is utilities and risk around rising energy prices. The Income/Expense IQ benchmarks show per-square-foot or unit utility charges for different markets around the U.S. You can demonstrate the inefficiency of a property not just in its energy use but in its high utility expenses compared to market averages. Upward trends, quantifiable with Income/Expense IQ benchmarks, could be part of a business case for a long-term energy contract to lock in rates or for replacing inefficient HVAC units with more climate-friendly and cost-effective ones.

Another area of the property budget where you can put numbers to risk is property insurance expenses. These costs have risen, especially in specific markets. You may not be able to overcome trends in the insurance industry or make policies available where they simply aren’t. However, you can use financial benchmarks to track rates, compare your property’s insurance rates to those of other markets, and leverage the pressure on NOI from rising rates to make the case for other cost-saving sustainability and resiliency measures.

Examine each line item

Certain line items in property budgets are more likely to see sustainability impacts. What inputs into an operating budget are most affected? The answer will be different for each property and area of operations impacted by a project or equipment upgrade. External factors may also impact some line items. For example, complying with local climate regulations can raise administrative expenses and professional fees. Meanwhile, the energy conservation measures necessary to comply with those regulations will likely reduce line items in the repairs and maintenance, and utilities expense categories.

Generally, sustainability projects will affect the following income and expense line items. Be sure to examine and track each line item for any effects from the property’s sustainability measures. 

Administrative expenses

• Administrative costs
• Professional fees

Repairs and maintenance

• Appliances
• Carpeting
• Cleaning supplies
• Elevators
• Grounds maintenance
• Janitorial
• Landscaping
• Maintenance repairs
• Painting/decorating

Utilities

• Electricity
• Heating fuel
• Natural gas
• Water and sewer

Taxes and insurance

• Insurance
• Real estate taxes
• Other taxes/fees/permits

Leasing expenses

• Turnover expenses

Sustainability projects may also impact income categories, including rents, vacancies, and concessions. However, these impacts are more challenging to predict and quantify. Tracking and examining key line items in the property budget compared to financial benchmarks will make it easier to spot trends and understand the full impact of your property’s sustainability programs. Management teams will find the effort worth the time in achieving cost savings that increase NOI and enhance the property’s value.

There are many improvement and resource reduction projects to explore. However, distilling this information into actionable steps and crafting a compelling narrative to get the project approved by your ownership, partners, or board can be daunting. To get started, connect with other IREM members who are actively engaged in this space, explore the IREM Certified Sustainable Property (CSP) for your properties, and earn the IREM Skill Badge: Environmental, Social, and Governance.