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The Electric Building
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When electricity was deregulated in Texas several years ago, it was difficult to find a consensus on whether it would be a good thing or a bad thing. Enron collapsing after trying to corner the electricity market in California was not reassuring. (more…)
A Word from Walker…
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Distressed Properties: is this the dog that didn’t bark?
I’m wondering. We’ve come to realize that most commercial property lenders would rather “extend and pretend”, than foreclose on upside down properties. Bankers are not real estate operators. (more…)
Managing the Flood
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The title is ironic. Like we can manage a flood…Ask the people of Pakistan or New Orleans how they did that. (more…)
Leaping Tall Buildings at a Single Bound
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One of my favorite business pastimes is perusing industry magazines for “buzz” or the latest talk around the virtual water cooler of the real estate business. In this month’s “Commercial Real Estate Network” magazine is an article for Property Managers, so it caught my attention. (more…)
Looking in our Crystal Ball…Again
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It may seem early to be planning what’s going to happen in 2011, but for us gnomes in the back rooms of real estate operating companies, it’s that time of year again. In commercial real estate particularly, it’s not just a good idea to do your best at budgeting, it’s essential.
Billing tenants for their share of expense increases is why. If you wag a number, and you’re wrong, the tenant gets billed either too much or too little, you maybe have to credit the overage at the end of the year or have a big number to collect from a tenant who might not be too happy to pay it, or have to explain to the owner why you’re shorting his distribution check.
Much better to spend a little more time on the front end and try to nail it the first time. You just need to start earlier. Like now.
The new game of electricity buying
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After several years of electricity deregulation in Texas, we’re still dubious whether it’s effect is beneficial, neutral, or if we’re worse off than before.
Degregulation is the rule though, and the way forward, at least for companies like us, seems mostly through brokers. Being brokers ourselves, that’s not a problem for us. It’s just that even knowing the right broker doesn’t take away the necessity for understanding the electricity market and adjusting to it.
Being in the business of property operations, securing electricity contracts is an important task for us. Recently we took the time to review electricity for all our properties. We found that we had some contracts, and some month to month commitments, some decent rates, some not, and contract expiration dates all over the map.
We decided to take a stab at getting a handle on it all, so with the help of a good broker, we bid it all, produced a lot of history and approvals, and we’re about to secure contracts for the entire portfolio at a rate of around 5.5 cents per KwH (plus 2 cents for the infrastructure cost) for three years.
For the properties without a contract, the new agreement will take effect now. For the properties with contracts in place already, the new agreement will be effective as soon as the old one expires. All will expire in three years, so that we can begin to negotiate and leverage the size of the portfolio for the benefit of all the properties.
One issue to overcome was whether we should sign on behalf of our clients. This has consequences for the owners if they want to sell their properties. If we asked all the owners to sign their own contracts, the process would break down. The turn around time is so tight that by the time you explain it all to an owner, it’s too late to get the pricing, and you have to start all over again.
So we decided to sign for them, and will do our best to make sure the electricity contract is transferred in the event of a sale.
The Big Project – still a nail biter…
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It’s funny how you can be screamingly anxious about how a project is going, have a few turns go in your favor, and first thing you know, you’re complacent. It’s going great, all is right with the world, and then Whammo! something comes from left field to make you remember why you thought you needed to nail down every detail.
Our big project has been going pretty well. So far we’re on budget, and sort of on time. And I’m starting to look to my left. What’s it going to be? The carpet that maybe won’t get ordered in time to be installed by the move in date? That’s one possibility. I hesitate to think of any others for fear I will bring it into reality.
We have already had one hiccup with the doors. The tenant thought re-using the doors would save money and gain LEED points. And it would save some. Problem is, by the time we get finished making them all uniform we’ll probably spend more than if we bought new doors altogether. They are all different color finishes, some painted, some stained. Holes drilled for previous hardware won’t fit the current hardware. They have all different bottom clearances depending on whether they were opening onto carpet or wood floors.
So I think I’ll stay up on those tippy toes and see if I can get a glove on the next curve ball coming my way.
The meter is running.
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If you have worked in commercial real estate long enough to remember when the term “energy management system” began, you’ve been here awhile, like at least the 80′s. In those days if you installed one, it was pretty much a set it and forget it kind of deal. Decide who needs cool air when, set the system to do that, and we were doing all we could to control our energy costs.
Well, not so much actually, as I have come to learn attending Realcomm. One of the themes I keep hearing is that you have to know what your usage patterns are, and keep adjusting your system to reduce that usage. Wow. What about my fancy energy management system? I hear that’s important, just not enough.
So one of the booths I spent some time at was a company that does sub-metering in office buildings. I know about sub-metering tenant computer rooms so we can bill them back for that usage, but these guys explained to me that if you ever want to get to the point of actually reducing your demand (remember the last post?) you have to know what your demand is on a continuous basis and compared to historical usage. Their sub-meters get installed on major equipment systems (water, electric for HVAC, lighting, elevators, etc.) and the usage information gets transmitted to and processed on their server, so that the office building personnel can access it through a web interface and discover what their peak usage times are.
Armed with that knowledge, the theory goes, you can better adjust your energy management system to reduce usage at peak demand times. How? Well, you might raise the temperature throughout the building at that peak load time just enough to impact demand. Or if you haven’t already, you might decide to install variable frequency drives on your HVAC system. These are one of the big changes to reduce usage. These drives (VFD’s) run the system at varying speeds depending on the need. Instead of just being off or on, a VFD can ramp up or down the speed of the motors only as much as necessary to meet the cooling or heating requirement.
If it sounds like a lot of work, well, maybe it is, or maybe we will eventually see stuff like this as the new normal. I was told that to outfit a building of about 100K square feet a sub-metering system would cost about $15K. That’s just for the sub-metering, not for any solutions to actually reduce the usage.
I’m curious whether anyone else reading this post and in commercial real estate thinks this sounds like a good capital investment?
Demand Reduction…On Demand
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Being a real estate person, and primarily an office real estate person at that, it is news to me that for years now it has been common for big utilities to have arrangements (either of the carrot or stick variety) with large industrial users to reduce consumption on short notice, like 15 minutes notice. Apparently this prevents the potential for brown out or even black out at peak demand times.
Usually demand reduction is incentivized…the utility will pay the user for the privilege of dropping usage on such a tight turnaround.
I guess it’s understandable that a large industrial user could put in technology to make this possible, but office buildings?
BOMA Chicago thinks so. Their big utility uses incentive payments (carrots, not sticks) to reduce consumption on demand. Together with a number of office building owners in Chicago they put together a grant proposal to the Department of Energy to create a “smart grid” in the central business district, that would tie most of the office buildings in that sector together, and make themselves available to reduce demand on short notice, and then be eligible for payments from the utility just like the industrial guys.
It’s an interesting concept, except that it’s proposal didn’t get funded, so it’s back to the drawing board for now. They plan to try again next year.
Next Post…What would it take to create a “smart grid?”
Expert Operators of Commercial Real Estate
Carol Coffman-Sosebee
