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In the meantime those of us operating commercial real estate had to decide whether to ignore it all (not really an option), sign a long term contract at a fixed rate, or ride the spot market.  It took several years to understand the differences.

The problem for us is that with more than 30 properties in our portfolio and an average of 2 electric meters at each property, different owners and usages all over the map it has been difficult to get a rope around it all.  Getting a rope around it all is critical to finding a way to leverage  the size of the portfolio.

Finally, though, we decided to buckle down & work our way through the maze.  We found an energy broker willing to work as hard as us,  worked through the myriad contract details, and educated owners about the benefits of banding together to get the best possible price.  And finally, we managed to secure a rate of 5.7 cents per square foot (plus the “wires” charge of about 2 cents), which represented a savings of between 15 and 40% for all our buildings. And managing the process will be simpler next time because we converted multiple expiration dates to a single point in the future, so we can re-bid it all together.

What really feels great is knowing that we truly added value to the properties in our portfolio by getting a handle on their electricity costs.

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. They don’t want to figure out what rental rates ought to be or what a janitorial company should charge. We understand.

That’s why it’s key to be a good operator right now. At SCM we know a lot about rental rates, and we excel at all those pesky operating de­tails. We might not be very good as bankers, though.

Watch that dog closely – we think it’s still going to bite.

Gary Walker

So far today we have had between 8 and 12 inches of rain, depending on where you are.  It wasn’t quite the  “biblical flood” we were all worried about earlier today, but still, it’s a lot of rain.  And guess what, most of our buildings leaked.

Being the conscientious stewards of real estate that we are, we feel bad when our buildings leak.  We seek solutions.  We don’t want it to happen again (however many times it does).  So today, when a trusted structural engineer we work with explained the following to me, it seemed worth repeating.

Barry Hendricks has helped us with a number of roof replacements, he’s written specs and helped us oversee contractors.  When we excitedly proposed a new roof drain solution today for one of our mid-rise buildings to head off future leaks, he suggested we take a deep breath and recognize that almost no roof is able to drain eight inches of water off its roof quickly enough because the storm drain system in Arlington (and for most cities) become overloaded when that much rain is coming down, so the water just has nowhere to go.

So if eight inches of water sits around for awhile, it will find a crack, slip through, and next thing you know, a tenant is unhappily finding it dripping on their important papers.    In the case of the mid-rise building in question, we discovered a bit of luck.  The roof decking is concrete.  If it were metal, eight inches of rain might have caused it to buckle under the weight and then we would have had problems.

What we’re doing is taking a deep breath, reviewing the leaks we had, and consider which ones really indicate a weakness that we need to address, and which ones would likely not occur again unless we have another  “act of God” rain.

Sometimes making places better can mean not simply throwing money at the problem.

Check out the skill level implied by this excerpt:  “Managers who are able to effectively negotiate contracts, control operations and reduce costs while maintaining tenant satisfaction, and advising owners on effective hold strategies will earn more business.”  I wholeheartedly agree with that statement.  The question is, how exactly does a Property Manager get those impressive credentials?  The article answers it nicely…by becoming a member of BOMA and taking advantage of all the learning opportunities.

In my humble opinion, however, it takes more than that.  It takes exposure to the ownership side of the equation.  Because that is where the real world of this kind of experience is gained.

Take the first part of the statement:  negotiating effective contracts.  In two areas of purchasing, property insurance and electricity buying, we have bundled all (or as many as possible) of our properties together to bid and negotiate the cost, and the process has indeed given us a number of advantages, in lowering costs, keeping increases to a minimum, and providing leverage we didn’t have before.  Here is the rub though–we had our “Owner” hat on when we instigated each process.  Had we been Property Managers only, we would have looked at each building as separate entities, and maybe not as a portfolio.  With a critical mass of properties in our portfolio that are owned by in-house partnerships, we take on the extra work (and it is extra work, believe me), and get the experience that allows us to “advise owners on effective hold strategies.”

In short, you have to know what you’re talking about, and walking in the shoes of the owner is the best way to get there.

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.

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.

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.

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?

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?”