Only Smart Money is Making Returns in CRE - Here's How
Since the Financial Crisis of 2008, the real estate industry has seen a recovery and large returns in many markets (albeit not all). Now, a decade later, high yields are no longer guaranteed. With revenue progression relatively fixed, the focus for CRE owners and operators should be on cost reduction and tenant retention for added value and stabilized NOI.
The current real estate upswing cannot last forever and a downturn is inevitable. There will still be growth in 2017 and beyond, but only for “smart money” that recognizes the importance of implementing cost-related strategies to improve bottom-line results. For a while dumb money could also get ahead, but if you want to play in real estate and win, now is the time to apply smart money tactics to your assets.
As we near the end of the economic cycle, smart money is employing technologies to address inefficiencies and process improvements. Systems to automate back-office processes, manage human capital, and optimize property management activities are being adopted while conditions are favorable and capital available.
There is no room for complacency. The actions that owners and managers take in the coming year to get ahead of anticipated challenges, seize near term opportunities and embrace change will determine whether they can sustain the boom.
Operators and managers are getting pressed to use more information, faster, and more efficiently. While it’s not always obvious which improvements should be made, there are promising opportunities ahead for those who can cut through the noise and make the right strategic investments in technology and digitization.
To add to market changes, interest rates are rising. On December 14, 2016, the Federal Reserve raised its key short-term rate to a range of 0.5%–0.75% from 0.25%–0.5% and announced three planned hikes in 2017, a more aggressive approach than expected.
Expecting pressure on returns, some organizations are starting to consider strategies and technologies focused on operational improvements and cost reductions.
Leveraging Technology for Competitive Advantage
In every industry, technology is a critical enabler not only of process efficiency, but also of customer satisfaction. Real estate is no exception. The internet of things (IoT) and Big Data are connecting operators more closely to how their buildings are performing in real time and automating back-office processes that add no value to the tenant.
As we enter a market of increasing uncertainty, there are a few questions every owner and operator should ask themselves.
What are the factors that could impact the overall return of a property or portfolio, and how well are you prepared to address those? What types of resources are you dedicating to identify worthwhile ideas to pilot? What strategies are being implemented to reduce operational costs today and in the near future?
This is not an exhaustive list, but here are 5 ways to use a building monitoring system to reduce costs and improve NOI:
1. Equipment Scheduling Analysis
Is your equipment running only when it needs to be? Even in buildings with sophisticated building management systems (BMS), the programmed schedule is not always optimal. In almost every building, at least one piece of critical equipment (boiler, chiller, HVAC unit, pump, elevator, etc.) is on when it could be off, thus wasting money and increasing wear and tear.
Running an analysis on the schedule of each piece of equipment and visually overlaying these data with occupancy rates can expose these inefficiencies. This should be performed often as maintenance staff sometimes forgets to change schedules back after activities are performed.
2. Streamline Tenant Submeter Billing
CRE properties that bill their tenants for their individual consumption often must rely on manual meter readings and extremely inefficient accounting processes. These activities, plus the potential costs of human error when creating invoices, are sources of operational waste that should be avoided at all costs.
To make the electric submetering process more efficient, companies should find an alternative to manual meter readings and transfer data to a cloud-based system. To go beyond, invoices should be sent automatically when the billing period ends, tracked digitally and integrated into the standard accounting or property management system to avoid transcribing numbers and risking human error.
3. Systematize Repairs & Maintenance
Equipment malfunctions are a fact of life for building operators and maintenance staff. But the process with which issues are handled can significantly impact labor allocation and the bottom line.
First, targeting maintenance on equipment systems that are on the verge of failure saves man hours and potentially avoids the cost of hiring outside repair vendors by identifying issues before failure occurs.
Second, when equipment does fail, notifying maintenance crews exactly which unit is broken and the likely cause can save a lot of time spent on identifying and diagnosing the problem as well as making multiple trips to get the right equipment.
Operators should have predictive maintenance strategies in place to ensure the highest operational efficiency and the lowest cost on maintenance staff activities.
4. Peak Demand Analyses
Buildings get charged for the highest amount of energy consumed over a 15-minute interval in the month. Keep in mind that peak demand refers to the energy consumed at a specific moment, whereas consumption charges are calculated using the building’s overall kWh consumption during a billing period.
To save operating costs, analyze your energy usage to determine when the highest 15-minute interval occurred during a month. From there, analyze the specific equipment contributing to that peak to find opportunities change the schedule or improve efficiency.
5. Real Time Leak Detection
Leaks can be a hidden killer of operating income. Not only do leaks waste water and associated costs, but the damages caused by leaks can force operators into large capital expenditures. Worse, leaks can cause costly disputes with tenant and even allow them to end their lease early.
To avoid this, operators should have a process in place to identify leaks as soon as they occur. Time is of the essence when a leak occurs so this analysis must be continuous to ensure success.
The truth is that these strategies and analyses are simply impossible without a building monitoring system built to continuously analyze the performance of every piece of equipment and tenant space in a building.
Luckily, there are emerging technologies that help execute these strategies and more in real time. Request a demo today to see how Enertiv's platform works!