Why Better NOI Starts with Better Utility Data

The current environment, with rising inflation leading to higher capital and operating costs, has many REITs looking to shore up their balance sheets. Add on rising energy costs and a stricter regulatory regime stemming from concerns over climate change, some have viewed utilities as a major cost sink.

According to Charlie Gerwe, sales and business development executive at Redaptive, the proper application of data and other creative solutions can turn this around, making utility management an important way for REITs to improve their NOI.

Expensive energy loss often goes undetected

Gerwe notes that poor utility management can impact a REIT’s bottom line in one of two scenarios: for a gross lease tenant, REITs have to absorb the impact of utility costs rising due to regulation or inflation. In a triple net lease property, when a tenant fails to comply with the growing number of municipality- and state-related energy requirements, REITs can be on the hook for compliance responsibility.

Even when everything is sorted out, other issues may escape detection without access to granular utility data.

“We worked with a large real estate company that found leaks across 25 of their buildings,” says Gerwe. “Tenants were losing $275,000 per month and wasting 42 million gallons of water due to leaks they didn’t know existed.”

Excellent utility management and efficiency may also hedge against vacancies. Tenants increasingly consider the operation costs of a building when selecting new sites. “In a competitive market, the details are what separates facilities. If there is a building across town that will cost 5-10% less to operate, why wouldn’t they occupy that building, especially with utility rates continuing to go up.”

How to spot the largest opportunities

Research also shows a connection between meeting environment, social, and governance (ESG) requirements, such as energy reduction measures, and investment performance. A GRESB study found participants implementing ESG-related measures experienced 40-point gains over an 11-year period. However, the key to impacting NOI is finding the highest-potential opportunities.

When considering a starting point to improve NOI, Gerwe suggests tapping into data to identify which opportunities have the highest potential impact on NOI. The data may also show which tenants are the most energy-intensive in a company’s portfolio, opening an opportunity to reduce energy costs through an equipment-as-a-service providers like Redaptive.

“There’s a couple huge benefits,” says Gerwe. “First, since the service is treated as an expense, REITs get the immediacy of not having capital constraints. Next, having a provider who specializes in this means you get a partner that can connect all the dots to better efficiency, and ultimately grow NOI.”

Organizations often think compiling data from various utility meters is enough, but it doesn’t give you the granular data required to identify the largest energy-saving opportunities, according to Gerwe.

“We have a team of auditors and engineers that specialize in finding projects that are going to save the most and improve NOI, and having that dedicated team makes a huge difference,” says Gerwe.