Inflation is among the many factors keeping management companies up at night. Here are how some are limiting the effects of inflation on utility costs.
With inflation cooling off a bit but still running historically hot—at 7.7% in October versus a year ago—management companies face a challenging picture in terms of utility costs for the coming winter and beyond. Energy is one of the commodities, along with food and shelter, that is among the biggest inflation contributors, according to CNBC.
But those in charge of monitoring and attempting to hold down costs for electricity, gas and water as well as tracking effects on net operating income (NOI)—while also planning for new sources of energy usage, such as electric vehicle charging stations, that residents may come to expect—say they’re busy working on solutions.
Seeking Transparency
At Denver-based Cardinal Group, which has a portfolio of more than 35,000 student housing and traditional multifamily residences across 38 states, gaining transparency into utility costs can be challenging, says Michael Nagy, Consulting Services Director.
On the conventional multifamily side, that’s because residents are responsible for most of the utility costs, and “we as owners sometimes aren’t legally able to get insight into those,” he says. And delays based on billing schedules for student housing means, “we don’t see that information for weeks, if not months. It can be really challenging to understand what’s happening at any specific time based on [factors like] seasonality and changes in occupancy.”
It’s also often arduous to convince building ownership groups on the conventional side to invest in projects to lower utility costs because residents benefit more than owner-operators. However, capital partners and the equity markets are starting to incentivize (or require) owners to make such investments into improvements like solar panels, low-flow plumbing fixtures and LED lightbulbs. “It’s easier to incentivize owners when they’re responsible for utilities, like they are in student housing sometimes,” Nagy says.
Residents are sometimes pushing the envelope on utility costs, demanding “green leases” in which terminology is added to boost transparency and require upgrades, Nagy says. “Cardinal works with multiple utility billing vendors that help us distribute those costs efficiently and legally,” he says. “They also help with the tracking, monitoring and reporting of this information. That’s really critical. In terms of inflation, we’re seeing an increased interest in solar, which can stabilize energy costs in an inflationary environment, especially in places like Denver, where energy providers have already announced planned rate increases.”
Cardinal has invested about $2 million into energy-efficiency projects across its own portfolio during the past 12 to 24 months and has seen a reduction in energy usage of between 15% and 30% year-over-year, Nagy says. “It varies by municipality and geographic location,” he says. “But in general, that’s kind of what we’re seeing. We have a lot of third-party management clients who save substantial amounts in those areas, as well.”
In addition, Cardinal has been talking about implementing technology solutions to enable residents to view their consumption in real-time so they can better understand their usage and what kinds of changes they can make to their daily routines to lower costs for themselves, Nagy says.
“We can’t control how long somebody takes to shower or leaves the window open in the middle of December,” he says. “What we can do is educate residents about consumption and push them toward incremental improvements and help them understand that, ‘You are one resident, but you are part of a 300-unit community, or a 15,000-unit portfolio. And if you make incremental changes to water consumption and save two gallons or five gallons of water by taking a slightly shorter shower—and if everybody makes those changes—you see an exponential reduction in costs, which benefits everybody.’”
Cardinal has been pushing itself internally to figure out the right mix of efficiency projects and understand how to build a reliable data-collection platform that can be used to report out compliance with municipal regulatory requirements, Nagy says. “It’s a focus of ours,” he says. “We’ve built some great relationships across the industry through vendors in all sorts of different areas.… We want to figure this out, to create engaging communities where our residents can thrive. That’s our mission statement. Implementing these efficiency projects and strategies is one way to get there.”
Benchmarking and Upgrading
Borger Management, a Washington, D.C.-based firm with a portfolio of about 7,000 A, B and C class properties—as well as an even mix between market-rate and rent-controlled apartments—budgets rental increases so that they, respectively, align with market trends and are based on the maximum allowable amount per D.C.’s rent control guidelines, says Michael Barboza, Director of Business Intelligence & Sustainability.
“In the rent-controlled market especially, the increase that the city allows [in what residents can be charged] doesn’t always keep up with increases in utility rates,” he says. “For our rent control properties that are master-metered, the building utilities are included in the rent. This is something that we take into consideration when budgeting and forecasting.”
In recent years, Borger has partnered with an energy consulting firm that’s benchmarking most of the company’s assets, helping to develop baselines and identify trends in usage, Barboza says. “We are monitoring all buildings’ usage from a historical basis, which has led us to the development of an improvement roadmap to guide all assets across the portfolio,” he says.
These improvements have included—sometimes with help from city rebates—converting to LED lighting fixtures, installing low-flow fixtures within apartment units and wrapping insulation around exposed piping, Barboza says, while more capital-intensive investments might include converting to Energy Star appliances or the replacement of larger building systems. “When it comes to the larger building systems that are approaching their end-of-life within five to 10 years, we’re looking at those from a more strategic standpoint: We have to start planning for their replacement by bringing in engineers to identify more efficient systems,” he says.
The firm’s portfolio is a mix of master- and individually metered buildings, with the master-metered buildings often being less efficient in terms of energy and water usage, Barboza says. “In some of our newer or renovated buildings that are master-
metered, we have already installed smart thermostats to improve the building’s energy usage,” he says. “In our master-metered buildings with older fan coil units and convectors, we have begun exploring specific smart thermostats that can help the buildings become more energy efficient.” Borger also has begun testing water management systems across some of its properties to help the company identify abnormal types of usage.
Building in Efficiencies
As a merchant builder, Franklin, Tenn.-based Bristol Development Group oversees but does not manage the day-to-day operations of its properties after they open. However, the company does take steps to reduce future energy consumption during construction—although not to the point of seeking LEED certification, according to Alissa McClard, Director of Asset Management.
Water-related inefficiencies seem to be the most acute problem, more so than electricity, McClard says. “With water, when you do have a problem, it’s not usually a small problem. Your bill might double, particularly with the surcharges utility companies have recently implemented due to rising fuel costs,” she says. “Before receiving an exorbitant bill, it can be so hard to know when you have a leak and detecting it is a challenge, as well. Devices out there, including monitoring software that you can put on your utility meter, help you to see spikes in usage. You can deduce that you had toilets running because the usage is higher at night. They send you alerts, and you can see real-time data and graphs.”
Another issue that McClard hears about related to keeping track of utility costs are difficulties pinpointing the energy flow within mid-rise communities with three or four electrical meters. “Usually, as buildings get bought and sold, people have no idea what meter is serving what location,” she says. “You might have a meter that’s off-the-charts but trying to troubleshoot what’s happening, when you don’t know what it ties back to, is almost impossible. When we’re constructing buildings, we try to communicate with the architect to ask, ‘OK, we have these meters. What are they feeding?’” And then ensure that information is tracked and passed along if the community changes ownership.
Another step that can help keep a lid on costs is adding a monthly amenity fee to cover not only coffee and other refreshments within common spaces but also the cost of utilities in those areas, McClard says. “Most builders are also installing motion light sensors in common areas, and LED lights, or low-flow toilets and touchless faucets that cannot be left on after use,” she says.
EV Charging Stations: A Growing Source of Utility Costs
They’re nothing new, but charging stations for electric vehicles are likely to become a more expected amenity in the coming decade as spending rolls out under the federal Inflation Reduction Act to promote the construction and usage of this new generation of vehicles, and car companies foresee their own reasons for wanting to shift toward that market.
Michael Nagy, Consulting Services Director at Cardinal Group, says his company is exploring the implementation of EV chargers across its existing assets and seeing new developments including EV chargers across 10% to 20% of parking spaces, with capacity for future expansion, especially in cities like Denver where EV capacity is required by law.
“We have seen a lot of increased appetite for electric-vehicle chargers, especially on the new development side of our business,” he says. “It’s so much easier to incorporate that capacity early on in a project, running the conduit or just designing an asset so that it can facilitate EV adoption down the line. It’s much more challenging to add those things after the fact.”
Nagy suggests that developers investigate and take advantage of incentives to incorporate chargers and work with partners who understand those regulatory incentives to help make a case for such improvements. “With Ford’s EV truck, and with low-cost EVs hitting the market right now—with Mercedes’ commitment to 100% of EV production by 2030—it’s absolutely critical to plan for those needs in advance,” he says. “It takes time to get those things in there.”
Charging stations are now required to be included in new construction in Washington, D.C., as well, which has helped spur conversations both among leadership at Borger Management and among its clients, says Michael Barboza, Director of Business Intelligence & Sustainability. How soon they will come to existing buildings is more of an open question.
“Within our portfolio stock, it’s not an easy thing to do,” he says. “In some of our historic properties, the architecture and existing power simply do not allow for the installation of EV chargers without paying a heavy premium, especially when so many parking garages are under the building. Within our newer properties, or those with above-ground parking lots, installation of EV chargers is an easier project.”
Alissa McClard, Director of Asset Management at Bristol Development Group, says the electric vehicle stations don’t typically increase electricity costs to building owners that much in the grand scheme of things. “You can charge back to residents, but make sure you’re not overcharging,” she says. “In some markets, you can only charge for the exact usage.… The main thing with EV stations is making sure you have enough power supply when you’re building. That’s where the huge expense comes in, whether during construction or after the fact.”
Ed Finkel is a freelance writer for units Magazine.