The 2017 Impact of Energy and Water Savings on NOI and Asset Value on Multifamily Properties
Using Energy and Water Benchmarking and Building Analytics to Improve NOI, Asset Value, and Make Smarter Investment Decisions
Executive Summary
NOI and asset value on multifamily properties can be improved significantly by controlling the variable expenses associated with energy and water use. The example in this report used benchmarking data from the WegoWise multifamily database, the largest in the real estate industry. The analysis demonstrates:
- Buildings can be benchmarked against each other to determine their range of efficiency from least, to the median, and then to the most efficient.
- The one year energy and water savings of $69,700, and its corresponding increase in NOI, improved property value by over $1.16 million for the most efficient property over the least efficient, and by $610,000 over the median analyzed.
- Energy and water benchmarking and building analytics software provide the capability to extend and sustain NOI and asset value from a property to an entire portfolio.
Introduction
Rising interest rates, inflation, and moderating rental income are brewing a perfect storm for multifamily real estate that will impact NOI, and ultimately asset value. The dynamics of historically low interest rates, and rising inflation, portend a multifamily trend toward the need for more proactive management of operating expenses. Add the peaking of millennial and baby boomer demographics for apartment rental demand, coinciding with a mature business cycle, and rental revenue is increasingly constrained. Property managers can control variable expenses, like energy and water usage, and the savings from them translate into a significant impact on NOI and asset value. This report will demonstrate the impact of NOI and asset value from an energy and water savings example based on real, 2017 utility data benchmarks from the WegoWise database of multifamily properties.
WegoWise is an energy and water benchmarking, building analytics, and sustainability reporting software company with the largest database of multifamily properties in the world, comprising more than 50,000 buildings, 1 million units, and integrations with almost 700 utility providers.
Property Analysis
To demonstrate the impact of energy and water savings on NOI and asset value, actual, 2017 energy benchmarking data from the WegoWise database was analyzed in conjunction with operating income and expense information from the National Apartment Association 2016 Survey of Income and Expenses. While this information is not derived from one particular property, it is demonstrative of how energy and water benchmarking potentially impacts NOI and asset value.
The sample property used in the analysis has the following characteristics:
- The property is located in the Northeast
- The size of the property analyzed is 50 units
- The average rent is $2,500 a unit per month, with a gross rent roll of $1.5 million per year.
To determine energy and water expenses, the WegoWise database provides information about this type of property, with 50 units, along three dimensions - the median (or 50th percentile), the least efficient property, and the best performing one. The difference between the dimensions is significant, providing an opportunity to improve NOI performance and property value over time.
| Property efficiency | Annual energy and water spend | |
|---|---|---|
| Total | Per unit | |
| Least | $136,700 | $2,734 |
| Median | $103,650 | $2,073 |
| Most | $67,000 | $1,340 |
On a per unit basis, where a property is master metered, the owner has the most to gain in reducing expenses and realizing an improvement in operating income. However, even in a situation where utilities are passed onto the tenant, the owner has the opportunity to realize an incremental increase in rental income, while creating an overall improvement in property value.
Extensible and Sustainable NOI and Asset Value Improvement
The WegoWise data, and customer usage of its energy and water benchmarking platform, demonstrates that in order for NOI and asset value to improve, utility savings need to be extended throughout the entire property, and sustained on an ongoing basis during the life of the property. It is then possible to scale the savings to optimize NOI, and hence, asset-value improvement.
In this example, a conservative approach is taken to show the NOI and asset value impact after one year of savings. Property owners can extend these savings to an entire portfolio, and over the course of several years, sustain and scale the savings to increase cash flow and consistently improve asset value.
A standard approach to real estate value calculation is through the use of capitalization rates (Property Value = Net Operating Income/Cap Rate). The cap rate varies under different market conditions and is essentially a quick way to gauge investor demand for a particular set of cash flows. Assuming a cap rate of 6%, the property’s value, based on one year of savings, increased significantly as a direct result of its energy and water savings.
| Property efficiency | |||
|---|---|---|---|
| Least | Median | Most | |
| Annual Gross Rent for Entire Property | $1,500,000 | $1,500,000 | $1,500,000 |
| Minus Vacancy and Credit Loss | $75,000 | $75,000 | $75,000 |
| Minus Maintenance and Other Expenses | $150,000 | $150,000 | $150,000 |
| Minus Taxes and Insurance | $180,000 | $180,000 | $180,000 |
| Net Operating Income before Utility Expenses | $1,095,000 | $1,095,000 | $1,095,000 |
| Minus Utility Expenses | $136,700 | $103,650 | $67,000 |
| Net Operating Income after Utility Expenses | $958,300 | $991,350 | $1,028,000 |
| Applying Capitalization Rate | 6% | 6% | 6% |
| Property Value | $15,971,667 | $16,522,500 | $17,133,333 |
Increasing Cash Flow Improves Property Value
Comparing the 50 unit property example, side-by-side, from a least efficient state to a most efficient one demonstrates the impact of energy and water savings on NOI and property value.
The one year energy savings of $69,700, and its corresponding increase in NOI, improved property value by over $1.16 million for the most efficient property over the least efficient, and by $610,000 over the median.
In looking at the increase over the median property, the increase in property valuation was 4% in one year.
The Value of Energy Benchmarking and Building Analytics
Energy and water savings drive increased NOI and property value. However, the savings demonstrated above are a starting point. There are many ways to find value with energy benchmarking and analytics software like WegoWise.
Better performing properties enjoy increased cash flows, which support higher loan proceeds and more favorable financing terms. Achieving higher loan proceeds, based on the use of energy benchmarking and building analytics software, will create an opportunity to invest in retrofits with more certainty associated with improved NOI performance and increased property value.
Alternatively, cash flow from one property may be deployed to other properties in the portfolio to improve their operating performance and value. Acquiring new properties, based on the visibility of how energy and water savings may apply to a similar property means the buyer is purchasing an undervalued asset, and as a result, the buyer can better determine the true, future value of the property better than the seller. The opportunity cost of deploying cash, in search of yield, provides a multifamily property owner with many opportunities to produce a return.
Retrofits and capital investment expenditures are a significant risk associated with multifamily real estate. Benchmarking and analyzing building analytics enables property owners to make smarter decisions about these expenditures, increasing the probability of savings, not just based on retrofit performance but also on avoiding costly repairs with a limited or zero return on investment.
Energy and water benchmarking and analytics software used as part of an operating plan creates a payback in months with a fast time to value. Additionally, its value over time, extended and sustained over an entire portfolio, drives the NOI performance of the portfolio, and consequently the value of its assets.