Are you leaving NOI on the table as your portfolio grows?
As we begin the ninth consecutive year of economic growth in the U.S., real estate market fundamentals remain strong and many portfolios are experiencing rapid growth. With growth comes new acquisitions and the controlled chaos of sorting out everything from financing to re-branding in 30-60 days. Amid this frenzy, opportunities to create value and increase NOI are often overlooked.
Leverage your buying power
Buying power increases as your portfolio grows. For simplicity and accounting purposes, purchasing decisions are typically made at the property level. However, aggregating your spend for recurring purchases and strategic upgrades across a region, fund, or your portfolio can significantly reduce your operating and capital costs. Most manufacturers and suppliers are willing to provide steep discounts for large volumes of “anticipated” purchases. And property-level accounting can be easily accommodated.
Get organized and drive down your operating and capital costs. The national account model (i.e., % off of list price) is convenient but is often fraught with a bloated supply chain and high margins. Go direct to manufacturers or national/regional suppliers for high volume purchases.
The gift that keeps on giving
Look beyond building deficiencies during due diligence and focus on operational improvement opportunities that will move the needle on your balance sheet. Target proven strategies with quick returns like dialing-in existing HVAC controls and LED lighting retrofits. Underwrite low-cost opportunities to ensure they are funded and savings are accrued in Year 1 and beyond.
Short hold periods should not be a deterrent. Approximately 95% of the recommendations Breea makes have payback periods of less than two years. When capitalized, modest increases in NOI can have a profound effect on asset value. For example, an LED lighting retrofit that reduces common area annual electricity costs by $50k can increase asset value by up to $1,000,000 at a 5 cap.
Follow this same strategy for ground-up projects. During the design phase, identify opportunities that will reduce future operating costs. The incremental cost premium of increasing equipment efficiency or upgrading controls during the design phase is a drop in the bucket compared to ongoing operating cost savings. Once again, do not let short hold periods be a deterrent. The business case is quite strong for even the most aggressive development strategies.
Teach them how to fish in THEIR pond
We have seen many examples of LEED certified buildings that were designed with every bell and whistle but guzzle energy. It all comes down to the building operators. They play a critical role in improving building performance and controlling operating costs.
Set the stage during the onboarding process. Rather than providing generic checklists or access to a pre-populated preventative maintenance system, train your building operators on how to operate THEIR buildings. Whether they are new to the building or have been there for 20 years, taking the time to expand their roles, set expectations, and train them can pay huge dividends.
Many utilities are eager to provide free money for reducing your energy loads so that they do not have to build new power plants. It is a win-win for everybody. Schedule a meeting with your utility representative to discuss available incentives and how they align with opportunities at the property. Not all opportunities are published by utilities, so ask questions and share notes.
If the property is in a regulated utility market, request a utility rate structure analysis from the utility to ensure you are receiving the most competitive energy rates. In deregulated markets, pursue competitive energy pricing on the free market.
If you would like to discuss opportunities to increase NOI as your portfolio grows,