How Property Managers Can Cut Utility Costs

By William Moseley, Director of Operations for California Utility Billing ServicesLike all professionals in the real estate industry, multifamily property managers have had their priorities dramatically shifted by the current economic downturn. The combination of falling housing prices and the growing unemployment rate has made attracting and retaining residents a more difficult task. Consequently, some property managers are being forced to lower rents or provide concessions in order to attract and/or retain residents. For Western National Property Management, the number-one goal for property managers in the current economic climate is to protect rental rates and economic occupancy.Because maintaining Net Operating Income (NOI) is the top priority for property managers in today’s economy, greater attention is being paid to operating costs that could negatively affect the bottom line. Perhaps the most significant operating cost for multifamily properties is the cost of utilities. As a result, many property managers are working to implement programs that can help reduce utility costs.This is not a temporary problem that will pass when the economy improves as the current credit crisis has had little effect on the overall hard costs of utilities. For example, in southern California, property managers face a consistent rise in the cost of water. These increased costs are not related directly to the country’s current economic situation, but because of the scarcity of the resource. Conservation is a key factor in making sure that ample water supply is available for new and existing developments, and as water continues to be scarce, costs will continue to rise.The cost of water can also be particularly high for communities based at higher elevations, which require pumping mechanisms to deliver their water supply. These communities incur pumping surcharges, which is an energy cost that is directly affected by the price of oil. Escalating fuel costs have also been a major factor in the increased cost of other utilities, particularly trash service. As fuel prices rise, many trash service providers are adding fuel surcharges.Sewage costs are also on the rise locally. As federal regulations have increased, the treatment of sewage is more costly and older infrastructures need improvements to meet these more stringent regulations. Infrastructure improvements to meet this need can also translate to an increase in per unit costs. The city of Long Beach, Calif. is a prime example of this. Voters passed a ballot measure during the recent election in November 2008 called the “Long Beach Infrastructure Reinvestment Act.” This ordinance calls for a special parcel tax to account for much needed infrastructure updates. For multifamily property managers, this ordinance means an annual increase of $120 per unit. These types of tax increases that make up for old infrastructure unable to support current needs are likely to become a national trend, particularly in older cities.Electricity and gas expenses are less of an issue since individual units receive services directly from the utility company and residents are responsible for the bill. Only the common areas shared by residents incur charges for the building. If an older structure still has master-metered electricity or gas utilities for the units, there are inexpensive sub-metering devices available that can help allocate the utility costs to the units.With all of these increased utility costs, the challenge for property managers is significant in order to manage the increase without raising rents. As a result, Western National Property Management, like other multifamily property managers around the country, is working hard to implement cost cutting initiatives to manage the issue. Executing energy efficiency updates on property are a major defense against the rising costs of utilities.There are steps that property managers can take to help manage the situation. Retrofitting plumbing is one effective tactic to curb the high cost of water. This involves the simple and inexpensive installation of devices that replace or modify existing plumbing fixtures to conserve water by restricting flow or displacing volume. Retrofitting is effective on toilets, showers and bathroom and kitchen faucets and there are incentives and rebates that can reduce the cost of these improvements.Property managers can greatly decrease utility costs by changing top loading washing machines to front load or energy efficient machines. Many property managers find these more environmentally friendly and energy efficient machines pay for themselves in one year through the savings in both water and sewage costs.Intelligent irrigation equipment is another solution to managing rising utility costs. Employing smarter landscaping in general will help conserve water and keep costs down.Another very effective strategy to lower utility costs for apartment managers is sub metering. Submetering permits the measurement of utility use in individual units through a building-owned meter that is installed for each unit. Submeters are owned by the building, not by the utility company. This allows the building to continue purchasing its utility at the cheaper, commercial bulk rate, but each individual unit is billed directly by the utility company based on consumption. This strategy is very effective in reducing utility costs by encouraging individual conservation and ultimately increasing property value.In the event of an increase in utility costs, residents are more likely to accept an increased bill for a utility whereas an increase in rent to cover these costs is often perceived as the property management company trying to profit from residents.Alternate energy sources such as the use of solar panels may be seen with greater frequency in the future. Some utility companies do offer programs that involve the use of alternate energy sources to make properties more environmentally friendly and cut costs. However, many of these programs lack sufficient funding. In the current market, property managers are unlikely to participate in these programs without the promise of a guaranteed return.As an industry, property managers are looking to each other to help weather the storm of the economic downturn. Rather than focusing only on the bottom line, many are looking to like communities to compare utility costs and what is driving them to determine the best practices for managing costs without increasing rents. Organizations such as the California Utility Billing Services (CUBS) can help companies such as Western National Property Management and others make these comparisons and help managers implement allocation formulas and submetering programs to prepare and provide bills for residents that can remove that highly variable expense from the property overhead. This helps keep rents stable, increase conservation and provides residents with a direct influence over one of their living costs.