Multifamily Takes Benchmarking’s Measure
- Sep 27, 2018
When savvy landlords talk about ways to cut costs and improve net operating income, they’re likely to cite a familiar adage: You can’t manage what you don’t measure.
That, too, sums up the argument for tracking a property’s water and energy consumption. Indeed, benchmarking is implemented widely, if not yet universally, as a key to strategy for operating communities efficiently and maximizing cash flow.
“It’s a great opportunity for data beyond anything we see in the market,” said Peter Giles, vice president of production and sales at Freddie Mac Multifamily. “It’s the opportunity to understand if improvements—new windows, insulation, thermostats, low-flow toilets and aerators—actually save as much as we anticipate. Ultimately what we really want to understand is if that’s helping tenants reduce costs. In the world today, with tepid or stagnant income and increasing rents, we’re looking for ways that a tenant can save money.”
As with other aspects of asset management, though, the trends that are shaping the practice continue to evolve, challenging the industry to keep up.
For some multifamily operators, satisfying GSE loan covenants is a major motivation. Local ordinances are an influence, as well; a still small but noteworthy number of cities, including some major municipalities, now require residential and commercial property owners to document energy use. Still another subset of operators has adopted the practice because those companies consider it smart business.
Yet recent research offers compelling evidence that the majority of multifamily operators have yet to embrace the practice and are missing out on its benefits.
By the Numbers
A telling study released in June 2018 by the Institute for Real Estate Management (IREM) details the long distance that the multifamily industry must still travel. According to IREM, the multifamily sector lags considerably behind the commercial sector in benchmarking energy use; nearly three quarters of commercial respondents they benchmark (73.4 percent) but less than half of multifamily stakeholders surveyed (48.4 percent). As a result, the study concludes, “large pockets of buildings lag behind the leaders and face significant barriers to reaping the benefits of energy efficiency.”
A growing body of evidence suggests that benchmarking can yield significant savings. As long ago as 2012, Fannie Mae reported that the most efficient multifamily communities use less than one third as much energy and one-sixth as much water as the least efficiently operated.
And buildings consistently benchmarked in ENERGY STAR Portfolio Manager reduced energy consumption by an average of 2.4 percent per year over a three-year period, according to the U.S. Environmental Protection Agency.
Among the national firms that routinely evaluate the performance of individual assets and compares them to others in its portfolio is Gables Residential. “We benchmark because of loans and compliance with municipal benchmarking ordinances, but we’re also doing it because sustainability is a core value of Gables,” explained Juliette Apicella, director of sustainability for the Atlanta-based company. “It’s a way for us to measure our buildings from a sustainability perspective, and also helps to inform our financial decisions.”
In 2016, Gables set a goal to reduce energy, water, greenhouse gases and waste 10 percent by 2020. Since then, the firm has reduced its energy use by 6.62 percent. One example: At Gables Sheridan, a 329-unit community in Atlanta, the firm was able to reduce its energy spend 11 percent year-over-year, which translated into an $8,815 savings. Energy use was reduced by 77,587 kilowatt-hours, with the savings attributed to lighting improvements. By benchmarking its portfolio, Gables identifies savings opportunities, prioritizes assets for those opportunities and analyze the effectiveness of those investments, Apicella said. “Understanding how assets are performing is key to managing costs and improving net operating income.”
A major impetus for benchmarking is the GSEs, which mandate the exercise for some of their finance programs. Freddie Mac, for example, requires benchmarking under its Green Up and Green Up Plus loans.
Borrowers receive a “green assessment” from a third-party vendor prior to rate-lock. That report contains recommendations on improvements that can achieve energy and/or water savings. To qualify for the financing, borrowers commit to making improvements that will reduce energy or water consumption by at least 25 percent. Borrowers must provide Freddie Mac with benchmarking data through Portfolio Manager, the U.S. Environmental Protection Agency’s online measurement tool. After the loan closes, the borrower then continues to report for four years after the loan closes.
Des Moines, Iowa-based BH Management Services, which owns or manages nearly 82,000 units in 21 states, currently benchmarks 74 of its properties, 31 of which are in Freddie Mac’s green program. Participation in the program provided an initial push to track consumption better and more regularly, reported Joanna Zabriskie, the firm’s president. “However, we are starting to track energy usage through our utility billing service vendor, which alerts us to anomalies in bills that could be attributed to leaks or malfunctioning equipment,” she added. “We are now tracking projects both in and out of the green program.”
Earlier this year, BH upgraded the 642 units at Silverbrook Apartments in Grand Prairie, Texas, with new bathroom faucets, showerheads and windows. The energy-efficient improvements will save an estimated $365,000 and more than 35 million gallons of water annually.
A handful of cities require benchmarking for properties exceeding a specified size. According to Fannie Mae, 17 jurisdictions mandate the exercise, among them Atlanta, Chicago and Denver.
That’s why The Schochet Cos., based in Braintree, Mass., is benchmarking its communities in Boston and Cambridge, Mass. “We already collect the data anyway, so we run it into Portfolio Manager and export it to send it to the two cities who want the data,” said Peter Lewis, Schochet’s vice president of property management at the Braintree, Mass.-based company.
Lewis notes that benchmarking hasn’t really helped him cut expenses at the Boston and Cambridge properties because the annual data is already old by the time it’s accumulated. “You’ve got to look at it more than once a year—not necessarily from a compliance reporting standpoint but from your own operational standards to make sure that nothing is out of control,” he contends.
Still, many industry executives feel that the data accumulated from benchmarking is valuable—and essential to peak performance.
“Benchmarking is just good property management,” said Eileen Lee, vice president for energy and environmental policy at the National Multifamily Housing Council. “Managing utility expenses, which are the largest expenses a property faces after debt service, just makes plain good sense.”