Buildings Cut Operating Costs
By MOTOKO RICH
Staff Reporter of THE WALL STREET JOURNAL
08/27/2002 - When drawing up an operating budget for an
office building, the biggest cost is electricity.
Now, deregulation of the power industry has provided building
owners and managers with a way to cut those bills, which
can represent as much as 30% of a property's operating costs.
A growing number of property managers and power brokers
are offering building owners the opportunity to save money
by teaming up with other landlords to attract bids from
alternative energy suppliers to bring power to their buildings.
In one example, Grubb & Ellis Co., the New York-based
real-estate-services company, pulled together a portfolio
of 17 buildings representing eight million square feet of
office space in New York City. Grubb & Ellis took the
portfolio to World Energy Solutions Inc., a Worcester, Mass.-based
energy broker, which ran an auction among six energy suppliers
that wanted the business.
World Energy, which says it runs energy auctions for various
agencies of the federal government as well as companies
with large portfolios like Ford Motor Co. and Philip Morris
Cos., asked suppliers in the auction to offer bids for the
entire portfolio and for each building separately. World
Energy also asked the bidders to structure bids reflecting
how some of the buildings consumed a lot of energy during
peak-demand periods while others consumed less. That way,
building owners could compare which approach would be most
cost effective -- banding all together, or in groups according
to peak usage.
In May, Con Edison Solutions, a unit of Consolidated Edison
Inc., won a bid to supply power to the five buildings that
consumed higher levels of power during peak periods, while
Select Energy, the marketing unit of Northeast Utilities,
won the bid to supply electricity to the 12 that consume
less at peak times.
John Poblocki, who heads up Grubb & Ellis's property-management
division for New York and Long Island, says the new contracts
will save the building owners about 10% on their electricity
bills. For the 12 months ended May 31, the 17 buildings
paid a total of $33 million for electricity. Under the new
contract, they will save about $3 million as a group. The
five buildings with higher levels of peak usage will save
$1.4 million, or about 20%. The 12 buildings with lower
peak usage will save about $1.6 million, or 7.5%.
Sue Dennis, executive director of the Interchurch Center,
a 20-story building that houses 80 nonprofit tenants, says
the new contract, which carries fixed rates for 12 months,
should help her building avoid the peaks in power prices
that hit its budget last year. "There was one month
where our utilities were about 40% over budget," says
Ms. Dennis, whose building is in the group that uses less
energy in peak periods.
While aggregation can help building owners get better deals,
some industry experts warn that buildings with good "load
profiles" -- those that don't have spikes in demand
during more expensive times of the day -- might end up subsidizing
buildings that do have such spikes. "If you run a particularly
efficient building, you might be able to get a rate on your
own that is better than a group rate," says Jerry Burin,
vice president of Sieben Energy Associates, an energy-management
consulting firm in Chicago.
Strategic Energy LLC, a Pittsburgh-based electricity retailer
that buys power on the wholesale market and resells it to
users, says it can help customers save 2% to 15% off their
average utility costs. Alex Galatic, director of marketing
for Strategic Energy, says one of the advantages of pooling
buildings is that building owners and managers lack the
time to research all their energy options in a deregulating
market. "You can pool your resources and be better
informed," he says. "You're mitigating your risk
of making a bad decision by pooling together with others
in a similar situation as you."
What's Intrinsic Value?
Last week's Building Value column prompted readers to ask
how Reis Inc. calculates the so-called intrinsic value of
apartment and office properties.
Geoffrey Rubin, the firm's vice president of economic research,
says first his firm estimates the future cash flow for about
100,000 apartment and office properties using data from
property owners and managers and forecasts of market and
submarket conditions in 50 U.S. metropolitan areas. Reis
then calculates a discount rate for each of those markets,
a figure arrived at by a complicated calculation, but which
basically quantifies the difference between future cash
flow generated by a property and what investors should be
willing to pay for the asset today. Next, the firm adds
1 to the discount rate and then divides future cash flow
by that number to produce the intrinsic value, for a single
property or a given market.
Updated August 28, 2002
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