Tag: energy costs

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The Effect of Energy Cost Cuts on Property Values


Cutting energy costs has many benefits, not the least of which is increasing property values.  The example below shows the effects on property values for a $10,000 cut in energy costs.  If you consider that many properties can have their costs cut by some multiple of that figure, it’s clear that building (or business) valuations can be increased a great deal.

Investment Payback Considerations

For anyone considering the possibility of selling their property or business, the valuation should be factored into the payback equation.  That is, even if a sale were contemplated for as little as one year out, an investment in energy cost cutting technology can make good sense even though the investment exceeds the returns on energy savings in that first year.  That’s because the investment is not just lowering annual expenses, it’s also increasing the valuation by some multiple of that expense reduction. In other words, the investment results in a positive net present value.

Property Taxes

Another benefit of cutting energy costs is that the benefits over costs go directly to the bottom line.  There should be little to no effect on property taxes because the added property valuation from the cost cuts would not be seen until the building or business is sold.  In the meantime, energy cost savings accrue for the entire time that the asset upgrade is in place.

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Cutting Energy Costs to Avoid Reverse Compounding

Energy use remains a low-hanging fruit for cutting costs. For many buildings, energy cost cuts of 10-50% are easily achievable. Energy costs are the single largest expense for some buildings, meaning that cutting energy costs can have an outsized impact on a building owner’s cost structure.

By not cutting energy costs where they can, and as soon as they can, building owners incur a reverse compounding (or negative compounding) of that opportunity. The chart below shows the effect of savings lost as if it were an expense. In this example we look at $10,000 in initial energy costs, 5 levels of savings, and the opportunity costs for not taking those savings compounded at 5%.

Reverse (Negative) Compounding

Multifamily building owners, managers, and tenants all benefit when energy costs are reduced. And cost cuts are both desirable and necessary. Competition in the multifamily sector is increasing. The total number of multifamily housing units increased by 587,000 units last year (2017), the most since 1971. That increased supply ripples across the housing markets, and puts pressure on every owner and manager, whether they be condo owners, multifamily REITs, municipal housing authorities, or direct investors.

The opportunity to cut costs is greatest for those paying the energy bills. Many building owners have already made changes to lighting, and perhaps upgraded to more efficient boilers and chillers. Others have entered into contracts that shave costs from their energy suppliers. There remain many others who don’t have the capital to invest in necessary upgrades. Fortunately, for all of these groups, the biggest opportunities for cost cuts remain. These opportunities are made possible through the application of innovative technologies.

Opportunities for significant cost savings are present whether a building has central heating and cooling, pays variable time-of-day energy rates, includes heating in rent, and more. When the scale of the savings opportunity is large, as it usually is, a solution can usually be found that’s suitable for almost any building.
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