Inflation, supply chain breakdowns, lower occupancy, soaring energy costs: Commercial property managers are facing no shortage of challenges. As such, the implementation of cost-cutting and expense-reducing measures in management operations, wherever they can be found, are taking on new urgency.
Focus on Energy
At a time when occupancy remains lower at many commercial properties than it was before the pandemic, the opportunity is ripe for curtailing energy expenditures. Renewable and sustainable solutions are proven to lower energy costs across the board, a major consideration amid rising prices of non-renewable sources. The key system to focus on is heating, ventilation and air conditioning systems (HVAC).
“Ensure [that] your short-, mid- and long-term capital plans include equipment retrofits that will reduce energy expenses,” Cary Fronstin, director of property management operations at Foundry Commercial, told Commercial Property Executive. “Even if the upfront costs are higher, most managers are making minor adjustments where they can and [are] paying attention to energy reduction.”
Especially in light of the firm’s commitment to ESG, paying close attention to building controls and investing in energy-efficient heating, ventilation and air conditioning equipment is an effective way to cut expenses, he added.
MacKenzie Management Co. constantly monitors energy expenditures at the properties it oversees, a valuable exercise as energy bills rise and occupancy at some properties is declining. “We look at it every single day, in buildings where we control the energy used through HVAC system,” Brendan Gill, the company’s president, told CPE. “You can start to compare that across different buildings where you are spending money; that measurement is really important.”
As some of MacKenzie’s office properties experience lower occupancy, it presents an opportunity for prudent, effective cost-cutting. “We invest a lot of money with a lot of landlords to control HVAC output; we were constantly dialing it back when it was appropriate, [while] keeping the tenants who are occupying the space comfortable.” The result, he reports, was a significant reduction in costs for properties where HVAC was under MacKenzie’s control.
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Another aspect of energy savings that MacKenzie has adopted, taking into account the state of supply chains, is HVAC equipment. Instead of switching out units that need to be repaired or replaced, MacKenzie has taken to keeping spare parts on hand and using them when they are needed. “Even though the unit itself may be replaced, we can keep some stock shelf, that may service an old computer board that needs to be custom-manufactured,” Gill said. “Because of supply chain issues, we can use an old piece of that equipment to keep it going, while we order the final replacement for it.”
Measure and manage
The same analytical approach to saving on energy-related costs can also apply to the finances themselves. This idea does not encompass one specific strategy so much as it does a willingness to dig deep and find where specific costs can be reduced, and what a manager may be spending more money on than they need to be. Fronstin cited building services as a major measure of cost reduction, with Foundry seeking to “find the best possible services at the best possible price; bidding service contracts typically helps accomplish that.”
This analytical approach to saving energy costs applies to finances, as well. Digging deep and identifying items are generating bigger spend than necessary are the keys. Fronstin cited building services as a major target, with Foundry aiming for “the best possible services at the best possible price. Bidding service contracts typically helps accomplish that.”
Foundry handles taxes and insurance costs similarly. The firm stays in close touch with its tax consultants to make sure they appeal assessments aggressively, Frontsin notes. Adding properties to Foundry’s consolidated insurance pool helps, as well.
In keeping with the mantra, “If you can’t measure something, you can’t manage it,” constantly evaluating operating costs is a vital exercise. “We’re really on top of creating an operating budget and creating financial statements with absolute regularity every month,” Gill noted, “so we can look at all the line items almost in real time and see where we can make tweaks.”
Often, those tweaks can be made to everyday management functions. “We met with our janitorial company to figure out if everybody is going to be in two days a week versus five days,” he said. “Without full occupancy you don’t need as big a janitorial load.” At some buildings, MacKenzie has also taken advantage of reduced occupancy in some buildings to make key repairs, including more than a dozen elevator modernizations.
Striking a balance
In the context of the economic horizon, it may be tempting to cut costs all at once across operations. Yet by taking such a step, managers risk harming both the bottom line and tenant service.
“Never stop seeking ways to reduce expenses, but always ensure the tenant experience isn’t impacted,” Fronstin cautioned. Similar to planning for emergencies, operating expense reduction planning needs to take place in advance. “Not everything has to be implemented all at once, but you need to be ready for the extremes if needed,” Fronstin noted.
For his part, Gill calls cost reduction a kind of “art form,” a balance between “limiting some services because it makes sense, and not disappointing your tenants.”