Summary

In 2019, landlords on average recovered 91% of their utility costs by submetering tenants. In 2020, that recovery rate is down to 63%
March was the low point, with only 53% of utilities recovered from tenants
As would be expected, there are significant differences between market types, building size and tenant types

In addition to rent collection, commercial real estate landlords are often billed by the utility for the total consumption of the building and “submeter” their tenants to recover those costs.

In a time where cash flows are of utmost importance, this is money going out the door each month in the form of utility bills that are not being recovered at the same rate as prior to the pandemic. This is critical because unoccupied buildings still require tens or hundreds of thousands of dollars in electricity, water, and gas each month.

In normal times, landlords would aim to capture 100% of these costs by billing based on individual consumption and use of common loads. Depending on the local regulations, some landlords had even turned this process into a profit center by capturing more than 100% of the costs they were paying.

Enertiv analyzed submetering recovery across 6,391 tenants in a variety of markets, utility regions, and building sizes to understand how this critical source of expense recovery has been affected by COVID-19.

The top-line numbers are clear. In 2019, landlords recovered 91% of their utility costs from tenants, so far in 2020, that figure has plummeted to 63%. March was the low point, with only 53% of costs recovered from tenants. But, like most analyses of commercial real estate, the story differs significantly when broken down into individual markets.

Market Type

Properties in Tier I markets (New York, San Francisco, etc.) are generally more sophisticated than those in Tier II markets (Philadelphia, San Diego, etc.). This plays out in numerous ways, from the utility rates they’re able to negotiate, to the sophistication of the leases, to the technology used for more sophisticated strategies like overtime HVAC billing. Tenants in Tier I cities also tend to have better financials and more cash on hand to weather storms.

At the end of the day, this has translated to Tier I properties, on average, being able to recover more than they pay out in utility costs. In 2019, this was by a healthy margin, with submetering recovery rates averaging 110% across Tier I assets. COVID-19 has decreased this number, but so far only to 102% in 2020.

The story is very different in Tier II cities, which had lower baseline and have been hit much harder by COVID-19.

In 2019, Tier II assets recovered 84% of their utility costs from tenants. Despite being below 100%, this is not bad considering that tenant activity generally takes up around 70 to 80% of the total building consumption.

Unfortunately, 2020 has been very challenging for Tier II assets. On average, these assets have only recovered 57% of all utility costs, dipping as low as 46% in March.

Tenant Type

While broad conclusions can be drawn by comparing Tier I and Tier II assets, it’s important to look at the underlying tenant industries to tease out novel insights into the health of the market.

The first and most obvious place to look is retail, which has been hammered by the economic and societal changes caused by COVID-19. Surprisingly, the picture is better than may be expected. In 2019, properties with retail tenants recovered 101% of their costs, in 2020, that number has fallen to 77%. While still a significant drop, it is much better than the 20% of rents paid from retail tenants that some landlords are reporting.

Recovery rates from office tenants have fallen to around the same place as retail, albeit a smaller drop from a higher baseline.

In 2019, properties with office tenants recovered the industry average of 91% of their utility costs from tenants. In 2020, that number fell 13 percentage points to 78%.

Finally, it’s important to study a tenant type that is poised to benefit from the COVID-19 crisis. Properties with data center tenants did not see any fall off in submetering recovery rate from 2019 to 2020. In fact, recovery rates slightly increased, from 82% to 83%.

Number of Tenants

Another dimension to look at submetering recovery rates is by the number of tenants in a building. Although buildings of all sizes took hits in 2020, on average, buildings with more tenants had higher overall recovery rates.

The group with the most tenants, defined as 40 or more per building, recovered an impressive 120% of their utility costs from tenants in 2020. That number has fallen significantly to 75%.

Properties with 20 or fewer tenants also saw a large drop, but from a much lower baseline. In 2019, these properties recovered 84% of their utility costs from tenants. So far in 2020, they have captured only 63%.

Conclusion

As rough as some of these numbers may be, they likely represent the higher end for the industry more broadly. That is because these are derived from properties that have adopted technology to streamline their meter reading and billing processes.

By digitizing their processes, they have created transparency into recovery rates that isn’t possible in the majority of buildings that still rely on paper-based records and manual billing.

In the era of COVID-19, upgrading a metering infrastructure to support remote digital readings is difficult or impossible. However, this shouldn’t be a deterrent to adopting technology to streamline processes, issue bills faster, and track recovery rates in real time.

The easiest way to achieve this is with mobile meter reading apps connected to billing software, which in turn is integrated into accounting and property management systems. Instead of writing numbers on a clipboard, transcribing those into a software, and ending up with records in a filing cabinet, an app can read the meter based on a picture and upload it to the cloud where bills can be generated automatically and transformed into analytics.

You can automate your tenant submetering before next billing period. Schedule a demo today to see how.