An asset manager of a large office REIT wants to reduce operating costs. Essentially, there are three approaches to pinpointing areas ripe for cost-savings: comparing performance against budget forecasts, against historical performance, or against a group average. The first two of these are straightforward enough. The third, making peer comparisons, is not always so simple. However, the benefits gained from analyzing peer performance can be tremendous.
Why is peer comparison so useful? The asset manager reviewing the REIT’s portfolio holdings may find a target property is performing in line with budget forecasts and historical performance. However, when using benchmark data to compare an office complex against similar buildings in the local market, the asset manager discovers the asset’s landscaping costs are above average. That peer-to-peer comparison provides extra intelligence on potential improvements in operations expenses that could translate into considerable value creation.
Digging deeper into data
Asset managers typically need to roll up costs into broader categories in order to make accurate comparisons to market, such as lumping all HVAC contracts, elevators, structural/roofing and electrical into a single maintenance category. While this simplifies reporting on a building’s total maintenance costs, it complicates apples-to-apples expense comparison. Asset managers cannot clearly see why one building’s operations expenses exceed a similar asset’s.
To find opportunities to enhance asset value, managers must be able to dig deeper into their data. This means data must be normalized to a standard chart of accounts and broken down to make it easier to uncover why maintenance costs at one building are significantly different from other buildings in the same portfolio, metro, or national asset class.
For example, let’s compare two multifamily assets located in similar markets with comparable size and number of units. Normalized to a standard chart of accounts, the comparison demonstrates their overall maintenance costs are in line with local market rates, yet drilling down further reveals HVAC contracts for one asset cost two percent more than at the other company. If you’re looking to cut operating expenses, this could be a signal to re-evaluate your vendor management strategy.
Understanding geographic markets
Comparing assets against similar assets in the same regional market deepens an asset manager’s understanding of portfolio performance. The regional market plays a role in an asset’s expenses. Similar buildings classes could have different expense line items based on the region. There’s no budget for snow removal for Miami. Other market drivers, like population growth or unemployment rates, affect performance. A local skilled labor shortage may impact costs in roofing or electrical for all properties in that market area. National data sets, as found from industry-leading organizations like BOMA, show what is happening on a macroeconomic level.
Conducting a peer-to-peer analysis of properties according to their geographic market is one way to set prices, but so is comparing against other similar markets. Two cities may not be exactly the same, but their characteristics can be similar enough to benchmark prices across markets.
Internal vs External Data
When we look at assets that are similar in size, location, and other relevant factors, outliers become obvious. The larger your portfolio, the more internal data you have for finding which vendors offer the best value for their services. When a national REIT used Waypoint to benchmark data on similar properties in Phoenix and Denver, they discovered the same type of cleaning services in one market was more expensive than the other. They used this data to negotiate for a bulk discount from the better vendor that reduced operations expenses and generated $200,000 in total cost savings for the year.
External data informs an asset manager whether they are paying competitive market rates for ongoing services. Additionally, this information assists with vendor procurement. If you know the going rate for office security in a given area is $0.05-$0.10 per square foot (PSF), the bids you receive should align with that data.
Using Data to Reduce Operating Expenses
Armed with the right information, asset managers can easily optimize their portfolio performance. Normalizing data for peer comparisons paints a clearer picture of the specific operating expense accounts to target.
As we discuss in our e-book Optimizing Vendor Management, peer-to-peer comparisons can help you find the best services for the best value. Download this free resource on best practices on using data for better vendor management.
Waypoint’s performance management software enables you to dynamically compare property expenses against other buildings of the same asset class, in specific geographic markets, using both internal and external data.