With large-scale data center development bringing major new investment into Central PA, one thing is becoming clear: demand for electricity and water is increasing. Many owners are concerned that this added demand will push utility costs higher going forward.
These data centers bring jobs and significant investment into the local economy, which is a positive for local real estate investors overall — but competition for power capacity, sites, and zoning is heating up alongside it.
One of the best things a real estate investor can do right now is protect themselves from rising utility costs, which are likely to climb as development at this scale puts new pressure on the region’s infrastructure.
Here are some suggestions to help manage your utility costs.
Remember that landlords cannot profit off the difference between utility costs and what they charge a tenant, but passing on and/or reducing these costs benefits both owner and tenant. With utility costs making up 10-18% of the average apartment building’s operating expenses, smart investors will focus here to reduce and stabilize this ongoing line item.
1. Electric
It’s standard for most tenants to pay their own electric. However, there are some avenues of benefit for owners here:
- Solar: while solar investment credits are expected to phase out over the next few years, there’s currently a window of opportunity for landlords to claim the Commercial Investment Tax Credit for installing solar panels on their buildings.
- While most apartment buildings have meters where tenants pay the utility provider directly, the electric used for common areas, laundry rooms, and parking lot lighting can add up.
- Thanks to the 30% Investment Tax Credit, landlords can take the credit, take accelerated 100% bonus depreciation, and benefit from a substantial tax incentive.
- What makes this work financially is net metering in PA and MD, which permits solar generation by property owners, with any excess supply sold back to the grid at retail rates.
- Example: on a $100,000 system, a 30% ITC is $30,000, bringing the adjusted depreciable basis to $85,000 ($100,000 minus 50% of the credit). If eligible for bonus depreciation, that’s an $85,000 deduction — potentially up to $115,000 of total tax benefit in the first year alone when you combine the credit and deduction.
2. Gas
Most landlord gas costs come from hot water heating, or overall building heating if the property has common heat.
For common heat: focus on reducing heating use by sealing air leaks around windows and doors, installing a smart thermostat, and insulating pipes for hot water heat systems. Make sure HVAC equipment meets a modern efficiency standard and is serviced regularly.
For hot water: insulate water heaters and the piping that carries hot water, replace old water heaters (gas models are more efficient), and install low-flow faucet heads in showers and sinks.
3. Water and Sewer
Water and sewer rates vary widely by municipality and metering method.
Water: since water charges are based directly on gallons used, decreasing usage is the easiest way to reduce this cost. Toilets are one of the largest culprits of water use, so replace with newer, lower-flow models. Install low-flow shower and sink heads. If you have a common laundry room, invest in newer machines that use less water and can sense load size to adjust usage. With today’s technology, wireless water submeters can monitor tenant water use, support a RUBS program to bill it back appropriately, and alert you to leaks.
Sewer: some municipalities charge a flat fee per unit for sewer use; others charge based on water usage if both utilities are municipally owned. In the latter case, reducing water usage directly reduces sewer cost too — a win-win.
4. Trash
Some municipalities require a contracted waste hauler for a building. Others allow an open market only for commercial classification — if you own apartments of 5+ units, verify whether you’re permitted to shop for service, since a competitive quote can meaningfully reduce cost.
For smaller apartments, some municipalities allow tenants to pay their trash service directly. Alternately, you can build the cost into ongoing rent.
Conclusion
Utilities can seem like a boring subject, but conserving these resources will become even more important for multifamily owners as the cost of basic services continues to climb amid inflation and growing regional demand.
Consider these conservation measures to enhance your return and stay on top of the best cash flow ratio for your asset. Many clients we work with appreciate the in-depth knowledge we provide to help them find profitable investments. If you’re looking to grow your portfolio, contact us today to discuss your strategic plan.
