Data

Decisions at many real estate development firms are largely guided by intuition, but the future is data analysis…STOP me if this sounds familiar. We are constantly bombarded with headlines about how data analysis will fundamentally change the real estate industry. If these articles provide an example at all, they describe a predictive algorithm developed through “machine learning” (cue eye roll) that identifies patterns from seemingly unrelated sources of data. Before taking Professor Tim Savage’s Real Estate Analytics course your eyes might glaze over but after the course you realize that the techniques employed are a relatively straightforward application of common statistical analysis. But there is still the problem of accessing the required data; at least until the commercial real estate industry realizes that we can gain far more insight by open sourcing the data then hoarding it. In the meantime, there are several opportunities to gain valuable and actionable insight with a little bit of knowledge and a little bit of data.

On Long Island almost all new apartments are built with gas furnaces/boilers and hot water heaters. The widely held belief is the monthly utility costs for tenants are considerably lower for gas utilities than for electric. Therefore, the considerable cost of running gas piping to each of the units, is necessary to achieve higher rents and lower vacancy rates. But given the large potential savings on construction costs (in this case $2 Million), I decided to further investigate the issue. As an engineer, I suspected the difference in utility costs were closer than most people believed due to the increase in efficiency in the building envelope, electric heating, and hot water heaters, but even I was surprised by the results.

I collected the average monthly gas and electric bills over the last year for two apartment complexes directly from the utility providers. The first apartment complex utilized a gas boiler to provide heat and hot water and the second apartment complex utilized electric heat and hot water systems.

	Apartment Complex 1	Apartment Complex 2
	Gas & Electric	Electric
Year Built	2014	2017
Heat	Gas: Hydronic forced hot air fed by gas hot water heater	PTAC (heat pump)
A/C	Condensing unit on roof	PTAC (heat pump)
Heat & A/C Control	Single zone smart thermostat	Multi zone smart thermostat
Hot Water	Gas hot water heater	Electric hot water heater
Cooking Range	Electric	Electric
Average 1-Bed/2-Bed Size	825 SF / 1,125 SF	850 SF / 1,300 SF
Number of data points	199	76

The results below show that the average total monthly utility bills for the electric-only apartment complex were lower than the apartments that have gas heat and hot water.

	Apartment Complex 1	Apartment Complex 2
	Gas & Electric	Electric
Average Total Utility Costs (gas + electric)	$162.73	$139.32
99% Confidence Interval	$156.52 – $168.94	$125.91 – $152.72

Before the letters start pouring in, I am not suggesting that electric heating is more energy-efficient than gas. In fact, when comparing the HVAC and hot water systems it is clear those installed in Apartment Complex 2 (electric only) are less energy efficient. But the data shows that the utility bills are lower for the all-electric apartment complex despite having larger unit sizes.

It is difficult to identify conclusive explanations for the lower utility bills for a number of reasons. First, privacy laws restrict the utility companies to provide an average monthly bill (averaged over the last 12 months) instead of actual monthly usage. Secondly, the large range in utility costs for similar size apartments show that user behavior is a major and highly variable factor in utility use. However, a preliminary analysis leads me to believe the difference in total utility bills is driven by (1) Gas providers basic service charge, (2) HVAC controls, and (3) the rate structure for electricity.

First, both electric and gas utility providers charge a “basic service charge” regardless of your gas or electricity usage. This means that regardless of how much, or if any gas/electricity was used, the utility provider charges a monthly fee (Gas: ~$23/month; Electricity: ~$14/month). While the gas HVAC system is more efficient, enough gas needs to be consumed to overcome this additional fixed cost before any savings are realized. This threshold is met during a few of the winter months, but the majority of the year not enough gas is used to overcome the basic service charge. As a result, any savings in the winter months are offset by the higher operating costs the rest of the year.

Secondly, the all-electric complex gains considerable efficiency through the use of multiple heating/cooling zones and the Nest thermostat system. In every apartment there is a separate PTAC unit for the great room (living, dining, kitchen) and each bedroom connected to a Nest thermostat. To approximate the effect on efficiency of multiple heating/cooling zones, I pulled the temperature data recorded every 15-minutes by the Nest thermostat in each room for a few sample apartments. Analysis of this data showed that roughly a third of the time one of the PTAC units was not running. Essentially, on average, only a third of the time tenants are heating or cooling a portion of the apartment. This dramatically increases the efficiency of the HVAC system.

Lastly, the electrical utility provider significantly decreases the price per kWh (-55.4%) from Oct 1 – May 1^st above a certain usage for apartments that use electrical heating units. This significantly reduces the operating cost for the electrical HVAC system.

Regardless of the accuracy of the analysis of the driving forces behind the difference in utility bills, the data clearly shows that the average total utility bills for the electric-only apartment complex are lower. As a result, the next project under development should consider switching from gas to electric systems which, in this case, will save approximately $2M on construction costs.

As you can see, a little bit of data analysis can lead to valuable and actionable insights. Although big data has yet to fulfill its big promises of revolutionizing the real estate industry, forward-looking organizations are able to find ways to harness the data that is currently available to make better decisions.