Property managers tightly controlled operating expenses throughout 2009, according to the 2010 Experience Exchange Report (EER) released by the Building Owners and Managers Association (BOMA) International in collaboration with Kingsley Associates. Analysis of operating income and expense data from “same buildings”—those who submitted data in both 2009 and 2010, whose total rentable area did not change by more than 10% and whose occupancy did not change by more than 15%—reveals that total operating expenses for U.S. private sector buildings declined by a little more than 1%.
The decrease in total operating expenses illustrates what commercial real estate managers noted all year: there is considerable pressure to reduce operating expenses and maintain strong net operating income. Rental income for all U.S. private sector buildings increased marginally, up 1% in 2009. For U.S. private sector downtown buildings, rental income increased 2.5% in 2009.
With data from 4,200 buildings in more than 250 markets, the EER® is the most comprehensive resource for financial performance information on private and public office buildings in the U.S. and Canada. It includes national trends analysis and city market-level reports, as well as reports for special use facilities such as medical office buildings, corporate facilities, financial buildings, agency managed and all electric buildings.
“The recession has slowed the volume of sale transactions, placing tremendous importance on maximizing both asset value and net operating income through effective day-to-day management of buildings,” commented BOMA International Chair Ray H. Mackey, Jr., RPA, CPM, CCIM, partner and chief operating officer, Stream Realty Partners, L.P.
Additional analysis of the two year “same building” sample reveals the following trends in office buildings’ financial performance:
- Control of utility expenses remains a high priority for most management teams. For U.S. private sector suburban buildings, utilities expenses decreased 9.6% during 2009, from $2.49 per square foot (psf) to $2.25 psf. In U.S. private sector downtown buildings, utilities expenses decreased 4.4%, from $2.48 psf to $2.37 psf.
- Fixed expenses, including real estate taxes, continue to climb. For U.S. private sector downtown buildings, fixed expenses increased from $4.50 psf to $4.65 psf, a 3.3% increase. The jump likely reflects an increase in real estate taxes, which constitute the largest share of the fixed expenses category. Suburban buildings, however, only experienced a 1¢ increase in fixed expenses, from $3.09 psf in 2008 to $3.10 psf in 2009.
- For U.S. private sector downtown buildings, office rental income increased 2.5%, from $25.96 psf in 2008 to $26.62 psf in 2009, though total income dropped 1.3%, from $28.42 psf in 2008 to $28.04 psf in 2009.
- For U.S. private sector buildings, retail rent increased 21.7%, from $17.65 psf in 2008 to $21.48 in 2009. Retail occupancy for all U.S. private sector buildings dropped 1.3%. For downtown properties, it decreased just 0.3%. Suburban properties saw a more significant drop in retail occupancy, a decrease of more than 10%.
- Despite gains in retail rent, miscellaneous income dropped 11%, from $1.55 psf in 2008 to $1.38 psf in 2009. The drop in miscellaneous income may be due to a drop off in retail sales, as miscellaneous income includes retail income as a percentage rent from retail sales as well as gross parking income; tenant service income; and other income from such sources as vending machines, signage, late charges, health club, etc.
For all U.S. private sector buildings, fixed expenses, the largest portion of which consists of real estate taxes, have consistently been the largest percentage of total expenses (35% in 2009). Utilities were the second largest portion of total expenses (19% of expenses in 2009).
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