Office Operating Income, Costs Relatively Unchanged: IREM  Report

Total collections for suburban office complexes nationwide in 2007 dipped less than 1 percent from 2006 levels to $19.31 per square foot of net rentable area, whereas those for downtown properties increased 3.1 percent to $19.85 per square foot. Total actual collections for downtown properties were 2.8 percent more last year than their suburban counterparts, according to the 2008 edition of the Income/Expense Analysis: Office Buildings, a new benchmarking study published by the Institute of Real Estate Management (IREM).The annual report analyzed operating income and costs for 1,549 private-sector office complexes–some containing multiple buildings–in major metropolitan areas and regions in the United States.Total operating costs for suburban buildings in 2007 rose just 2.1 percent from the prior year to $8.47 per square foot, while operating costs for downtown properties increased 6.6 percent to $9.43 per square foot of rentable area. Nationally, net operating costs for suburban buildings increased a slight 2.8 percent to $6.19 per square foot in 2007 vs. 2006, whereas those for downtown properties increased 3.9 percent to $6.90 per square foot.All major expense categories for suburban properties rose last year except for janitorial/maintenance costs, which remained the same. Insurance costs saw the largest increase, 7.7 percent, followed by real estate and other taxes, up 4.7 percent, utility costs up 3.1 percent, and administration/benefits costs up a slight 0.9 percent. Similarly, all major expense categories for downtown properties increased except for insurance costs, which remained the same. Utility costs increased 3.4 percent in 2007 vs. 2006, janitorial/maintenance costs increased 2.8 percent, and administrative/benefits costs increased 1.8 percent.Focusing again on major expense categories, but as a percentage of total operating costs, the IREM study revealed that suburban properties spent 24.9 percent of their operating budget on janitorial/maintenance services, 23.8 percent on utility costs, 23.5 percent on real estate and other taxes, 13.2 percent on insurance services, and 12.9 percent on administrative/benefits costs. Similarly, expenditures for janitorial/maintenance services accounted for the largest chunk of downtown properties’ operating budgets, 26.9 percent, followed by 24.7 percent spent on real estate and other taxes, 22.7 percent spent on utilities, 12.7 percent spent on insurance services, and 12.2 percent spent on administrative/benefits. Overall, suburban properties proved 10.2 percent less costly to operate in 2007 than their downtown counterparts as all expense categories were less than those experienced by downtown buildings. The national vacancy rate for suburban office properties in operation for 12 months or more was exactly the same last year as the prior year, whereas the rate for downtown properties dipped 2 percent. Vacancy levels for both suburban office properties and downtown properties were 5 percent.Though downtown properties reported higher total actual collections than suburban properties in 2007, the overall operating experience of both downtown and suburban office markets were similar as reflected by their median operating ratio (total operating costs divided by total actual collections). The median operating ratio at suburban properties was 0.43, while the operating ratio at downtown properties was 0.46.