As the U.S. office market continued to stabilize in 2005, rents rolled down, lowering Net Operating Incomes (NOI) as old leases burned off. According to the data collected and reported in BOMA Intl.’s 2006 Experience Exchange Report (EER), the NOI for the US private sector office market decreased by 7.92 percent ($13.03 vs. $14.15 in 2004). However, as the economy and the overall job growth continued to pick up, office occupancy increased slightly (89.70 vs. 88.70 in 2004).
As the turmoil in Iraq and other corners of the Middle East continue to roil the energy markets, energy costs continue to rise, resulting in a noticeable increase of 9.29 percent in utility costs ($2.00 vs. $1.83 in 2004).
The amount spent on different expense line items provides a mixed picture, but the overall expense data in the 2006 EER indicate that though total operating expenses increased by 3.8 percent ($6.56 vs. $6.32 in 2004), total expenses (operating plus fixed) decreased slightly by 0.3 percent ($9.71 in comparison with $9.74 in 2004). The dollar amount spent on fixed expenses showed a considerable decrease of 7.92 percent ($3.06 in comparison with $3.39 in 2004), contributing to a slight decline in total building expenses (operating plus fixed). The trend to increase efficiency, while decreasing administrative costs continued from the last 3 years with administrative expenses decreasing by 3.2 percent ($1.18 compared to $1.22 in 2004). Expenditures for cleaning increased slightly by 1 percent ($1.21 versus $1.20 in 2004). The amount spent on roads and grounds remained constant at $0.17/rsf of the building. However, the dollar amount spent by U.S. private sector office buildings on repairs/maintenance increased by 2 percent ($1.55 vs. $1.52 in 2004).
Security costs decreased slightly by 1.79 percent in 2005 ($0.55 compared to $0.56 in 2004), but these costs remain high compared to pre-9/11 expenditures. While security is still a major concern for management due primarily to the ongoing war in Iraq and the threat of new terrorist attacks, these costs seem to have stabilized over the past year. Building insurance costs also have stabilized since 9/11 with a continued decline for the second year in a row in 2005 at $0.32/rsf vs. $0.37 in 2004. Real estate taxes also declined by 9 percent ($2.56 vs. $2.82 in 2004).
The year-end asking rents increased slightly to $21.82 vs. $21.69 in 2004 as tenants filled vacant space as the economy picked up and forecasters predicted a better 2006. However, office income decreased slightly at $20.79 compared to $21.84 in 2004. Retail area income in office buildings also declined slightly to $19.42 in 2005 (versus $19.85 in 2004), but remains higher than income reported prior to 2003.
As overall employment has continued to grow, increasing by one million during the second half of 2005, the U.S office buildings sector registered the best net absorption since the peak in 2000. Despite the continued threat of terror strikes and the effect of gulf hurricanes, the vital economic indicators remained strong. Increases in leasing activity have been evident in nearly all major metro areas but have been most noticeable in the markets which suffered the greatest occupancy losses during the downturn.
Despite the consumer confidence sinking to 99.6 in August 2006, the vital economic indicators remain strong. Office employment is forecast to accelerate and is predicted to outpace overall job creation. The office building industry’s analysts are predicting acceleration in space absorption and the re-emergence of many poor performing local markets that had been overshadowed by the strongest regions.
The operational statistics and percentages in this article are derived from BOMA Intl.’s annual Experience Exchange Report (EER), an annual income and expense benchmarking report for the commercial real estate industry. For a detailed description of the report, visit (www.boma.org).