U.S. Office Market Sees Nominal Gains in NOI

Nov. 1, 2008

BOMA Intl. predicts that commercial real estate firms will be under pressure to make their assets perform

Recent turbulence in the capital markets has economists and industry practitioners revisiting the fundamentals of real estate performance. As access to capital in the commercial real estate markets has tightened, and cap rates have started to climb, it's clear that commercial real estate firms will be under pressure to make their assets perform.

These firms will have their work cut out for them. In 2007, net operating income (NOI) increased only marginally in downtown properties, up 61 cents to $14.89 per square foot (PSF) from $14.10, a 5.6-percent nominal change, which amounts to only 1.2-percent real change when dollar values are adjusted in accordance with the consumer price index (CPI), according to BOMA Intl.'s 2008 Experience Exchange Report. Suburban properties fared much worse, seeing only a 4-cent increase to $13.83 from $13.79 from 2006 to 2007. When dollar values are adjusted, suburban NOI actually declined by 3.8 percent.

The 2008 Experience Exchange Report analyzes actual income and expense data from commercial office buildings throughout the United States and Canada. To gauge how overall income and expenses changed for the industry this year, BOMA Intl. examined income and expenses from a control sample of buildings in which total rentable area did not change by more than 10 percent from one year to the next, and reported office occupancy did not change by more than 15 percent, and from buildings that submitted data to the EER in 2006 and 2007. This control sample set represents the entire United States, and also encompasses a large amount of total rentable and office rentable area. Most of the buildings included in this control sample are larger than 50,000 rentable square feet (RSF), so this trend data is reliable.

While total income did increase in downtown and suburban private properties, increased expenses in key categories offset those gains. Total operating expenses for downtown properties rose from $7.54 PSF to $7.71, a 2.3-percent nominal change; when adjusted according to the CPI, expenses actually declined by 2 percent over 2006. Suburban properties reported increases in total operating expenses of 4.8 percent, from $6.82 to $7.15. When adjusted to the CPI, the increase is only 0.5 percent. Utilities increased the most for downtown properties, up 4.6 percent from $2.16 to $2.26 PSF. Suburban properties reported only a nominal increase in utilities - just 0.4 percent from $2.24 to $2.25 PSF - but saw a significant increase in roads and grounds expenses, which were up nearly 20 percent, from 27 cents to 32 cents PSF. Downtown properties reported declines in security expenses, and no change in roads and grounds expenses.

The relatively small increases in utilities in downtown and suburban markets are surprising since energy costs were rising long before the current capital-markets turbulence. Those nominal increases may reflect that the commercial office sector is implementing energy-savings measures to control costs and usage. Because utilities consistently represent the largest variable expense associated with office buildings, they also represent the clearest opportunity to generate savings through operational strategies. The burgeoning of firms announcing sustainability efforts seems to indicate that the industry recognizes this important opportunity and is prepared to capitalize on it.

The extent to which current capital market conditions will impact income and expenses of most commercial office assets remains uncertain. Utility costs are expected to continue to rise, as are the costs of other goods and services, but the financial health of tenants may be the more critical piece of preserving NOI for the year.

City Comparisons for Total Income and Total Expenses per RSF

The downtown and suburban markets with the highest total income per RSF are:


Total Income per RSF

Washington, D.C.


New York, NY


Boston, MA


Miami, FL


San Francisco, CA




San Mateo, CA


Santa Monica, CA


Los Angeles, CA


Columbia, MD


West Palm Beach, FL


The downtown and suburban markets with the highest total expenses per RSF are:


Total Expenses per RSF

Stamford, CT


New York, NY


Washington, D.C.


Boston, MA


Oakland, CA




Princeton, NJ


Santa Monica, CA


Los Angeles, CA


New York, NY


Miami, FL


To purchase the 2008 EER, visit www.boma.org or call BOMA Intl. at (202) 408-2662.

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