Office Building Performance Reported in IREM Benchmarking Study

Total collections for suburban office complexes nationwide in 2010 decreased 6.5% from 2009 levels to $18.46 per square foot of net rentable area. Downtown properties experienced a mere 0.1% year-to-year collections’ rise to $21.91 per square foot. Total actual collections for downtown properties were 18.7% more last year than their suburban counterparts.

These are among the major findings reported in the 2011 edition of the Income/Expense Analysis®: Office Buildings, a new benchmarking study published by the Institute of Real Estate Management (IREM®).

This annual research study, conducted by IREM since 1976, analyzes operating income and costs for 2,215 private-sector office complexes – some containing multiple buildings – in major metropolitan areas and regions in the United States and Canada. For the very first time, it also contains financial data for 354 medical office buildings.

The study is designed to help property owners, facility managers, investors, appraisers, lenders, developers, and other real estate professionals evaluate and optimize a buildings’ performance. Specifically, the publication can help managers build better budgets; identify ways to trim waste, address inefficiencies and make needed improvements; prepare feasibility studies, appraisals and loan requests; and much more.

Total operating costs for suburban buildings in 2010 decreased 4.8% from the prior year to $8.38 per square foot of rentable area, while operating costs for downtown properties increased 0.5% to $10.14 per square foot. Nationally, net operating costs for suburban buildings in 2010 decreased 3.7% to $5.97 per square foot of rentable area, whereas those for downtown properties increased 0.1% to $7.14 per square foot.

Four of five major expense categories for suburban properties decreased last year, with insurance/services costs experiencing a 5.2% decline, real estate and other taxes decreasing 4.3%, and utility costs and janitorial/maintenance services experiencing year-to-year declines of 4.4% and 4.3%, respectively. Only administrative/benefits costs increased, a mere 0.9%, to $1.12 per square foot of net rentable office area.

In contrast, two of the five major expense categories for downtown properties increased last year versus 2009, with one category experiencing a slight decline and two others reporting the exact same expenses as in 2009. The biggest year-to-year increase, 4.7%, was for real estate and other taxes, followed by utilities, up 1.4%. Expenses for janitorial/maintenance services declined a mere 1.2%, whereas those for administrative/benefits and insurance services were unchanged.

Focusing again on major expense categories, but as a percentage of total operating costs, the IREM study reveals that real estate and other taxes along with janitorial/maintenance services accounted for the largest portion of suburban properties’ operating costs, 26.3% and 24.1%, respectively. Utilities represented 23.4% and administrative/benefits and insurance/services represented 13.4% and 13%, respectively.

Similarly, expenditures for real estate and other taxes and janitorial/maintenance services accounted for the largest portion of downtown properties’ operating costs, 26.4% and 25.3%, respectively. Utilities represented 21.4% and administrative/benefits and insurance/services accounted for 12.1% and 12.3%, respectively. Overall, suburban properties proved 17.4% less costly to operate in 2010 than their downtown counterparts, with all expense categories less than those experienced by downtown buildings.

The national vacancy rate for both suburban and downtown office properties in operation for 12 months were exactly the same in 2010 as in 2009. Suburban properties experienced an 11% vacancy rate whereas that for downtown properties was 7%.

Though downtown properties reported higher total actual collections than suburban properties in 2010, 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 0.45; the operating ratio at downtown properties was 0.46.

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