Trends Trends in Office Buildings Operations, 2011 THE SAMPLE This 2012 edition represents 2011 data collection from nearly 2,700 private-sector buildings across the United States and Canada. This year s sample represents 2,140 office developments, some of which contain multiple buildings. Additionally, 370 Medical Office Buildings were included in a separate report (Part 6), and are not included in these trend reports. Table 1 displays some of the characteristics of this year s sample. The typical suburban office property contained an average of 135,710 square feet and is occupied by an average of 10 tenants. Office buildings in downtown areas were typically much larger, containing an average of 349,365 square feet and 15 tenants. The suburban office buildings tend to be relatively new with 86.3 percent of them built within the last 32 years. Downtown properties were more diverse in composition with 64.9 percent constructed since 1980. Suburban office buildings are mostly structures of 1 to 10 stories in height. 89.9 percent of the suburban sample falls into this category. Downtown properties generally contain at least five stories. 49.3 percent of this year s downtown sample contains more than ten stories while 26.3 percent had five to ten stories. Table 1: Sample Distribution 2011 Downtown and Suburban Total Sample Number of Buildings Reported Item Downtown Suburban Number of Office Developments 465 1,675 Number of Buildings 543 2,146 Average Size of Buildings (Sq. Ft.) 349,365 135,710 Average Number of Tenants 15 10 Year of Construction* Downtown Suburban Before 1965 75 20 1965-1979 67 196 1980-1989 169 663 1990-1999 41 346 2000-2009 53 343 2010-to date 0 4 Total 405 1571 *Not all buildings report year of construction SUBURBAN MARKET SUMMARY Table 2 and Chart 1 summarize the median income and expenses for suburban office complexes across the nation. Total collections decreased slightly in 2011 to $18.22 per square foot of net rentable area. This represents a 1.3 percent decrease from 2010. The most significant variance for individual expenses occurred for Janitorial/Maintenance, increasing 3.0 percent from last year. Total operating costs decreased 0.7 percent to $8.32 per square foot. Income/Expense Analysis : Office Buildings 4% 2% 0% -2% -4% Chart 1: Cost Variations by Category 2011 Suburban Total U.S As a Percentage Increase Over 2010 Expenses -2.8% -0.9% 0.0% -2.7% 3.0% Table 2: Median Income and Expenses 2009-2011 Suburban -0.7% Line Item 2009 2010 2011 10-11 Total Collections $19.75 $18.46 $18.22-1.3% Utilities 2.05 1.96 1.96 0.0% Janitorial/Maint. 2.11 2.02 2.08 3.0% Admin./Benefits 1.11 1.12 1.11-0.9% Net Operating Costs* 6.20 5.97 6.03 1.0% Insurance/Services 1.15 1.09 1.06-2.8% R.E./Other Taxes 2.30 2.20 2.14-2.7% Total Operating Costs 8.80 8.38 8.32-0.7% Occupancy Levels 89% 89% 89% 0.0% *Insurance not included in Net Operating Costs Table 3 presents the median net operating costs (including insurance) for suburban office buildings by geographical regional areas. The map on page 20 defines the geographical areas and the codes which represent them. Due to the small sample sizes of some areas, several individual regions have been grouped to form larger and more statistically representative areas (Regions 1, 2 and 3; Regions 7, 8 and 10). Nationally, net operating costs increased to $6.03 per square foot. All Regions net operating costs decreased with the exception of the Northeast and Mid-Atlantic: and West Coast regions. The Northeast and Mid-Atlantic region reported the highest net operating costs, $6.78. The Southeast region reported the lowest net operating cost, $5.32. 12
Income/Expense Analysis : Office Buildings Trends Table 3: Median Net Operating Costs 2009-2011 Suburban 1,2,3 $7.11 $6.70 $6.78 1.2% 4 5.65 5.50 5.32-3.3% 5 6.06 5.57 5.53-0.7% 6 6.71 6.78 6.61-2.5% 7,8,10 5.58 5.47 5.40-1.3% 9 6.18 5.54 6.07 9.6% U.S. 6.20 5.97 6.03 1.0% Table 4 isolates the median utility costs for suburban properties by region. As a whole, suburban office utilities costs remained the same at $1.96 per square foot. All regions experienced decreases with the exception for the West Coast region. The Southwest region experienced the highest utility costs at $2.12, while the Central, Rocky Mountain, and Northwest region reported the lowest at $1.76. Table 4: Median Utility Costs 2009-2011 Suburban 1,2,3 $2.40 $2.08 $2.04-1.9% 4 1.92 1.91 1.82-4.7% 5 1.76 1.83 1.78-2.7% 6 2.28 2.26 2.12-6.2% 7,8,10 1.76 1.77 1.76-0.6% 9 2.04 1.94 2.04 5.2% U.S. 2.05 1.96 1.96 0.0% Table 5 breaks down expense categories by the proportion of total operating costs which the individual expense categories represent. Real Estate Taxes and Other Taxes for suburban offices accounted for the largest portion of operating costs, 25.7 percent. Janitorial/Maintenance along with Utilities represented 25.0 percent and 23.6 percent, respectively of total operating costs. Insurance/Services and Administrative/ Benefits represent the remaining portion of total operating costs. Table 6 lists median management fees expressed as a percentage of total actual collections. Nationally, median management fees represent 3.35 percent of a suburban office property s total actual collections. The median management fees for the Pacific Coast region reported at 2.84 percent of total actual collections. Management fees in the Southeast represent 3.70 percent of total actual collections. Table 6: Median Management Fees 2009-2011 Suburban As a Percent of Total Actual Collections Change 1,2,3 2.96% 3.16% 3.10% -0.06 4 3.18% 3.71% 3.70% -0.01 5 3.23% 3.59% 3.58% -0.01 6 2.92% 2.88% 2.89% 0.01 7,8,10 3.36% 3.47% 3.31% -0.16 9 2.76% 2.87% 2.84% -0.03 U.S. 3.04% 3.41% 3.35% -0.06 Table 7 lists the median year-end vacancy levels for suburban properties. The typical suburban office properties experienced a 2011 year-end vacancy of 11 percent. The Midwest region experienced the highest vacancy rate at 17 percent. The Northeast and Mid-Atlantic regions reported a 6 percent vacancy rate in 2011. Table 7: Median Year-End Vacancy 2010-2011 Suburban As a Percent of Rentable Office Area Regions 2010 2011 10-11 Change 1,2,3 6% 6% 0 4 11% 10% -1 5 11% 17% 6 6 12% 13% 1 7,8,10 11% 8% -3 9 19% 16% -3 U.S. 11% 11% 0 Table 5: Comparison of Expense Categories 2011 Suburban As a Percent of Total Operating Costs Utilities 23.6% Janitorial/Maintenance 25.0% Real Estate and Other Taxes 25.7% Administrative/Benefits 13.3% Insurance/Services 12.7% 13
Trends Income/Expense Analysis : Office Buildings DOWNTOWN MARKET SUMMARY Table 8 and Chart 2 summarize the median income and expenses for downtown office complexes across the nation. Nationally, total collections decreased to $20.30 per square foot of net rentable office space. The cost of operating a downtown office building decreased 1.9 percent to $9.95 per square foot of net rentable area. The most significant variance for individual expenses occurred in Administrative and Benefits, decreasing 4.9 percent from last year. Table 8: Median Income and Expenses 2009-2011 Downtown Line Item 2009 2010 2011 10-11 Total Collections $21.89 $21.91 $20.30-7.3% Utilities 2.14 2.17 2.20 1.4% Janitorial/Maint. 2.60 2.57 2.63 2.3% Admin./Benefits 1.23 1.23 1.17-4.9% Net Operating Costs* 7.13 7.14 7.12-0.3% Insurance/Services 1.25 1.25 1.26 0.8% R.E./Other Taxes 2.56 2.68 2.62-2.2% Total Operating Costs 10.09 10.14 9.95-1.9% Occupancy Levels 93% 93% 91% -2.0% *Insurance not included in Net Operating Costs 4% 2% 0% Chart 2: Cost Variations by Category 2011 Downtown Total U.S As a Percentage Increase Over 2010 Expenses 0.8% 1.4% 2.3% region reported the lowest net operating cost, $6.38, a decrease of 0.3 percent. Table 9: Median Net Operating Costs 2009-2011 Downtown 1,2,3 $9.53 $10.25 $9.79-4.5% 4 6.45 6.40 6.38-0.3% 5 6.65 7.09 7.26 2.4% 6 7.01 7.03 6.56-6.7% 7,8,10 6.25 6.72 7.05 4.9% 9 7.91 7.59 6.74-11.2% U.S. 7.13 7.14 7.12-0.3% Table 10 indicates that median utility costs for downtown office properties rose 1.4 percent to $2.20 per square foot of net rentable area. The Central, Rocky Mountain, and Northwest region had the largest increase of 9.9 percent from 2010, to $2.11. The West Coast region experienced the largest decrease in utility costs, dropping 15.7 percent to $1.98. Table 10: Median Utility Costs 2009-2011 Downtown 1,2,3 $2.94 $3.12 $2.94-5.8% 4 2.05 2.03 2.20 8.4% 5 2.04 1.95 2.00 2.6% 6 2.20 2.18 1.96-10.1% 7,8,10 1.83 1.92 2.11 9.9% 9 2.27 2.35 1.98-15.7% U.S. 2.14 2.17 2.20 1.4% -2% -4% -6% -4.9% -2.2% -1.9% Table 11 breaks down expense categories by the proportion of total operating costs which the individual expense categories represent. Utilities for downtown office accounted for 22.1% of total operating costs. Janitorial/Maintenance consumed the largest portion of total operating costs at 26.4 percent. Real Estate and Other Taxes account for 26.3 percent of total expenses while Administrative/Benefits accounted for 11.8 percent. Insurance/Services accounted for 12.7 percent of total operating costs. Table 9 lists the median net operating costs for downtown office complexes by geographical region. As a whole, the median net operating costs for a downtown office building decreased 0.3 percent to $7.12 per square foot of net rentable area. Office properties in the Northeast and Mid-Atlantic region reported the highest net operating costs at $9.79 per square foot, a 4.5 percent decrease from 2010. The Southeast Table 11: Comparison of Expense Categories 2011 Downtown As a Percent of Total Operating Costs Utilities 22.1% Janitorial/Maintenance 26.4% Real Estate and Other Taxes 26.3% Administrative/Benefits 11.8% Insurance/Services 12.7% 14
Income/Expense Analysis : Office Buildings Trends Table 12 lists median management fees expressed as a percentage of total actual collections. Nationally, median management fees represent 2.96 percent of total actual collections. The median management fees for the Central, Rocky Mountain, and Northwest region consumed 3.37 percent of a property s total actual collections. Management fees in the Pacific Coast regions were reported at 1.98 percent. Table 12: Median Management Fees 2009-2011 Downtown As a Percent of Total Actual Collections Change 1,2,3 2.62% 2.69% 2.56% -0.13 4 3.11% 2.89% 3.04% 0.15 5 2.56% 2.65% 3.01% 0.36 6 3.07% 2.89% 2.96% 0.07 7,8,10 3.08% 3.11% 3.37% 0.26 9 2.09% 2.51% 1.98% -0.53 U.S. 2.83% 2.88% 2.96% 0.08 Table 13 presents the median year-end vacancy levels for downtown properties. The national year-end vacancy increased to 9 percent. The West Coast region reported the highest vacancy rate at 17 percent. The Northeast and Mid-Atlantic; and Central, Rocky Mountain, and Northwest regions reported the lowest vacancies, at 5 percent. Table 13: Median Year-End Vacancy 2010-2011 Downtown As a Percent of Rentable Office Area Regions 2010 2011 10-11 Change 1,2,3 6% 5% -1 4 7% 9% 2 5 15% 16% 1 6 10% 13% 3 7,8,10 4% 5% 1 9 13% 17% 4 U.S. 7% 9% 2 OFFICE MARKET SUMMARY Table 14 compares the median income and expenses experienced by suburban and downtown developments surveyed this year. During 2011, downtown office properties total actual collections were 11.4 percent more than their suburban counterparts. The suburban office project is less costly to operate than a downtown building with total operating costs 16.4 percent less than those of a downtown building. All expense categories for suburban properties were less than those experienced by buildings in a downtown setting. Though the downtown properties reported higher total actual collections than suburban properties, the overall operating experience of both downtown and suburban office markets were similar as reflected by the median operating ratio (total operating costs divided by total actual collections). The median operating ratio for at a suburban development was.45 while a downtown building s operating ratio was.46. Table 14: Median Income and Expenses 2011 Downtown vs. Suburban Line Item Downtown Suburban Total Collections $20.30 $18.22 Utilities 2.20 1.96 Janitorial/Maint. 2.63 2.08 Admin./Benefits 1.17 1.11 Net Operating Costs 7.12 6.03 Insurance/Services 1.26 1.06 Total Operating Costs 9.95 8.32 Operating Ratio* 0.46 0.45 *Median from the National Reports Data Summary The Tables on the following pages provide an overview of the statistics generated from the surveys. The first column of each page describes the size of the sample in multiples of 10,000 per square feet. Key income items and expense subtotals follow across the page. All dollar figures are based on net rentable office area. For more detailed information on a particular region, city or building category, the reader should refer to the various complete reports provided for each of the sub-samples located elsewhere in this study. 15
National Data Summary Income/Expense Analysis : Office Buildings Table 15: Summary of Selected Downtown Reports 2011 Operating Data Median Values in Dollars per Square Foot of Net Rentable Office Area Sq. Ft. Office TAC Utility Janit./ Admin. Ins./ NOC TOC (10,000s) Rents Costs Maint. Costs Svcs. Reported United States 12657 16.22 20.30 2.20 2.63 1.17 1.26 7.12 9.95 Selected Regions Regions 1,2 & 3 3072 33.98 40.25 2.94 3.72 1.90 1.51 9.79 15.92 Region 4 2071 14.94 17.08 2.20 2.27 1.01 1.27 6.38 8.76 Region 5 2095 11.87 17.94 2.00 2.84 0.96 1.10 7.26 10.26 Region 6 2589 15.42 18.23 1.96 2.36 1.27 1.29 6.56 9.22 Regions 7,8 & 10 1442 12.91 17.79 2.11 2.63 1.06 1.12 7.05 9.04 Region 9 1389 22.31 23.76 1.98 2.72 1.22 1.54 6.74 9.95 U.S.-By Building Size 5,000-39,999 113 12.12 15.14 1.98 2.52 0.79 1.06 6.23 8.50 40,000-99,999 459 13.15 16.87 2.11 2.51 1.04 0.91 6.46 8.46 100,000-249,999 1502 15.16 21.97 2.41 2.49 1.28 1.32 7.68 10.05 250,000 and Over 10584 19.69 24.89 2.18 2.86 1.34 1.43 7.51 11.43 U.S.-By Age Before 1965 1226 11.59 17.89 2.32 2.60 1.11 1.27 6.77 9.59 1965-1979 2570 17.67 20.64 2.55 2.95 1.27 1.30 7.51 10.44 1980-1989 5691 16.29 19.76 2.05 2.62 1.22 1.26 6.93 9.57 1990-1999 1630 17.49 25.05 2.22 2.84 1.29 1.19 7.84 11.96 2000-2009 1313 19.69 26.29 2.41 2.45 1.14 1.32 6.93 10.22 U.S.-By Rental Range $1.00-$9.99 514 8.42 10.08 2.04 2.07 0.76 1.00 5.71 7.48 $10.00-$15.99 2825 13.05 15.39 1.94 2.24 0.98 1.09 6.28 8.45 $16.00-$19.99 2099 18.14 20.36 2.25 2.53 1.17 1.17 6.73 9.57 $20.00-$24.99 1607 21.01 25.40 2.34 2.87 1.44 1.55 7.93 11.37 $25.00 and Above 3708 32.11 42.59 2.92 3.86 1.83 1.79 9.55 16.87 U.S.-By Type 1 or 2 Stories 126 14.93 16.54 1.89 2.06 0.71 1.16 5.06 7.65 3 or 4 Stories 404 12.13 15.56 2.20 2.53 1.06 1.03 6.69 8.91 5-10 Stories 1990 15.64 21.00 2.24 2.63 1.14 1.11 7.32 9.77 11 or More Stories 10137 18.37 23.76 2.22 2.84 1.33 1.38 7.49 11.11 Selected Cities Atlanta, GA 501 16.22 22.49 2.25 1.92 1.13 1.39 6.63 10.22 Boston, MA 788 42.68 54.75 3.34 4.06 3.01 1.99 11.63 22.99 Charlotte, NC 498 11.76 15.02 1.52 2.31 0.93 1.74 6.38 7.91 Dallas, TX 994 13.84 16.63 1.99 1.94 1.28 1.16 6.55 9.22 Houston, TX 771 15.42 24.67 2.10 3.05 1.79 1.73 7.83 11.44 Kansas City, MO 284 11.23 19.13 2.72 2.73 1.10 1.13 7.86 9.34 Phoenix, AZ 340 16.77 15.93 1.86 2.07 1.10 1.18 6.06 8.47 Portland, OR 222 21.23 24.71 1.98 2.89 1.01 1.43 7.94 10.79 Seattle, WA 244 19.75 24.16 1.75 2.81 1.57 1.51 7.06 9.62 Washington, DC 1369 38.56 47.31 3.18 3.86 2.08 1.61 10.14 17.69 33.65 16
Income/Expense Analysis : Office Buildings National Data Summary Table 16: Summary of Selected Suburban Reports 2011 Operating Data Median Values in Dollars per Square Foot of Net Rentable Office Area Sq. Ft. Office TAC Utility Janit./ Admin. Ins./ NOC TOC (10,000s) Rents Costs Maint. Costs Svcs. Reported United States 20448 15.90 18.22 1.96 2.08 1.11 1.06 6.03 8.32 Selected Regions Regions 1,2 & 3 4494 24.73 27.13 2.04 2.42 1.60 0.99 6.78 9.28 Region 4 3317 15.76 16.49 1.82 1.78 0.99 0.98 5.32 7.17 Region 5 1987 11.61 15.09 1.78 2.01 0.85 0.99 5.53 8.18 Region 6 4828 15.76 17.97 2.12 2.24 1.29 1.14 6.61 9.26 Regions 7,8 & 10 1968 14.61 17.20 1.76 2.02 0.73 0.97 5.40 7.56 Region 9 3855 19.30 20.76 2.04 2.05 1.15 1.86 6.07 8.83 U.S.-By Building Size 5,000-39,999 783 12.36 13.96 1.54 1.74 0.84 1.09 5.04 6.91 40,000-99,999 3657 15.00 16.91 1.85 1.96 1.07 0.95 5.75 7.85 100,000-249,999 7072 17.48 19.87 2.11 2.17 1.22 1.05 6.41 9.12 250,000 and Over 8936 19.32 23.65 2.16 2.57 1.45 1.35 7.05 10.68 U.S.-By Age Before 1965 182 18.27 24.30 2.15 2.76 0.80 1.09 6.78 9.69 1965-1979 2847 15.68 18.11 2.15 2.34 1.13 1.23 6.39 8.71 1980-1989 8770 16.21 18.05 2.06 2.29 1.17 1.12 6.35 8.76 1990-1999 4265 14.94 17.59 1.73 1.90 1.05 0.98 5.48 7.90 2000-2009 3644 18.08 21.27 1.82 1.87 1.17 0.93 5.89 8.32 U.S.-By Rental Range $1.00-$9.99 631 8.30 8.73 1.41 1.49 0.54 0.92 4.39 6.05 $10.00-$15.99 4292 13.72 14.69 1.83 1.96 0.86 1.02 5.51 7.55 $16.00-$19.99 4384 17.54 19.27 2.06 2.15 1.08 1.13 6.32 8.77 $20.00-$24.99 3133 20.82 24.03 2.21 2.23 1.24 1.11 6.59 9.41 $25.00 and Above 4332 29.71 35.21 2.54 2.92 1.74 1.45 7.95 11.84 U.S.-By Type 1 or 2 Stories 3618 12.88 14.90 1.53 1.65 0.91 1.00 4.85 6.73 3 or 4 Stories 4790 16.32 18.59 2.11 2.15 1.14 1.01 6.28 8.63 5-10 Stories 5903 18.22 20.12 2.10 2.30 1.28 1.06 6.61 9.29 11 or More Stories 6137 20.38 24.23 2.24 2.75 1.48 1.38 7.22 11.10 Selected Cities Atlanta, GA 868 16.22 17.77 2.10 1.81 1.00 1.22 5.72 7.87 Charlotte, NC 661 16.51 18.60 1.41 1.82 1.06 0.88 5.00 6.94 Chicago, IL 429 15.02 25.27 1.79 2.24 0.88 1.25 6.12 9.15 Dallas, TX 1898 15.42 16.31 1.97 2.08 1.18 1.02 6.24 8.81 Houston, TX 1786 15.26 18.33 2.22 2.23 1.28 1.30 6.62 9.26 Kansas City, MO 223 15.49 15.85 2.16 2.42 0.65 1.07 6.22 8.87 Los Angeles, CA 1012 26.56 31.05 2.83 2.93 1.72 3.22 8.45 12.26 Minneapolis-St. Paul, MN 750 10.66 16.65 1.69 2.17 0.87 0.94 5.55 9.72 Phoenix, AZ 415 15.35 16.69 2.03 1.87 1.00 0.90 5.45 8.25 St. Louis, MO 331 16.90 18.22 2.35 2.84 0.77 1.31 6.74 10.08 San Diego, CA 341 22.40 22.44 1.20 2.05 1.21 1.84 5.34 8.94 Washington, DC 2488 31.13 35.17 2.29 3.01 1.93 1.06 7.98 11.18 17
Graphic Income/Expense Analysis : Office Buildings Downtown- Distribution of Median Annual Income And Operating Costs 5.8% 6.2% Percentages of Total Actual Collections Net Operating Income... 51.3% Janitorial, Maintenance & Repairs... 13.0% Utility Expenses... 10.8% Real Estate and Other Taxes... 12.9% Administrative and Benefits... 5.8% Insurance and Services... 6.2% 12.9% 51.3% 10.8% 13.0% Comparison of Total Actual Collections and Total Operating Costs Downtown Buildings U.S. For Selected Regional Areas Based on Dollars per Square Foot of Net Rentable Office Area Regions 1,2 & 3 4 5 6 7,8 & 10 9 U.S. Total Actual Collections (TAC) $40.25 $17.08 $17.94 $18.23 $17.79 $23.76 $20.30 Total Operating Costs (TOC) $15.92 $8.76 $10.26 $9.22 $9.04 $9.95 $9.95 $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 TAC TOC $15.00 $10.00 $5.00 $0.00 Regions 1,2 & 3 Region 4 Region 5 Region 6 Regions 7,8 & 10 Region 9 U.S. 18
Income/Expense Analysis : Office Buildings Graphic Suburban- Distribution of Median Annual Income And Operating Costs Percentage of Total Actual Collections Net Operating Income... 54.2% Janitorial, Maintenance & Repairs... 11.4% Utility Expenses... 10.8% Real Estate and Other Taxes... 11.7% Administrative and Benefits... 6.1% Insurance and Services... 5.8% 11.7% 6.1% 5.8% 10.8% 54.2% 11.4% Comparison of Total Actual Collections and Total Operating Costs Suburban Buildings U.S. For Selected Regional Areas Based on Dollars per Square Foot of Net Rentable Office Area Regions 1,2 & 3 4 5 6 7,8 & 10 9 U.S. Total Actual Collections (TAC) $27.13 $16.49 $15.09 $17.97 $17.20 $20.76 $18.22 Total Operating Costs (TOC) $9.28 $7.17 $8.18 $9.26 $7.56 $8.83 $8.32 $30.00 $25.00 $20.00 $15.00 TAC TOC $10.00 $5.00 $0.00 Regions 1,2 & 3 Region 4 Region 5 Region 6 Regions 7,8 & 10 Region 9 U.S. 19