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Feb 274 min read

What Are Operating Expenses In Commercial Real Estate?


Whether you’re a prospective commercial real estate buyer, the property owner, or planning to lease a space for a business, knowing the average operating expenses for rental property is core to your business. In this post, we answer what operating expenses, also called OPEX, mean in real estate lingo.


Operating expenses are exactly what they sound like — the costs that occur to keep a business running. In commercial property, operating expenses are defined as the costs to keep a building or property standing and usable. In general, these expenses are factored into the rent for the property so that running the building is still profitable for the owner(s).


Of course, the operating expenses won’t be the same for every single property. Larger properties will likely have higher operating expenses. Retail spaces will have very different operating costs from apartment buildings, and both will differ vastly from industrial and manufacturing. There is no “one size fits all” answer for the cost of operating expenses for office buildings.


We can, however, help you estimate the average operating expenses for a commercial property. This post will cover what falls under operating expenses, why it matters so much, and the average costs for office properties. 


What Is Included in Operating Expenses for Buildings?

A lot of factors fall under the umbrella of operating expenses. Here is a list of the most common operating expenses in CRE: 


  • Property taxes: This will vary from state to state and even from municipality to municipality. Property taxes range typically between 1% and 2.5%. States and local governments will offer temporary property tax abatements (low or no property taxes) to businesses to attract them to areas, in exchange for providing jobs and other economical stimuli. For more on property taxes, read this Tax Foundation article, which outlines the rankings of property taxes by state. 

  • Insurance: Property insurance provides financial reimbursement to the owner or renter of a structure and its contents in case there is damage or theft. For the purposes of CRE, this is called real property insurance. The cost of insurance is affected by location, property size, area crime rate, and other factors. It may come as no surprise to learn that coast properties tend to have the highest insurance premiums.


  • Maintenance: This includes the minutiae of maintaining a property. Things like cleaning and janitorial fees (and janitorial supplies), property repair, landscaping costs, and other expenses that relate to the property being suitable to conduct business fall under maintenance. This has a wide range of costs. 


  • Utilities: If you own or rent personal property, these are already familiar to you. Electricity, gas, HVAC, and trash disposal services are all examples of CRE utilities, as is the ever-important broadband internet. The costs of these will depend on location, time of year, and size of property. 


  • Administrative & management fees: This can include the costs of property management services or other miscellaneous fees dealing with the costs of leasing and maintaining property. This will vary case by case. 


Operating expenses don’t include costs like tenant improvement allowances, advertising, refinancing, and capital improvements. These can fall into non-operating expenses or capital expenses. 


What is an Operating Expense Ratio for CRE?

An operating expense ratio is intended to help property owners calculate what their effective gross income needs to be in order for the property to be profitable. Investopedia defines it as: 


OER = Total Operating Expenses - Depreciation / Gross Revenue


In other words, you take the total amounts of all the expenses we listed above and subtract depreciation expenses (property that tends to wear down and decrease in value over time) from that. Then, divide that value by your gross revenue. 


The resulting number will be the OER ratio, or percentage. A lower OER will signify that your expenses are well-balanced with your revenue. It may even be a sign that rent could feasibly increase. Investopedia marks an OER of 60 - 80% as ideal, but an operating ratio of between 20% and 30% is still considered to be good. 


This key performance indicator (KPI) matters to both property managers and investors, as it’s a direct signifier of whether a property is profitable or not. Breaking your OER down will also assist you in understanding which operating expenses are too high and how your business needs to shift its strategy to stay sustainable. 


What are Average Operating Costs Per Square Foot?

As we outlined above, operating costs will range dependent on different factors. But we can start to estimate your building’s operating costs based on the type of building it is and its size. Here are some tools and references for estimating operating expenses in commercial real estate: 


  • Constellation, a clean energy company, estimated that most CRE owners pay around $6.79 per square foot of property in operating expenses. 


  • This Certified Calculator will calculate an average operating cost based on your total rentable area (per square foot), utilities cost per square foot, and maintenance costs per square foot. Again, we outlined the factors that contribute to operating expenses, and this calculator may not account for everything. However, it’s still useful for providing an estimate. 


  • BOMA International has a 2018 article on averages for the private sector. These have no doubt changed over the past 6 years, but are still useful for understanding the ratios between certain expenses. 


Ultimately, it does benefit you to take the time to calculate the average operating expenses for rental property. This is how you calculate rent and understand your true profit margins. Tracking your OER over time will also be beneficial to your investors as they see demonstrable value in your property. 



 

Additional credits and sources consulted

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