January 27, 2021
It has been a while since we last discussed Operating Expenses and, with annual reconciliation statements on the way, we are expecting to see effects on operating costs due to the pandemic. Back in April 2020, many companies sent their employees home and vacated workplaces. Some of these companies have returned entirely or partially, and some continue to work from home. We predict many of the major Operating Expense categories will be affected by the pandemic. As you review your reconciliation statement from your Landlord, here are a few possible expense changes to be aware of:
Utilities – Compared to 2019, costs in utilities should be down in 2020, especially electricity costs. When the majority of office companies vacated, lights were turned off and office equipment was not used during normal business hours. Empty or partially occupied spaces also required less HVAC usage. Water costs should be down with restrooms being used less.
Janitorial Services – Janitorial services could remain flat and, in some cases, could even increase. When spaces were vacated completely, nightly cleaning was not necessary, but some Landlords continued these services to avoid lease default. However, the pandemic has required the need for additional cleaning of common spaces (lobbies, elevators, restrooms, etc.).
Taxes – Taxes should nominally rise since both Wake and Durham counties had completed their real estate tax assessments before 2020.
Insurance – Insurance should significantly rise due to a few factors. First, insurance rates over the last 10 years have remained stagnant. Unfortunately, that has recently changed due to an increase in nationwide hurricanes, wildfires, and property damage. In some areas, do not be surprised to see this cost increase by more than +/- 15%.
Repairs & Maintenance – Costs associated with repairs and maintenance could increase as many Landlords have attempted to kill bacteria by installing new high-efficiency particulate air (HEPA) filters and UV lights to HVAC systems. Some Landlords are even installing touchless fixtures, technology, and antimicrobial coated surfaces.
Management – Expect this cost to go down if the building’s vacancy increased in 2020 or if rent collections were down.
Snow Removal – With little or no threat of winter weather in 2020, these costs should be less due to the frequent winter storms that occurred in 2019. Remember: this is an expense that cannot be controlled by most Landlords.
The RCR team has discussed these expenses with a number of property management professionals, and the consensus seems to be that each building will be affected differently depending on the tenancy and management style of the Landlord. We feel that for some buildings, it is reasonable to see expenses increase by +/- 7%, as compared to 2019. If this unfolds, it is possible the market caps on expenses could be triggered, making it very important to have a thorough review of the line-by-line items of your reconciliation statement this year.
Additionally, in a slightly worrisome trend, RCR has already found two instances of accounting errors in estimated expense increase statements. Fortunately, in both instances, we were able to ask enough questions on behalf of the Tenant to uncover the error. Given that experience, we suspect that we could see an uptick in property management operating expense errors with many property management professionals working from home and therefore unable to effectively work and collaborate.
In summary, pay attention and have your Tenant Broker review (it should not cost you anything!) your statements. As always, if you have any questions or concerns about your Operating Expense Reconciliation Statement, please contact RCR for a free review and analysis.