Office Costs Increasing

If you rent office space, you probably already know that office rent rates rose in 2004. According to the Studley Effective Rent Index released last week and reported by Reuters, the first increase in three years was largely due to higher real estate taxes, electricity costs and operating expenses.


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Reuters reports that national rents rose to $42.66 per square foot, an increase of 2.8 percent. Despite the increase, rents remain well below 2000’s $51.18 per square foot rate. The Index represents base rent plus all other costs and covers high-quality buildings in major cities.

The National Tenet Effective Rent Index also rose 3.4 percent to $34.31 while the National Landlord Effective Rent Index posted only a two percent increase to $15.42 per square foot in 2004 according to Reuters. The National Tenet Effective Rent Index includes incentives granted by landlords. The National Landlord Effective Rent Index measures the amount of rent received by landlords.

“What we’re seeing is a slow, but steady improvement of rental rates in major commercial business districts across the country,” Mitchell Steir, Studley’s chairman and chief executive officer said in a statement issued with the report.

If you are thinking of keeping a lid on operating expenses by purchasing office space, think again. Rising rents and fewer vacancies are leading to improvements in the commercial real estate market as well. The National Association of Realtors (NAR) Commercial Real Estate Spotlight is forecasting solid gains in commercial real estate through 2006. The NAR forecast for four major commercial sectors is based on data from 57 metro areas. Among the markets tracked are office, retail, industrial and multifamily markets.

Growing employment has resulted in greater demand for office space. Office space vacancies should decline 14.1 percent by the fourth quarter of 1005 and 12.2 percent by the end of 2006. Office rents are forecast to grow by 4.4 percent in 2005 and 4.9 in 2006.

“In simple terms, new jobs mean a greater demand for work space, and strong consumer spending increases the need for transporting, warehousing and retailing of goods and products,” says NAR President All Mansell, CEO of Caldwell Banker Residential Brokerage in Salt Lake City in pointing out that employment growth and retail spending are stimulatig the commercial market.

Of course, there is more to operating an office than just paying rent or mortgage on office space. This is particularly true for operating accounting offices. Fortunately, the Accounting Office Management & Administration Report (AOMAR) publishes a monthly Accounting Office Cost Index. According to the AOMAR the Accounting Office Cost Index “is aimed at helping accounting firm managing partners and administrators monitor relevant office cost changes within their area and compare them with other regions.”

The Index factors in rent and other space-related expenses, equipment, support personnel, stationary, insurance, phone, and other operating expenses but excludes accountants’ salaries, benefits, and profit shares. According to the Index published in June 2005 issue, San Diego, San Francisco and New York had the highest average current costs. San Diego also had the greatest cost increase, 9.5 percent, over the previous year. New York and Philadelphia also saw increases of more than seven percent. The lowest current average costs can be found in Buffalo where costs have not increased over the last year.

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