One way to assess your property maintenance performance is to compare it to average costs per square foot in the US and your region

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Average costs per square foot in the US

A critical measure of a successful real estate investment is free cash flow, and operating costs are a major impact on free cash flow. When working with a NNN lease, operating costs are the responsibility of the tenant, which will be a single occupant almost exclusively. However, many commercial office buildings have multiple tenants, and, therefore, those buildings usually have gross leases, which shift the responsibility of operating costs from the tenant to the landlord. The business of managing office buildings consists of many things, but few are more important than successfully maintaining a clean, attractive, and well operating property.

Below is a table that represents a sample of office building operating costs in the US on a cost per square foot basis. As explained further on, comparing averages in operating costs can be helpful though not entirely thorough.

As you can see repairs and maintenance take up the majority of property operational costs, Followed by utilities, janitorial, landscaping, and finally security. Finding efficiencies in the most expensive categories without sacrificing excellent service and care for your property will positively impact your net operating income and property management.

Property management fees, property tax, and insurance

Some operating costs are not included in the chart above, e.g. property taxes. Despite frequently being the most expensive operating cost per square foot, property taxes are excluded for more than one reason. Property taxes per square foot have several variables in it that resist equitable comparison across states or even building types. The property taxes of a particular city or state may be much higher than another state on the exact same building.

Additionally, even if another building shares a similar size in square feet and is located within the same city or state, it may be a much newer, more costly building. Its higher tax appraised value and higher taxes per square foot make comparing property taxes or even trying to isolate an average for such a figure unuseful.

Property taxes can be less controllable than other operating costs, but on the other hand, that does not mean that a property owner is at the mercy entirely of the county tax appraiser. You can challenge each and every year's tax appraisal, if it increases. You can also apply for tax rebates from the city or state if you feel your property has valid reasons for an abatement. Usually these abatements are approved, though seldom at best, for new development as a way to incentivize the area’s economic growth.

Comparing averages to your building

Calculating your building’s operating costs per square foot may allow for useful comparison to those of other office buildings. The below graph is an example of how to compare your building to that of the averages mentioned here.

Class of property

The average cost of operation quoted above is across Class a, Class B, and Class C properties. Your actual operating expenses may be materially different based upon the class level of your property. Class C office buildings for example may require more frequent maintenance on older equipment or outdated fixtures. However the costs of each of those may be substantially less than the repair and maintenance of brand new and more expensive fixtures in a Class A trophy building. On the other hand, newer buildings may still enjoy labor warranties that cover repairs on major equipment, helping keep your maintenance costs even lower.

The age of your property is also a major factor in the timing of substantial repairs. Depending on the type of structure and its construction, you may find your ownership period aligning with that of needed roof repair or even electrical upgrades. Being familiar with the age of each of your major infrastructure components can help you predict your maintenance costs more accurately, and even help you price the property more precisely before purchase.

Category of your property

Naturally you will see varying costs across categories of real estate. For example, office buildings will generally have higher costs for janitorial work than industrial, but industrial may have higher utility costs depending upon what type of business they house.

Cost of living in your region

If you are noticing that your operational cost per square foot is significantly higher or lower than the average is posted here, also consider the cost of living in your region. Higher cost of living areas will demand higher labor costs for janitorial, maintenance, and security. More remote areas will require higher installation and equipment costs for maintenance. Cities or counties that have worked to ensure lower crime rates may allow you more leniency on your security costs as well.

Efficiency Levers

Maintenance

Maintenance per square foot can vary wildly based on the class of the property, the previous maintenance quality of the previous building owners, and the level of equipment. One method that may not only lower overall maintenance costs slightly but also even out distributions to investors is implementing a preventative, rather than reactive, maintenance schedule, not dissimilar to preventative maintenance on plant equipment or even consumer automobiles. Such preventative maintenance might require substantial planning from the maintenance supervisors, but those efforts can result in a better maintained building and with fewer repair surprises along the way. To execute a maintenance plan successfully, the maintenance team must have excellent knowledge of each major piece of equipment, it's technical specifications, and the manufacturer recommended maintenance schedules.

With maintenance costs increasing at quicker rates than other areas of property management, mostly due to the lack of people choosing handyman jobs as careers, it may also be less costly to employ an in-house maintenance staff. Some property management firms avoid maintaining an in-house maintenance staff because of the conflict of interest it may present by making profits on repairs. However, investors ultimately may prefer a well-maintained building at the lowest cost per square foot, regardless of who profits.

Utilities

On average, around half of utilities costs come from heating, ventilation, and air conditioning. With that in mind, efficiency efforts can be focused on that aspect of utilities.

Common methods for keeping the costs at a reasonable level for HVAC is using a centrally controlled thermostat for the entire building or for each floor, sometimes allowing for small, half degree variations changeable by tenants.

Open space layouts usually require more heating and ventilation to maintain a target temperature and private offices, which can affect overall costs. Depending upon the area, you may have several choices of utilities providers, at least for electricity. If that is the case, be sure to conduct an annual review to contract the most cost effective supplier.

Utility costs can work hand-in-hand with maintenance repairs. For example the air-conditioning may rise steeply any particular month, not because of the weather but because of an overdue filter becoming clogged with dirt and debris. That can cause the ventilation system to expend as much as 80% more energy to cool the same building in the same temperatures.

Regular mechanical maintenance on the air conditioning and heating units can also save significant amounts of money. An HVAC unit working under its capabilities because of the few easy to fix maintenance issues may Go unnoticed for years, Wasting valuable income to your net operating line.

Your utility costs may also be a direct function of the energy efficiency design of the property in question. Some LEEDS certifications may indicate a lower utility cost for certain buildings and may be worth additional investment In the price of the building

Janitorial

One of the quickest ways that janitorial costs may be reduced is through daytime versus nighttime janitorial shifts. Daytime janitorial work has been reported with some landlords to cost less per square foot because it requires fewer, if any supervisors, no extra security on the property while the buildings being clean, and less expensive day-times labor hours.

Another lever of efficiency in the janitorial space is equipment. Vacuuming may be reduced by using vacuum bots that activate on a timer without any human oversight. Auto scrubbers can be used for polishing tile or marble entryways on a timer and with little to no human involvement as well. These equipment enhancements can be leased or purchased. A good deal on purchased equipment can pay for itself in less than two years.

Wrap Up

Operating a large scale commercial building has many levers of control and many levers of efficiency. Managing a property effectively may be done best in-house or with third parties, depending on your specific situation. Though some costs are less controllable than others, putting efforts into the areas that can make impactful improvements to your property's cash flow can make the efforts worthwhile for all parties.

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