Soaring energy costs aren’t just hurting drivers. They’re also putting new pressure on owners of the city’s office buildings.
The cost of oil has been surging for five straight years. In the past year alone, prices have jumped 51.5 percent, to about $120 a barrel. These price hikes have triggered increases in the price of natural gas, which causes jumps in the price of electricity — a commodity that skyscrapers use aplenty.
Office building owners are in a particular bind: In Manhattan, the vacancy rate for all classes of office space started creeping up at the start of this year, and that means that raising rents for new tenants in order to offset energy costs is not an option. At the end of May, Manhattan’s overall vacancy rate was 8.5 percent, compared to 7.1 percent a year ago, according to a Colliers ABR report released last month. In addition, Colliers expects the rate to hit 10 or 11 percent by the end of this year.
“They can’t raise rents,” Robert Von Ancken, executive managing director at Grubb & Ellis, said of landlords. “If they raise rents, they’re not going to get any
tenants. They have to suffer the increases in operating expenses.”
Real estate executives said that building owners are responding to the growing cost pressure in different ways.
Some landlords are grudgingly absorbing the energy-induced cost increases. Others are becoming more aggressive about passing higher operating expenses on to tenants, even if they’re not in the form of increased rent. Since leases sometimes allow landlords to pass on increases in electrical costs, some owners are demanding somewhat higher-than-normal increases from tenants.
“I’ve seen energy costs [for tenants] definitely rise in the last 12 to 24 months,” said Paul Amrich, a senior vice president in
the brokerage services group at CB Richard
Ellis. “In the past, it was $3 a square foot. Now, it’s $3.50 a square foot per year.”
Many landlords are looking at ways to contain consumption by using technology — and to cut costs by entering into agreements with energy managers. Some are also shopping for better deals on electricity and taking out fixed-price contracts that offer protection against market-related price swings.
To save money, the owners of one 35-story office tower at 1370 Sixth Avenue have signed a one-year agreement with an energy contractor. The owners invested $640,000 in an automated energy management system that will control the use of lights, air-conditioning and other equipment throughout the building, said David Bury, vice president of property management with Normandy Realty Partners. Under the terms of the contract, the owners are guaranteed to see a reduction in the amount of electricity consumed.
The system should also make the 35-year-old building more comfortable for tenants, particularly on days when the weather is unseasonably warm or cold, Bury said.
Still, savings won’t come overnight. Indeed, it may take five years before the system delivers a return on the investment.
The building’s managers intend to highlight the system when marketing the building to both prospective and existing tenants. The system runs beyond normal business hours which could be a selling point for tenants who conduct business overseas, said Amrich, the broker for the building.
“This makes our building more attractive,” he noted.
Shopping around for energy is certainly catching on with commercial property owners. In New York’s deregulated market, Con Ed is no longer the one-stop shop for electricity. While it still controls transmission and distribution, Con Ed has sold its generating plants to other providers, allowing consumers and businesses to buy electricity from private, unregulated companies.
Margaret Carey, president of MC Energy, an energy services consulting company based in Westchester County, said she’s seeing more commercial and industrial property owners shop for electricity as well as natural gas and oil supplies.
Some are taking out longer term fixed-price contracts — beyond two years — that shelter them from price increases due to swings in the market. Longer-term contracts make sense for owners who intend to hang on to the property for a while, she said.
“It’s foolish not to be shopping for your energy supply,” she said. “You can never remain static and have the same buying strategy.”