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Commercial Real Estate

Greg Biggs: Another Dallas Advantage—Operating Expenses

Base office rents for Class A space in Dallas range anywhere from one-half to one-fourth of what's charged for East Coast properties. But North Texas has a big advantage when it comes to operating expenses, too. For example, a company that leases 50,000 square feet can save about $297,000 a year if it picks Dallas over Boston. That's nearly $3 million during the course of a 10-year lease.
Greg Biggs

While on a recent trip to the northeast, it was no surprise to hear from our counterparts about the differences in rent between cities like New York, Boston, and Washington, D.C., versus Dallas. Although we’re used to rents for Class A properties in Dallas—including operating expenses—averaging in the mid $20’s, rents in the northeast range from $40 to $150 per square foot.

The base rent is somewhat understandable in these markets, in light of demand and the scarcity of product, due to either lack of developable land or the high cost of construction and land costs. The really interesting part of the differential in rent costs revolved around the operating expenses.

Operating expenses in the northeast cities might exceed $20.00 per square foot—almost as much as Dallas’ average rent cost!

Typically in North Texas, operating expenses, net of electricity, are included within the rent charged by the landlord. Operating expenses are made up of the day-to-day costs of operating the building, including real estate taxes, janitorial, insurance, repairs and maintenance, security, common area electricity, and building management.

As an example, the table below demonstrates the difference in the average operating expenses, including electricity, between Dallas and Boston. (Click on chart for larger image.)

These numbers are based on the BOMA 2010 Exchange Report and consider an average of Class A office buildings.

Obviously, real estate taxes and electricity make up a large part of the delta in the operating expenses in this comparison. A company that leases 50,000 square feet (approximately two floors) in both cities would save $297,000 per year on the operating expenses alone by having an office in Dallas instead of Boston! Over a 10 year lease, that equates to nearly $3 million in savings.

Although operating expenses are less costly in Dallas than most parts of the country, they’re one of the cost segments that can be financially impactful over the life of a lease. Besides outlining what is included in the operating expenses, a well-negotiated lease will also detail what should be excluded in the annual operating expense costs. An annual “true up” may help determine if the terms of your lease are being followed.