Building Owners Feel The Heat

October 28, 2005
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GRAND RAPIDS — The commercial office building industry spends about $24 billion each year on energy costs, according to the Building Owners and Managers Association International. And BOMA International also says that figure is the largest, controllable operating expense for office buildings.

Maybe that controllable part was true last winter. But come January, when the "lake effect" swings into its full take-no-prisoners mode, there isn't much that a landlord will be able to do about the monthly heating bill but pay it.

With the price of natural gas, fuel oil and propane — three of the four main heating sources used in office buildings — expected to skyrocket from 45 percent to 70 percent this winter from last year, another layer of insulation probably won't take a big bite out of what could be a sticker-shock bill.

And although tenants may have to pick up part of the increase, building owners are likely to be feeling most of the financial heat.

"In office properties, where there are common lobbies and areas to heat, the landlord is responsible for those and often is also responsible for a significant portion of the cost of heating tenant spaces, as well," said Charlie Hoats, president of the local BOMA group and a key member of the Grubb & Ellis/Paramount property management division.

"Office leases will often contain something that says in effect that landlords will provide a space that is heated and cooled appropriately. So they will do their best to keep the space between 70 and 75 degrees Fahrenheit. And often tenants in office buildings will pay their share of increases in operating expenses," he added.

Hoats said a tenant usually begins to pay that cost as a lease ages because the price of the energy source used to heat the building tends to rise above the agreed-to expense in the contract's base year.

"If it costs $5,000 for gas to heat the building one year and the next year it costs $5,500, the tenant will pay their proportional share of that extra $500. So some of that cost gets passed through to the tenants. But in an office setting, a lot of times it's the responsibility of the landlord to keep the building at the right temperature," said Hoats.

"So increases in heating fuel costs affect the landlord's bottom line."

According to the Energy Information Administration, district heat is the fourth heating source for commercial buildings. District heat is steam, which is exactly what the Kent County Department of Public Works provides to 125 commercial buildings in the central business district.

District heat can be less expensive than the other three sources. But the price of steam will also rise this winter for downtown building owners because steam runs on heating fuel.

"I think the county does as good of a job as they can do with trying to purchase that heating fuel; they do a pretty good job of trying to get gas at a lower cost to produce the steam. But in effect, I think no matter what you're using to heat, an increase in cost is going to trickle down to you somehow," said Hoats.

So what is a landlord to do? Information on benchmarking energy costs and cutting out potential waste is available online at www.boma.org. Other than that?

"I think from an operations standpoint you just have to keep things maintained and running as efficiently as possible," said Hoats. "But a cubic foot of gas costs what it costs and you just have to try to get as much out of it as you can. Other than that, I don't know what the answer is."    

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