CHICAGO— IREM's Income/Expense Analysis program allows owners and property managers to have data at their fingertips that can serve as a benchmark against which to compare their own operating experience, organization executives Vera McPherson and Nick Harris tell GlobeSt.com. The program provides trend income-and-expense data on condos, co-ops, conventional and federally assisted apartments, office buildings, shopping centers and a host of other categories. We spoke with McPherson, managing director of WHH Trice & Co. in Norfolk, VA, and vice chair of IREM's income/expense analysis advisory board, and Harris, VP of operations for Realty Performance Group in Rochester, NY, and chair of IREM's income/expense committee, about the value of such programs and how owners and managers can use this information to improve ROI for their properties.

GlobeSt.com: What is the value in income/expense analysis studies for owners and property managers?

McPherson: The Income/Expense Analysis program allows owners and property managers to have data at their fingertips, compiled through submissions by members of IREM as well as other related practitioners from various parts of the United States. Owners and property managers are able to refer to geographic areas to form a comparison based on regional, national and special reports. These reports contain pertinent information broken down into categories such as size, age groups and operating costs.

The information is represented as “medians” and “ranges.” Median describes what may be called the “typical” expense for a given sample, and the range reflects the upper and lower limits within which the central portion of the sample falls.

Harris: It allows users to benchmark their property's performance against the industry norms to highlight both the positive and negative aspects of their own operations. It also allows you to play with variables for ranges of value, estimate of upside potential and measure of performance.

Harris: “I predominantly use [these analyses] for my consulting services and find they can be very helpful in showing industry standards where there is not good historical data for the property that is the subject of my consulting report.”

GlobeSt.com: How can owners and managers use this information to improve ROI for their properties?

McPherson: The core mission of the Income/Expense Analysis program is to provide important financial facts of property operation for property managers, investors, developers, appraisers and lenders to use as a benchmark for their own operating experience. Having this information at their fingertips will aid users in making informed management decisions, which in turn will hopefully increase profitability and efficiency on their investment.

Harris: After benchmarking, they can focus on what the property needs, pick out all the areas where their property is under-performing and then target each of those line items for scrutiny in the coming year to reduce the related expense or increase the related income.

GlobeSt.com: What are the most striking things this year's analyses showed in each of the asset categories?

McPherson: According to IREM's 2017 Income/Expense Analysis Reports, fundamentals across the overall office-building sector demonstrated improvement in 2016, led by downtown markets. Downtown office buildings saw a 10% increase in total collections and a 2.9% decrease in median net operating costs, while the suburban market remained relatively stagnant. Suburban-office total collections remained virtually unchanged at $19.76 per square foot, while median net operating costs dropped by 2.6%. Vacancy rates held steady in downtown markets (8%) and increased only 1% in suburban markets (5%). Taxes and janitorial/maintenance costs continued to be the largest expenses in both downtown and suburban markets.

During 2016, downtown office properties' total actual collections were 21.7% more than their suburban counterparts. Generally, a suburban-office property is less costly to operate than a downtown building with total operating costs 23.2% less than those of a downtown building. All expense categories for suburban properties were less than those experienced by buildings in a downtown setting.

Though downtown properties reported higher total actual collections than suburban properties, the overall operating experience of downtown properties was slightly worse than properties in suburban-office markets as reflected by the median operating ratio (total operating costs divided by total actual collections). The median operating ratio for a suburban development was 0.43 while a downtown building's operating ratio was 0.45.

The conventional-apartment sector continues to outperform most other property types. But within that sector, one type of conventional-apartment community outshines the others. If you guessed the property type with the lowest average vacancy, you would be wrong. According to IREM's 2017 Income/Expense Analysis Reports, high-rise elevator properties lead the way nationally, with an average net operating income of $12.97 per square foot—a 25.9% increase over last year's average. That is almost $5 per square foot better than the next best apartment type: low-rise buildings of 25 or more units. The NOIs per square foot for other conventional apartment properties were $7.99 for low-rise properties over 25 units, $7.61 for garden-style properties and $6.52 for low-rise building of 12-24 units.

High-rise buildings achieved higher NOI even though they had the highest average vacancy rate of any conventional-apartment property type at 6.6% of gross potential income. Even though low-rise properties of 12 to 24 units had the lowest average NOI, they also had the lowest vacancy at 4.3%. Garden-style properties averaged 5.9% vacancy, while low-rise building of 25 or more units had an average vacancy of 6.2%. While it seems counterintuitive, the property types with the highest vacancy rates also had the highest NOI.

Apartments' total actual collections and total all expenses continue to rise as elevator and garden types have risen for five straight years. High-rise collections have increased 36% since 2012, and expenses have increased 20%. As for garden buildings, collections have increased 28% and expenses have increase 14% since 2012.

GlobeSt.com: What else should our readers know about these reports?

McPherson: Over the past 62 years, our reporting has become an integral source in making an effective comparison leading to an informative decision and a positive return on investments. In the 1950s, the Income/Expense Analysis program began its research program, and by the 1970s, information regarding suburban-office building operations was available. Over the years, this program has developed into a major annual research effort encompassing office buildings, condominiums, cooperatives and planned unit developments, federally assisted and conventional apartments as well as shopping centers. The report is carefully audited to ensure that the information received is relevant to the normal operating experience. Additionally, the information is constantly used for development budgeting and buildings already operational. The Income/Expense Analysis data provided by IREM includes data from nearly 11,000 properties. This information is annually produced in more than 1,000 pages of analysis in five specialized volumes.

Harris: I predominantly use them for my consulting services and find they can be very helpful in showing industry standards where there is not good historical data for the property that is the subject of my consulting report. Owners can and should use them routinely.

GlobeSt.com: What is the value in income/expense analysis studies for owners and property managers?

GlobeSt.com: How can owners and managers use this information to improve ROI for their properties?

GlobeSt.com: What are the most striking things this year's analyses showed in each of the asset categories?

GlobeSt.com: What else should our readers know about these reports?

Instant Insights /

What You Can Gain From an Income/Expense Analysis Program

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