New York: Renters Face Big Increase in Heating Bills This Winter

By Ray A. Smith, Staff Reporter of The Wall Street Journal

NEW YORK - Renters be forewarned: There is a good chance that you, not your landlord, could bear the brunt of the escalation in energy bills this winter.

In recent years, as the economy soared and vacancy rates of everything from offices to apartments to stores tightened, property owners have been able to modify lease contracts to shift more responsibility for paying rising operating expenses, including electricity and gas, to tenants.

'Right now, landlords are giving very little in tenant improvements when you lease a space, never mind trying to protect you from expense increases,' says Ray Torto, managing director of Torto Wheaton Research, a Boston-based provider of commercial real-estate research. 'It's really a landlord's market.'

That is illustrated in a report to be released soon by Torto Wheaton showing that the average rent paid by office tenants rose by 7% in the past six months, twice as fast as overall inflation. Out of 54 markets the firm tracks, 19 reported rent growth of 10% or more. Currently, says Mr Torto, 'the tenant is at the mercy of the landlord.'

At Equity Office Properties Trust, the nation's biggest publicly held office landlord and manager, many older leases already call for tenants to pay for all operating expenses. Equity Office also has lease structures where it is responsible for paying those expenses. But in newer leases, the landlords have insisted more often that tenants share any future increases.

'We are protected from rising expenses on old leases, and new leases provide us with protection against future cost increases,' says Richard Kincaid, chief financial officer of Equity Office, which has a national portfolio of 381 buildings.

Of course, some landlords could be hit indirectly by rising energy costs. For example, landlords who lease retail space, and often receive a portion of a store's sales as rent, could take in less rents if consumer spending slows. In a report released this week, Lawrence D. Raiman, an analyst at Donaldson, Lufkin & Jenrette Inc., says that higher oil and gas costs will hit the retail real-estate-investment-trust sector hard.

'Retail REITs are more exposed than most others to rising energy prices because high costs take hard dollars out of the pockets of consumers, thereby hurting retail-sales growth,' he says. James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, agrees that consumer spending will be diverted as energy prices increase. 'That is a consumption tax and so [consumers] will spend less. It will be felt by retailers, but it won't be fatal.'

For all property types of REITs, energy costs are between 2% and 6% of revenue, based on available data, according to Mr. Raiman. Most companies, he notes, don't specifically report utility expenditures.

-- Carl Jenkins (Somewherepress@aol.com), October 02, 2000

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Though the prices of crude and home-heating oil leveled off this week following the Clinton administration's decision to release 30 million barrels of oil from the nation's emergency reserve, oil prices remain near 10-year highs. For its part, the real-estate industry has been taking some steps on how to use fuel more efficiently. Late last year, the National Association of Real Estate Investment Trusts announced that it had entered into an agreement with the Environmental Protection Agency to educate its members about the EPA's Energy Star Buildings program. The program's goal is to encourage building owners and managers to use proven energy-efficient technologies to eliminate waste and lower operating costs.

'There clearly is awareness,' says Michael Grupe, the association's vice president and director of research. 'The industry clearly is aware of the importance of the cost of energy in their businesses and the importance of employing energy-efficient technologies in their buildings and businesses.'

http://dowjones.work.com/index.asp? layout=story_ind_news&vertical=Energy&industry=Oil+% 26+Gas&doc_id=10273

-- Carl Jenkins (Somewherepress@aol.com), October 02, 2000.