Anyone can get an electric shock by sticking a fork in a toaster, but for many Massachusetts landlords and business owners this month, all they really had to do was stick their hand in the mailbox. There, the latest electric rate increases, which took effect July 1, offered a decidedly hair-raising experience for the unprepared.
“It’s ugly,” said one Boston property manager. “It’s a big surprise to everybody.”
The property manager, who requested anonymity, said some Cambridge buildings under his firm’s stewardship have seen rates spike as high as 40 percent. Mark Tassinari, property manager for CB Richard Ellis/Whittier Partners, estimated that increases in CB’s 40 million-square-foot Bay State portfolio have typically ranged between 10 percent to 25 percent.
“It’s definitely a broad issue,” said Tassinari, adding that the rates have been rising throughout the year. “It has had a major impact on the operating expenses at all of our buildings.”
NStar spokesman Mike Monahan attributed the most recent jump to the increased cost of oil and gas used to produce electricity. Natural gas prices are at a 15-year peak, he said, while oil prices have also been running much higher of late. As part of the state’s electric industry deregulation agreement, which was struck in 1998, suppliers are allowed to pass along such extraordinary expenses, he explained.
“It has been caused solely by the skyrocketing cost of oil and gas,” said Monahan, adding that any savings emanating from deregulation have been “overshadowed” by the fuel price increases, at least temporarily. He added that the costs are being passed on to not just commercial customers, but also to residents and industrial users.
Monahan could not estimate what the average increase has been for a commercial customer, but agreed that “it certainly has been significant.” Tassinari said utility costs typically make up the biggest chunk of a property’s operating budget, estimating that a $7 per-square-foot base might include $2 to $3 per square foot for that expense. It depends on lease terms as to whether some or all of the higher rate is passed through to the tenant or absorbed by the landlord, Tassinari said. In most cases, the tenant is given a base allowance early on, but must pick up escalation costs later in their lease term.
Exacerbating the situation are the energy requirements of today’s office tenants, with CB/Whittier suburban broker Christopher Tosti noting that the technology world has affected that equation. “There’s a tremendous need for power,” he said, with firms that might previously have required five watts per square foot now clamoring for seven or even eight watts per square foot.
Whatever the reason, Tassinari said energy issues have come to the forefront for property managers, who are constantly seeking ways to improve the efficiency of building systems and the way they are operated. Due to peak pricing rates and other factors, CB/Whittier has implemented strategies to keep costs down, sometimes staggering when certain machines are turned on and also installing more modern systems. Rebate programs from energy suppliers have encouraged the latter effort, he said. At 100 Hancock St. in Quincy, for example, the installation of new elevator operating machines earned a $30,000 rebate.
“The utility companies have money for these rebate programs, and they want people to have it,” Tassinari said. “It’s one of the things we are constantly looking into, and [the savings] can be substantial.”
David Begelfer, of the Massachusetts Chapter of the National Association of Industrial and Office Properties, said his group has yet to hear any sustained war cry from its members over the most recent electric rate increases, predicting that the pass-through option to tenants may have lessened the direct impact on property owners. NAIOP is, however, upset about the way in which electric service is being delivered to its members, he said, so much so that the group recently formed an energy task force to address issues of concern.
“There are several problems that we are looking into,” Begelfer said, including the time it takes for a new commercial building to get electricity, and an increased call by providers for security deposits before new service is provided. In one instance, he said, it took up to three months for a tenant to move into a building because the power was not installed.
“We’re hearing a lot of griping among developers,” he said. “But not so much how much a unit of energy costs, but more the ability to get the energy delivered on time and under reasonable [terms].”
One specific topic of debate will be the result deregulation has had on the market, with Begelfer maintaining that it appears “it has not worked out as well as it was billed.”
“We do think there is a problem,” he said. “Now, we are trying to define what the problem is and what can be done about it.” Among the group’s plans is to meet with NStar and its competitors to outline the real estate industry’s issues and attempt to hammer out a solution.
Monahan said he believes deregulation will ultimately prove successful once more competitive energy suppliers come into the market. Ironically, the growth of such firms was hurt by the recent increases in oil and gas for fuel, he said. Because NStar now focuses on delivering energy rather than producing it, Monahan said his company looks forward to the day when additional suppliers come into the market.
“We are certainly unanimous in wanting to see the cost of the fuel to produce the electricity come down,” Monahan said.