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Thursday, Mar 28, 2024
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Energy Rates Building managers mull pass-through of energy costs

Companies entering the commercial real estate market are seeing something that wasn’t as common the last time they signed a lease for office space: Electricity’s not included.

The change is compliments of the state’s energy crisis, as landlords have had to search for ways to shuffle along the ballooning electricity prices that thundered across the state over the last year.

Now, lease language is changing, tenants are getting stuck with extra costs and conservation is a regular task.

“Before the crisis, we absorbed any increase in electricity costs. In our current and future leases, increases in energy costs will be born by the tenant,” said Glenn Welsh, building manager for the Chamber Building in Downtown.

Welsh said the average lease rate in the building has increased from $1.50 per square foot a month to $1.66.

This sort of increase yanks an extra $19,200 a year from the pockets of a tenant that rents 10,000 square feet of space.

“Tenants are beginning to see the costs of operating their businesses going up significantly,” said Joe Murphy, senior real estate manager at real estate brokerage CB Richard Ellis in San Diego.

Some relief is on the way. An April bill signed by Gov. Gray Davis capped business energy rates at 6.5 cents per kilowatt-hour.

Before the action, rates rose to as high as 50 cents a kilowatt-hour in San Diego.

The capped rate will begin appearing on bills at the end of June, said Cybele Thompson, president of the Building Owners and Managers Association of San Diego, which pressed hard for the cap. Also, Thompson said the cap is retroactive to Feb. 7, and the credits are supposed to show up in August electricity bills.

Though the cap helps, it still marks a nearly 100 percent increase in kilowatt costs in the last year, said Craig Benedetto, BOMA legislative director and partner of Benedetto Communications.


– No Gains, No Losses , Yet

Welsh said the energy crisis has “pretty much flattened out the market.”

“Over the last three months, leasing has almost been flat,” he said. “We haven’t lost tenants, but we were gaining tenants and now we’re not.”

He places equal blame for the inactivity on the energy crisis and the slumping economy.

San Diego-based CommonWealth Partners owns and manages more than 1 million square feet of office space countywide. Utilities were included in the rent for the company’s space before the energy crisis hit, said Leasing Manager Stefan Khudic. Now, he said, the landlord will only pay what 1999’s utility rates were, passing along the leftover costs to the tenant.

“It really hurts the tenants,” said Khudic, who has seen electricity costs expand 200 to 300 percent. “There’s nothing the landlord can do about it.”

Murphy, who manages the Wells Fargo Plaza in Downtown, said electricity is still included in the building’s rent, but he “wouldn’t be surprised if we started doing that pretty quick.”


– A Push For Conservation

In the meantime, building managers are pushing conservation.

By cutting down on after-hours air conditioning and turning off lights and computers, Murphy said Wells Fargo Plaza has reduced utility consumption by 18 percent.

“Unfortunately, costs are still high,” he added.

Murphy’s building is also one of many looking into on-site power generators.

At the Chamber Building, Welsh said common-area lighting has been reduced by 50 percent, garage-area lighting by 80 percent and outside signs have been turned off. The building’s air conditioning system also has been modified. The efforts have reduced electricity usage by 15 percent, he said.

But the demand for electricity remains, meaning tenants are still left with huge utility bills.

“The situation is out of control,” Benedetto said. “In commercial real estate, your tenants can conserve by turning off lights and computers , but they just can’t turn everything off.”

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