Q: What should I budget for utility costs for a warehouse space?
A: This question comes up fairly frequently, but there isn’t a simple answer unfortunately. It ultimately comes down to two main variables: the property and the tenant. First, efficiencies can vary greatly between buildings. As a generalization, a newer property should be more efficient than an older one. A property with the original roof and few upgrades will be less efficient than one that’s been modernized. The heating ventilation and air conditioning (HVAC) system will play a large role as older, less efficient models will clearly cost more than modern systems. A building could have a combination of overhead heaters, rooftop heaters, forced air furnaces and radiant heating, each of which has pros and cons that factor into the utility cost. The ceiling height also plays a big factor as a larger cubic footage will take more gas to heat than one with a lower ceiling height. The process is further complicated by water usage being measured in cubic meters, electricity costs in kilowatt hours and gas in gigajoules. Understandably, it can be a bit confusing for a tenant simply looking for a monthly estimate.
After the property, the second main variable is the tenant. For example, one tenant might run their facility for extended hours, or prefer the space hotter in the winter and cooler in the summer. If the tenant regularly opens the overhead doors in the warehouse, it will more adversely affect heating costs over a tenant that only opens them sporadically. The number of employees in the building will also have an impact as each additional person uses incrementally more utilities. These are just a few large factors which can influence utility costs with a full list being virtually endless.
A common request is for utility bills from the past tenant. However, due to Alberta’s Personal Information Protection Act (PIPA), the only person privy to that information is the past tenant. Therefore, neither the landlord nor the service provider has or can release that information. Even in the event the past utility information is available, a new tenant should take caution in how much they rely on the numbers. While past utility bills can provide some helpful information, they can also be a misleading estimate of what the next tenant will face.
As each building is different, and each tenant will consume a unique combination of utilities, a tenant will have to make an educated guess on what their utilities will be in the first year. Once they’ve established a baseline of what they’re usage is, they could more accurately budget for the following year.
While it can vary significantly depending on the building and what the intended use is, for industrial properties, we suggest budgeting between $2.00 – $3.00 / sq ft for utility costs1. We emphasize that depending on the variables mentioned above the actual utility cost could be less than $2.00 / sq ft or more than $3.00 / sq ft, but we have surveyed a number of our past clients, and it commonly falls within this range.
As an example, if an office / warehouse property of 10,000 square feet has a net rent of $9.00 / sq ft and operating costs of $5.00 / sq ft, we would recommend budgeting as follows:
Net Rent: 10,000 sq ft * $9.00 / sq ft = $90,000 per annum or $7,500 per month;
Operating Costs2: 10,000 sq ft * $5.00 / sq ft = $50,000 per annum or $4,167 per month;
Utilities: 10,000 sq ft * $3.00 / sq ft (high side of our estimate) = $30,000 per annum or $2,500 per month.
For budgeting purposes, a tenant looking at this specific example should be budgeting $14,167 per month for net rent, operating costs and utilities.
1 This is an estimate for information purposes only and should not be relied upon as real estate advice.
2 Operating costs, sometimes referred to as Additional Rent, generally include the tenant’s proportionate share of property taxes, building insurance, common area maintenance, and management fees. Some utilities may be included if there is a house meter. Otherwise they are the tenant’s responsibility. The number quoted is an estimate and will be adjusted yearly. Accordingly, tenant’s should prepare and budget for yearly increases.
Alberta Utilities Commission, Alberta Government
Chad GriffithsPartner, SIOR, CCIM
Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.
Ryan BrownPartner, BCom, SIOR
Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.
Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.
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