Feeling the Heat: Inflation and Energy Costs Strain Commercial Real Estate
- Jun 16, 2025
- 2 min read
Inflation affects nearly every facet of the economy—and commercial real estate is no exception. As the cost of goods and services rises, so too do the expenses tied to operating and maintaining commercial properties. This includes:
Labor Costs: Wages for maintenance, janitorial, and administrative staff are increasing.
Materials and Supplies: Building materials, cleaning supplies, and repair parts have seen cost surges.
Service Contracts: Vendors and contractors are raising rates to account for their own higher input costs.
These rising line items eat into a property’s operating budget and can place pressure on NOI, particularly for properties with long-term leases that limit rent escalations.
Energy Costs: A Key Driver of Expense Volatility
One of the most significant contributors to increased operational expenses has been the rise in energy costs. Whether a property runs on electricity, natural gas, or oil, energy is a foundational component of day-to-day operations.
Key areas where energy inflation hits hardest:
Heating and Cooling: Higher utility bills during peak seasons directly impact cash flow.
Common Area Maintenance (CAM): Multi-tenant buildings with shared utilities often see CAM charges rise, sometimes creating tension with tenants.
Lighting and Security Systems: 24/7 operations increase electricity usage, especially in retail, industrial, and office settings.
While energy prices are inherently cyclical, recent supply constraints and global market pressures have introduced more persistent volatility than many owners have budgeted for in the past.
Implications for Investors and Owners
Rising expenses affect more than just monthly cash flow—they can alter the long-term outlook for a property:
Pressure on NOI: As expenses rise faster than revenues, a property’s net income may decline.
Valuation Impacts: Reduced NOI can translate into lower property values, particularly if cap rates rise simultaneously due to interest rate changes.
Lease Structuring: Investors may explore lease types such as triple-net (NNN) to shift expense risk to tenants, though such strategies depend on market demand and tenant creditworthiness.
Sustainability Initiatives: Owners are increasingly exploring energy-efficient upgrades to mitigate costs and attract ESG-conscious tenants.
Strategies to Manage Rising Operating Costs
While no investor can control macroeconomic trends, proactive property management can help address rising expenses:
Energy Audits: Identifying inefficiencies and exploring renewable options may reduce long-term utility costs.
Preventive Maintenance: Avoiding deferred maintenance can limit surprise repair costs.
Lease Review: Aligning rent escalations and expense pass-throughs with inflation metrics.
Technology Adoption: Smart building systems can optimize energy use and reduce waste.
The current inflationary environment—and particularly the sharp increases in energy costs—have added complexity to the commercial real estate landscape. Investors and property managers who adapt to these changes with a proactive and data-informed approach may be better positioned to preserve long-term value and cash flow. As always, working closely with qualified property managers, financial advisors, and legal counsel is essential when navigating these challenges.
