Heat Costs Expected
To Hurt Property Owners

Higher energy prices are expected to squeeze all commercial property sectors this winter, though most real-estate investment trusts are protected because their tenants pay for heat and electricity.

The hardest-hit sector in real estate will likely be apartment-building owners, which aren't able to pass on all heating costs to tenants, as well as for some not-for-profit housing providers, especially those who serve the poor. The U.S. Energy Information Administration said all heating sources will cost more this winter than last. Bills for natural gas, used by 55% of American households, are expected to be an average of 48% higher.

Many other sectors benefit from more-favorable lease structures. Shopping malls and warehouse buildings typically can pass through most energy costs to tenants. Office-building owners will get hit harder, especially those with high vacancy rates or with lots of properties in cold areas.

In addition to the bump in costs to heat common areas, such as clubhouses, fitness facilities and laundry rooms, many apartment REITs have at least some units where the rent includes all utilities. Of the REITs surveyed, Merrill Lynch predicted that Apartment Investment & Management Co. along with Camden Property Trust would be hit hardest by higher energy prices. Merrill reduced its estimates of funds from operations for both companies by 2% for 2006, still up from this year.

Kim Callahan, a Camden spokeswoman said electricity and natural gas account for 5% to 6% of the portfolio's total operating costs, which appears to be in line with the other apartment REITs examined by Merrill Lynch. Also Camden, Houston, has very few units that include utilities in the rent.

An AIMCO spokeswoman said the company wouldn't discuss the matter until its third-quarter earnings call Nov. 1, but said that doesn't necessarily mean it will be hit harder than its competitors by heating costs.

Landlords can always raise the rent to cover the heating bills but with apartment markets weak in many parts of the country, that could be difficult. Already, landlords are threatening such increases in Chicago, tenant advocates say. Many low-income residents pay month-to-month so the increase can often be enacted with only a month's notice.

Bob Prettyman, regional vice president of property operations of Mercy Housing Inc., a national not-for-profit that provides housing to low-income families, said as many as 30% of Mercy's units are not individually metered to renters, so the utility costs will be borne by those complexes.

Email your comments to rjeditor@dowjones.com.