Energy Prices Hit Property Values
By Tom Ramstack
The Washington Times, November 16, 2005

ENERGY PRICES HIT PROPERTY VALUES: Real estate advisers at a downtown D.C. meeting warned yesterday that rising energy prices will offset gains in property values, prompting higher rents for tenants and greater expense for owners.

"Something's going to have to give," said William R. Beckmann, president of Beckmann Appraisals, a New York property-appraisal firm.

"Either you're going to get a new tenant who can pay the rent, or you're going to have a decrease in profitability."

About 100 real estate executives met at the Renaissance Mayflower Hotel downtown for the annual convention of the Counselors of Real Estate, an association of real estate advisers.

From December 2003 to November 2005, wholesale electricity costs nearly doubled from 4.4 cents per kilowatt-hour to more than 8.6 cents per kilowatt-hour, according to World Energy Solutions, a Worcester, Mass., energy brokerage firm.

So far this year, natural gas prices rose from $ 6.80 per million British thermal units to $ 10.70 per million Btu, according to FutureSource.com, a futures market information provider.

"The increased costs are obviously passed on to the tenant," said Richard Domaleski, World Energy Solutions' chief executive officer.

Energy costs can range from as little as 3 percent of expenses for some commercial properties, such as hotels, to more than 25 percent for office buildings.

Many real estate investors already are being forced to accept relatively low yields on their properties because they put so much money into the purchase of overpriced properties.

Higher energy prices would reduce their yields even more, potentially helping to speed up any downturn in the real estate market as interest rates rise, Mr. Domaleski said.

Some organizations that use large amounts of energy are increasingly using "reverse auctions" over the Internet to buy electricity or natural gas in bulk quantities. In reverse auctions, buyers notify any of about 150 energy suppliers that they are invited to bid on a long-term contract.

The District gave a $ 41.2 million contract last year to Select Energy of Berlin, Conn., after a competitive bid over the Internet. The two-year contract is supplying electricity to 600 D.C. properties over local power lines.

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