Defining Operating Expenses in Commercial Real Estate

Operating expenses are an inevitable part of owning or managing commercial real estate. They cover essential costs that keep a property running, from utilities to property taxes. However, costs can quickly spiral out of control without a clear understanding of what these expenses include and how they’re structured.

With an average net profit margin of around 42% for real estate agencies, any increase in expenses can have a substantial impact on profitability. This is particularly true as property taxes have nearly doubled over the past decade, rising more than 10% in 2018 alone. When left unmanaged, these expenses can reduce a property’s value, complicate financial planning, and create a costly cycle for both owners and tenants.

To stay competitive, property managers and tenants need a reliable way to track, understand, and control these expenses—without guesswork or unexpected costs.

In this blog, we will guide you through everything you need to know about operating expenses in commercial real estate. You’ll learn what qualifies as an operating expense, what doesn’t, who typically pays, and how the right strategies can help manage these costs to maximise return on investment.

What are Operating Expenses in Commercial Real Estate?

In commercial real estate, operating expenses (often abbreviated as OpEx) refer to the ongoing costs needed to keep a property running and in good condition.

These are essential, routine expenses that ensure the property remains functional, safe, and attractive for tenants and visitors. 

Difference Between Operating Expenses and Capital Expenditures:

Operating expenses are often contrasted with capital expenditures (CapEx). While OpEx covers the ongoing, necessary costs for property operation, CapEx involves larger, one-time investments that improve or extend the property’s value. For example:

Operating Expense (OpEx): Suppose the HVAC system in a commercial building requires regular maintenance, such as cleaning, filter replacements, and small repairs. These ongoing costs are considered operating expenses because they are necessary to keep the HVAC system running smoothly on a daily basis and do not add long-term value to the property.

Capital Expenditure (CapEx): Now, if the HVAC system becomes outdated or inefficient and the property owner decides to replace it with a new, energy-efficient model, this would be a capital expenditure. This one-time investment improves the property’s overall value and extends the useful life of the HVAC system, so it’s classified as CapEx rather than OpEx.

Now that we understand what operating expenses are, let’s dive into the specific costs that typically fall under this category.

What is Included in Operating Expenses?

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Operating expenses in commercial real estate cover a range of necessary costs that keep a property functional, appealing, and compliant. These costs may vary based on property type, location, and tenant requirements.

Here’s a breakdown of the primary expenses included in operating costs:

1. Property taxes: These are mandatory payments to local governments based on the property’s assessed value. Property taxes are typically unavoidable and vary by location, directly impacting the overall operating budget.
2. Insurance premiums: Property insurance protects the owner and tenants from potential risks, such as fire, natural disasters, and liability claims. Insurance costs vary depending on factors like property size, location, and coverage level.
3. Common Area Maintenance (CAM): CAM covers expenses related to shared spaces within the property, such as lobbies, hallways, parking lots, and elevators. These costs include:

• Maintenance and repairs: Routine upkeep includes HVAC maintenance, electrical repairs, and janitorial services.
• Landscaping and outdoor maintenance: Includes costs to maintain greenery, clean pathways, and ensure proper lighting in shared outdoor spaces.
• Security: Security services or surveillance systems, depending on property requirements.

4. Administrative fees: Administrative costs cover the expenses of managing the property, such as accounting, legal services, and property management fees.

By understanding these key components, both property owners and tenants can anticipate the recurring costs involved in property management, helping to plan better and allocate budgets accordingly.

With a clear view of what’s included in operating expenses, let’s take a closer look at what is typically excluded from operating expenses.

What Isn’t Included in Operating Expenses?

While operating expenses cover a range of essential, ongoing costs, specific types of expenses don’t fall under this category.

These excluded costs often involve substantial, one-time investments or expenses that directly benefit specific tenants rather than the property as a whole.

Here’s a breakdown of what’s generally not included in the OpEx:

1. Capital expenditures (CapEx): These are significant investments that improve the property or extend its useful life, such as major renovations, roof replacements, or new HVAC installations. Unlike operating expenses, which are regular and recurring, CapEx costs are occasional and focused on long-term value.
2. Tenant improvements: These expenses are modifications or enhancements made to individual tenant spaces to suit specific business needs. Tenant improvements are generally negotiated separately.
3. Debt service: Debt-related costs, such as mortgage payments, are the owner’s responsibility and are not passed on to tenants as operating expenses.
4. Marketing and advertising expenses: Costs incurred to promote the property or attract new tenants, such as advertising, property tours, or promotional events, fall outside operating expenses since they benefit the owner directly.
5. Leasing commissions: Fees paid to brokers or agents for securing new leases or renewing existing ones are excluded from operating expenses, as these are one-time costs tied to tenant acquisition rather than ongoing property operations.

Distinguishing these excluded costs from operating expenses helps property owners and tenants clearly understand budget allocation and tenant responsibilities, providing transparency in property management.

With an understanding of what doesn’t fall under operating expenses, let’s explore a key financial metric in commercial real estate: the operating expense ratio and its role in evaluating property performance.

Key Metrics: Operating Expense Ratio (OER)

The Operating Expense Ratio (OER) is a crucial metric in commercial real estate, providing insight into a property's cost efficiency. Simply put, OER shows what percentage of the property’s income is spent on operating expenses.

By calculating and monitoring this ratio, property owners can understand how well they’re managing expenses relative to income, making it a valuable tool for assessing property performance and identifying areas for cost control.

How to Calculate the Operating Expense Ratio (OER)

The formula for OER is straightforward:

Operating Expense Ratio (OER)= Total Operating Expenses/Gross Operating Income

• Total operating expenses: This includes all recurring costs required to keep the property functional, such as utilities, property taxes, insurance, maintenance, and management fees.
• Gross operating income: The total income generated by the property, including rent and other sources like service fees, before deducting operating expenses.

For example, if a property generates AED 500,000 in income and has AED 200,000 in operating expenses, the OER would be calculated as:

OER= 200,000/500,000 =0.4 or 40%

This result means that 40% of the property’s income is spent on operating expenses.

Why is OER Important?

Understanding the OER helps property owners:

• Assess cost efficiency: A lower OER indicates that a smaller percentage of income is spent on expenses, often reflecting efficient management.
• Compare performance: Owners can benchmark their OER against similar properties or industry standards to see how efficiently they manage costs.
• Identify cost-saving opportunities: A high OER could signal that expenses are taking up too much of the income, highlighting areas that may need cost control or efficiency improvements.
• Improve decision-making: Knowing the OER can guide budgeting, pricing, and investment decisions, helping owners and managers set realistic income goals.

What is a Good Operating Expense Ratio?

The ideal OER varies depending on property type, location, and market conditions. However, a typical OER for commercial real estate usually falls between 30% and 50%.

Properties with lower ratios (closer to 30%) are generally more efficient, as they’re spending less on operating expenses relative to income.

Understanding and managing OER helps owners maintain profitability and align expenses with revenue, ultimately contributing to the property’s long-term financial health.

With a solid grasp of OER, let’s dive into why consistently tracking these expenses is essential for maintaining a property’s financial health.

Importance of Tracking Operating Expenses

While operating expenses are crucial in property management, tracking them is just as important. Without consistent tracking, costs can become unpredictable, disrupting budgets and making it difficult to identify areas for cost-saving.

Let’s explore why tracking operating expenses is so essential.

Key Benefits of Tracking Operating Expenses:

• Helps maintain profitability: By monitoring each expense, property owners can see where money is being spent and where adjustments can be made to reduce costs. This keeps profitability stable and reduces unnecessary spending.
• Improves budget accuracy: Accurate tracking allows for better forecasting and budgeting, helping owners plan for seasonal fluctuations, maintenance needs, and other predictable costs.
• Supports lease negotiations: Understanding operating expenses can also benefit tenant relationships, as it allows owners to offer transparency in lease agreements. Tenants gain a clearer picture of what they’re paying for, which can lead to smoother negotiations and fewer disputes.
• Boosts property value: Efficient expense management shows the financial health of a property, which is essential for increasing its market value. Buyers and investors are more likely to consider properties with stable, well-documented expenses.

Tracking operating expenses is vital for maintaining profitability and accurate budgeting in real estate. At Alaan, we offer a streamlined solution designed to track and manage operating expenses in commercial real estate.

Our AI-powered spend management platform provides real-time expense tracking, customisable spend controls, and automated approval workflows—giving property managers immediate insights and control over every expenditure—from routine maintenance costs to utility bills and vendor payments.

Even if you use popular accounting software like Xero, QuickBooks, or NetSuite, our one-click accounting integration enables seamless capture, tracking, and reconciliation of operating expenses.

With real-time analytics that reveal cost-saving opportunities and support precise tax recording, Alaan empowers property owners and managers to maintain budget predictability, reduce manual errors, and keep a clear view of every operating expense.

“Alaan was able to seamlessly integrate with our accounting systems, and made it feel like such a plug-and-play solution.”— Murtuza Unchwaniwala, Chief Financial Officer, Al Barari Real Estate.

Now that we’ve covered the importance of tracking these expenses, let’s look at how lease structures impact specific cost categories.

How Lease Structures Influence Operating Expenses in Commercial Real Estate

Understanding how lease structures influence operating expenses is important for both property owners and tenants. Lease terms determine who pays for various costs associated with operating a commercial property.

Different lease types have different structures, affecting the share of expenses and impacting budgeting and financial planning.

Here’s an overview of the main types of lease structures commonly found in commercial real estate and how each one handles operating expenses:

1. Triple Net Lease (NNN Lease)

In a triple net lease, tenants pay a base rent in addition to a portion of the operating expenses, often covering:

• Property taxes
• Insurance
• Common area maintenance (CAM)

Key point: The tenant takes on a significant portion of the property’s operating costs, making this lease structure suitable for stable and established businesses that can manage these predictable costs.

2. Full-Service Gross Lease

With a full-service gross lease, the base rent includes most or all of the property’s operating expenses. The landlord is responsible for covering these costs, which often include:

• Utilities
• Maintenance and repairs
• Property management fees

Key point: This lease structure offers tenants cost predictability since the base rent covers expenses. However, landlords may charge a slightly higher rent to offset these included expenses.

3. Modified Gross Lease

A modified gross lease is a flexible option that combines aspects of both triple net and gross leases. Typically, the landlord covers some operating expenses (such as taxes and insurance), while the tenant covers others, like utilities or specific maintenance costs.

Key point: This lease allows landlords and tenants to negotiate cost-sharing, making it ideal for businesses looking for flexibility in their expense commitments.

Choosing the Right Lease Structure

Selecting the appropriate lease structure is crucial for maintaining predictable costs and financial stability. 

Tenants must assess their ability to manage expenses, while landlords should evaluate how much responsibility they want to retain for property-related costs.

With lease structures setting the foundation for who covers which costs, the next step is understanding which operating expenses are negotiable and which are not.

Negotiable vs. Non-Negotiable Operating Expenses

In commercial real estate, some operating expenses are flexible, allowing tenants to negotiate, while others are fixed and unavoidable.

Understanding which costs fall into each category gives both property owners and tenants a clearer view of potential savings and obligations.

Non-Negotiable Operating Expenses

Non-negotiable expenses are essential costs that cannot be changed due to legal requirements, property needs, or uncontrollable market factors. These expenses are passed directly to tenants and usually include:

• Property taxes: Levied by local authorities, property taxes are a standard requirement and vary based on property location and assessed value.
• Insurance premiums: Building insurance protects the property against potential damage and risks. These premiums are essential to the owner and are typically non-negotiable.
• Utilities: Basic services like water, electricity, and heating are necessary to maintain operations and cannot be excluded.
• Regulatory fees: Fees for permits, safety inspections, and compliance with local building regulations are mandatory and not open for negotiation.

Negotiable Operating Expenses

Negotiable expenses are often under the property owner's control and can be managed or capped to protect tenants from significant cost increases. Common negotiable expenses include:

• Common Area Maintenance (CAM) costs: These expenses cover shared services like landscaping, janitorial work, and security in multi-tenant properties. Tenants can negotiate caps on CAM fees to prevent large annual increases.
• Maintenance and repair costs: While necessary for property upkeep, tenants can request specific limits on the annual increase of these costs, especially if repairs are not essential or frequent.
• Administrative fees: Owners may include administrative fees as part of operating costs, but these charges can often be negotiated to ensure they’re fair and reasonable.

With a clear understanding of negotiable and non-negotiable expenses, we can now explore effective strategies for managing these costs to maximise return on investment (ROI) in commercial real estate.

How to Maximise The Return on Investment in Commercial Real Estate?

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Managing operating expenses effectively is crucial for property owners looking to maximise their return on investment (ROI).

By controlling these costs, owners can improve profitability, maintain tenant satisfaction, and increase the overall value of their property. Here are some practical strategies to help manage operating expenses in commercial real estate.

1. Conduct Regular Expense Audits

Regular audits help to identify unnecessary expenses and areas where costs can be reduced. By closely examining every expense category, you’ll find opportunities to cut costs without compromising quality.

• Utility usage: Review utility expenses, pinpoint wasteful practices, and consider energy-saving upgrades.
• Maintenance costs: Check if maintenance expenses are in line with market rates. Sometimes, vendors might be overcharging for services.

2. Invest in Energy Efficiency

Energy is one of the highest operating costs for commercial properties. Implementing energy-efficient solutions can significantly reduce this expense.

• LED lighting: Replace traditional lighting with LED alternatives to lower electricity costs.
• HVAC optimisation: Regularly service HVAC systems and consider programmable thermostats for better control.
• Water-saving fixtures: Install water-efficient fixtures to reduce water-related utility expenses.

3. Use Preventive Maintenance

Preventive maintenance minimises costly repairs by addressing issues early and, also extending the lifespan of assets.

• Scheduled inspections: Set up regular inspections for systems like plumbing, electrical, and HVAC.
• Asset tracking: Monitor the age and condition of major assets to plan timely maintenance or replacement.
• Maintenance records: Keep detailed maintenance records to identify recurring issues and areas needing upgrades.

4. Negotiate Vendor Contracts

Negotiating with service providers—especially for recurring services like cleaning, security, and landscaping—can yield cost savings while maintaining service quality.

• Multiple quotes: Gather quotes from various vendors to compare pricing and services.
• Long-term contracts: Consider long-term agreements, as some vendors offer discounts for extended contracts.
• Performance-based contracts: Structure contracts based on performance metrics to ensure you pay for work that meets specific standards.

Conclusion

Operating expenses form a core part of property management; effectively controlling and tracking these costs is critical to maximising returns and sustaining profitability.

However, managing operating expenses can quickly become overwhelming, with manual data entry, inconsistent tracking, and delayed approvals adding up to lost time and increased costs.

At Alaan, our AI-driven platform simplifies expense management by consolidating all operating costs into a single, intuitive solution. Property owners and managers can set budget controls, automate tracking, and streamline approvals—all in real-time across every expense category—from utilities and maintenance to vendor contracts.

Our seamless integration with top accounting software like Xero, QuickBooks, and NetSuite ensures every transaction is accurately captured, tracked and reconciled.

Whether you’re looking to reduce manual work, save time, or ensure accurate reporting, Alaan is designed to meet all the needs of modern property management.

Book a free demo today and start your journey towards more effective expense management and a stronger return on investment with Alaan.