Operating Expense Ratio

What Is Operating Expense Ratio (OER)?

Operating expense ratio (OER) helps you see how efficiently a commercial property runs. It compares the money you spend to operate the property with the total income it brings in. This simple metric gives you a clear look at the property's financial health.

A lower OER means you’re managing costs well compared to your income. That’s a good sign for property managers and investors.

Why does operating expense ratio matter for commercial property investors?

OER is a vital tool for commercial property investors for several reasons:

• You can compare the efficiency of different properties in your portfolio or across the market.
• Tracking OER over time can show if management is improving or if problems are growing.
• A property with a low OER may offer higher profits, making it more attractive to investors.
  
  

How to Calculate Operating Expense Ratio

To calculate the Operating Expense Ratio, follow these steps:

What Is a Good Operating Expense Ratio?

A “good” OER depends on your property type, location, and the market. Typically, lower is better; it means you’re managing costs well and getting more return from your property.

Here are some common OER ranges for different property types:

• Multifamily properties: 35% to 45%
• Office buildings: 35% to 55%
• Retail properties: 60% to 80%

Compare your OER to similar properties in your area to see how you’re doing.

Regularly reviewing your Operating Expense Ratio ensures you can respond proactively to any shifts in your property’s financial health.

What factors affect operating expense ratio?

Several things can change your OER:

• Property age and condition. Older buildings often need more repairs, raising expenses.
• Occupancy rates. More empty units mean less income, so your OER goes up.
• Lease structure. Net leases can lower your OER since tenants pay some costs.
• Property management efficiency: Effective property management can help control operating expenses and maintain a lower OER.
• Market trends. Inflation and rising utilities can raise expenses and your OER.
  In 2024–2025, commercial property owners have faced sustained inflation, with U.S. consumer prices rising 3.3% year-over-year as of May 2024. This has driven operating expenses higher—especially for utilities, insurance, and building services—causing average OERs to increase across most CRE sectors. For example, CBRE reports that average OERs for multifamily and office assets have increased by 1–2 percentage points compared to pre-pandemic levels. (Bureau of Labor Statistics, 2024) 

How can you manage operating expenses?

To keep your OER healthy, try these best practices:

• Review expenses often and look for ways to save.
• Use energy-efficient systems to cut utility bills.
• Maintain the property regularly to avoid big repair costs later.
• Negotiate with vendors and get competitive bids for services.
• Use technology and automation to reduce manual work and save on labor.

You’ll see the term Net Operating Income (NOI) throughout commercial real estate conversations. NOI is the total income a property produces after deducting all operating expenses, but before subtracting taxes and financing costs. It’s a key figure for measuring a property’s profitability.

What are the limitations of operating expense ratio?

While OER is a valuable metric, it has some limitations:

• It does not account for debt service or capital expenditures, which can significantly impact a property's overall financial performance.
• A low OER may not always indicate a well-performing property, as it could be the result of deferred maintenance or insufficient investment in the property.
• OER should be used in conjunction with other financial metrics, such as net operating income, cap rate, and cash flow, to gain a comprehensive understanding of a property's financial health.

How property management software helps improve OER

Property management platforms can help you lower OER by making your workflow smoother and improving cost control:

• Automation: Use technology to handle repetitive tasks and cut labor costs. Automation also helps manage time and resources better.
• Expense tracking: Track every expense in detail. This helps spot trends and areas to save money.
• Data analytics: Use reports and dashboards to see what’s working and where you can improve. Good data helps you make smarter decisions and stay ahead of problems.

In short, the operating expense ratio is a simple but powerful way to track property performance. Use it alongside other financial tools to make smart decisions and keep your property running efficiently.