Operating Expense Ratio

OER provides a standardized way to compare the cost efficiency of properties across a portfolio or market. A property with a lower OER retains more of its income as NOI, which generally translates to higher value. Typical OERs vary significantly by property type: multifamily properties commonly run 35-50%, office buildings 40-55%, and retail centers 25-40% (lower because NNN tenants absorb many expenses).

Monitoring OER over time is valuable for identifying management issues or cost trends. A rising OER may indicate deferred maintenance catching up, property tax reassessment, insurance premium increases, or inefficient management. Conversely, a declining OER could signal successful expense reduction initiatives or economies of scale from recently completed renovations.

When comparing OERs between properties, ensure you are using consistent expense categories. Some owners include replacement reserves in operating expenses while others treat them as capital expenditures. Similarly, on-site management salaries may or may not be included depending on the owner's accounting practices. Normalizing expense categories before comparing OERs is essential for accurate benchmarking. Also be aware that NNN properties will show artificially low OERs because tenants pay most expenses directly.