The only item that makes a better showing-or a poorer showing, depending on the point of view-is store rents, with a modest increase of 30 percent. That I will talk about a little later. It is recorded! here to make the picture complete.

You may wonder why we chose this particular period for comparison; and the answer is, probably for the same reason that the Senate Small Business Committee, in a spot-check survey covering six cities, selected at random, hit upon this same 1940-50 comparison. Ever since humans learned to count on 10 fingers, we have fallen into the habit of computing by 10's. Thus 10 years offers a convenient measuring stick. Moreover, this particular ten years takes in the adjustments and readjustments that preceded and followed World War II; it is therefore peculiarly significant. For your purpose and ours, too-it would seem to be a "natural."

The Senate Small Business Committee survey, as the Housing Expediter reminded you, showed a 78.5-percent increase during this same interval. Several features of that survey might be open to questions, if one were disposed to quibble. The free and easy method of accepting returns, with or without identification, might readily account for some considerable margin of error. The fact it is not so many points higher than the percentage supported by carefully checked yearto-year trends, would seem to indicate that, by and large, the Senate committee survey was a creditable one-time job.

It

Let me repeat, before we leave this chart, that it serves a primary purpose. It throws certain facts into their proper perspective. shows that commercial rents held back-that they were definitely not pushing ahead.

It tends to show that rental increases have been reasonable, indeed, in the light of irresistable trends.

But you may be thinking all this is water over the dam. This is looking backward 10 years. What has happened since Korea? What are commercial rents doing here and now? Well let's see.

Chart 2 was taken almost bodily from a governmental report. It is a portrayal of economic changes that have taken place from June 1950 to January 31, 1951.

You will find a similar graph in the joint economic report covering inflationary hazards, issued early in April, with which, Mr. Chairman, certain members of your committee are quite familiar.

About all we have done is to make a 2-week adjustment in the percentages to the right-which in the original were dated February 13— and insert the additional item, in red, "Office rent."

Here we have a 7-month comparison that is even more striking toan our first illustration. The base figure shown at the left-is 100; therefore 102.6 is an increase of 2.6 percent.

This, then, reflects the impact of inflationary pressures which the Korean outbreak unleashed.

This, then, is our industry reaction to resumption of an economy governed by emergency powers, with threatened shortages, scare buying, and all the rest.

This is what really happened-in contrast to grave apprehension that sharp increases in rentals of business accommodations might upset the stabilization program.

The higher percentage increases I hardly need recite themclearly indicate that other factors in our business economy are much

more sensitive to inflationary influence than is this item of commercial

rents.

Inflation generates its own momentum. These various factors react upon each other. Those of us who own or operate commercial properties are by no means immune to the pressure of higher costs. One item not shown upon this chart, because there was no good place to put it, merits particular attention at this point.

During the 7 post-Korean months that witnessed this gain of 2.6 percent in rental rate, the operating costs in these same reporting buildings increased 7.4 percent-nearly three times as rapidly.

Let me repeat, because it is highly significant-a 2.6 percent increase in rental rate; a 7.4-percent increase in operating cost. That supports the assertion which I borrow from the supplemental statement of one of our member associations-represented here todaythat we are victims of inflation, not a contributing cause.

But now we are getting into the economics of office building operation, and I hasten to give you the over-all picture.

We would be quite within our rights, I presume, to show you those facts which are favorable to our position, and pass lightly over any which might give aid and comfort to those who may differ with us. But we are not smart enough, or perhaps too smart-I don't know which, and really don't care.-to pick and choose. What we have to submit to you is the facts, all the facts, and nothing else but. In chart III we give you a panoramic view of office building operatons from 1924 to 1950, inclusive, covering all phases of the so-called business cycle and all stages of emergency from all-out peace to all

out war.

To make it quite simple, this chart deals with just two things, total income and operating costs, each recorded in dollars per square foot. The red curve is the ratio between the two, and that is what tells whether business is good or bad.

Back in the middle twenties, when we thought of conditions as "normal," it took 60 cents of each dollar of income to operate our buildings. So the operating ratio was 60.

Later on, in the thirties, when the depression hit us, the operating ratio got up around 80, which meant that 80 cents of every revenue dollar was required to keep our buildings going. That was bad business very bad in fact for the 20 cents remaining was not enough to meet financial obligations, such as interest on borrowed money, and leave anything for the owner as a respectable return on his investment, if he happened to have any return at all.

This brings out two facts which I think may surprise you.

One is that our business hit the low point of the great depression, not in the thirties as one would expect-though every year seemed like the low point-but in 1941, when everyone but us had fully recovered. That year, as you can see, charts the narrowest margin between income and cost of operation.

The other point is that we are still in an unfavorable position. In 1949 this ratio had only come down to 68.2, and in 1950 it actually turned in the wrong direction.

Real property has that peculiar characteristic-its trends lag far behind. Contrary to the popular impression, the industry is still in a subnormal state. It has never shared, as other businesses have done, in the prevailing era of prosperity. You do not find our opera

tions recorded in those charts which portray high corporation earnings-all because of this characteristic lag. This lag is apparent in times of deflation; it is quite as pronounced in times of inflation. That is why commercial rents present no present inflationary threat. Chart IV covers the same period of years, but introduces some new factors.

One of these new factors is occupancy, which plays an obviously important part in profitable operation.

Another and from the viewpoint of our tenants the only one that matters is office rental rate. This line, shown in red, runs from 1934 on, because prior to that time our method of reporting did not provide for this calculation.

Perhaps I should explain that this figure of rental rate is not anyone's guess. It is not an asking price, subject to negotiation. It is the actual dollars received for each square foot of occupied office area. This is the true and accurate rental rate, as contrasted with rule-ofthumb quotations; and I might add that the experience exchange report is the only place you will find it.

Note also the introduction of "office rental income," which differs slightly from "total income" shown in the previous exhibit. The obvious difference between office rental income and office rental rate, is that income is based on total rentable area, whether occupied, or not, whereas rate is for occupied only.

In the early thirties, as you will see, income fell off much faster than rental rate. That is because we were reacquiring so much vacated space. During recent years, happily, the situation has been reversed, and rental income has gone up faster than rental rate-this because occupancy has been improving. This increase in rental income is the bright spot in our recovery. It amounted to 98.6 percent over the last 10 years. It marks the transition from excessive vacancy to better than average occupancy.

In this chart we have marked off that last 10-year period (1940 to 1950); and the box at the bottom, applicable to this 10-year section, is indicative of net changes during the period.

I would have you observe that during this 10-year interval-the same 10 years we were talking about in connection with the first chart shown-occupancy increased 18.5 percent; rental rate increased 62.5 percent; operating cost increased 63.6 percent.

I repeat: rental rate up 62.5 percent; operating cost up 63.6 percent. Again I ask, is that inflation?

Honestly, I think this is evidence of weakness. I am not proud of our poor showing as building managers. During 10 years of prosperous times when nearly everybody was making money and making it fast, we weren't able to keep ahead of operating costs.

True, we were getting the benefit of increased occupancy; but that was only catching up on what had been lost during desperate years of operation in the red.

Here we were with the law of supply and demand in our favor― our tenants making money, and everything rosy-and the best we come up with is a 62.5 percent mark-up in rental rate, compared with 63.6 in operating costs.

And on top of that, as reported a moment ago, we take 7.4 percent increase in costs, post-Korea, with a 2.6 offset in rental rate. Well let's pass on.

The new factor introduced in chart V is store rent. The typical office building, as you know, has stores and shops on the ground floor and offices above. In a 40-story building the proportion of store space is relatively small; but in the average building it is a substantial factor. From the standpoint of income production, it may be a very sizable consideration; in fact not a few cases have come to our attention where the stores carry the load.

When it comes to store rentals, we can only speak from our own experience, which obviously does not cover the entire merchandising field. But I do believe that for the purpose of this inquiry, we can give you a cross-section that is well suited to the purpose and typical of the picture as a whole. For one thing, these are mostly small independent stores, and it is on the protection of independent smallbusiness enterprises that the proposed bill places particular emphasis. A goodly number of these stores pay rent on a percentage basis, just as they do in other locations. What this chart shows is the average rental per square foot, regardless of whether this has been arrived at by percentage formula or flat rate. In either case it is what the store pays.

One significant fact which this portrayal brings out, is that store rents are lower today than they were 25 years ago.

Another point of interest-and of significance, too-is that percentagewise, the recovery, from 1940 to 1950, is considerably less than in the case of office rents. This percentage or recovery was shown in our first exhibit-30 percent.

And finally, as you can see, in 1950 the trend was down, undoubtedly attributable to reduced volume of sales, in the case of percentage leases. According to Department of Commerce statistics, retail sales in certain categories increases as much as 167 percent between 1940 and 1950. With higher selling prices, the dollar volume in all categories has certainly increased considerably more than 30 percent over that period.

That is to say, the rental charge is a diminishing factor in the cost of doing business-not an increasing burden.

What these facts indicate is that in the record up to now, there is nothing to support such fears as have been expressed that the small merchant will be driven out of business.

Chart VI is by way of summary, to bring the information previously given, quickly into focus.

In this 1940-50 period, office occupancy increased 18.5 percent; store rent 30 percent; office rental rate 62.5 percent; operating costs 63.6 percent; total income 83.2 percent; office rental income 98.6 per

cent.

The particular point I would have you note here is the relation of rental rate to rental income. This is brought out in the color scheme, as indicated at the left.

Improved rental income and as the record shows there was plenty of room for improvement-is the result of two things, higher rental rate and higher occupancy.

Of the 98.6 percent, 62.5 percent represents increase in rental income resulting from advance in rate-which did not quite cover the advance in operating costs. The rest of the increase in rental income

results from better occupancy.

Occupancy we must have, or office buildings go through the wringer. That is the business hazard that confronts every one of us. If you are making shoes, and business slides off, you just curtail production. But in office buildings, it is different. The space is there. You can't eat it. And believe me, there have been times when we have wished That brings to our last exhibit, chart VII which deals with occupancy-in the last analysis, a controlling factor.

we could.

The greater part of this curve appeared in one of our earlier exhibits but something new has been added. I told you that our compilation of May 1 office occupancy returns was completed just before we left home. But we still had time to get it in this chart-though I am not sure the ink is dry. Here it is, in the upper right corner:

May 1, 1951, occupancy 97.81 percent, a gain since October 1950, of 0.37 percent.

You will note that the direction of the occupancy curve is remarkably consistent over long periods. The low point was in May 1934, the high in October 1946. Between these two dates the trend was continuously upward. Since 1946 the trend has been down, until it ran into a flurry of adjustments (some up, some down) directly attributable to the mobilization effort.

The present vacancy (2.19 percent) translated into rentable area, is between 4 and 5 million square feet.

Frankly, I expected a more pronounced gain than the May 1 survey discloses. This new figure indicates to me that the post-Korean impact has had considerably less influence on demand for space than we were led to anticipate.

We have been operating for more than 5 years on a smaller space surplus than now exists and, as you have already seen, in the ground we have been over, no rent squeeze or other dire consequence has resulted. There is nothing in this up-to-the-minute picture to occasion either apprehension or alarm. On the contrary this evidence of a tendency to level out, is definitely reassuring.

There are certain relevant factors that, for one reason or another, are less subject to statistical treatment or graphic presentation.

For example, there is the primary consideration-generally accepted or, shall we say, self-evident-that commercial rents have only an indirect and remote relationship to the cost of living, which economic controls are designed to keep in line. At worst, their effect at consumer level would be confined to the added cost, if any, of doing business.

I say "if any" advisedly, for fundamentally the function of a commercial building is to reduce the cost of doing business by providing superior facilities for less money than a tenant could provide for himself.

But let's be practical and specific. The fact is that, currently, office rent is a small and decreasing factor in the cost of doing business. I say "small," because it probably ranges somewhat under or over 6 percent. I say "decreasing" because, as we have already seen, other costs are rising much more rapidly than rents.

We get this information from our tenants; they naturally are the ones who know. Some of these tenants maintain their own research departments and keep close tab on all business costs, as any efficient organization should. I will cite just one example drawn from the

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