Multifamily Expenses Outgrow Rents


Brian D. Milovich

Managing Principal, Calvera Partners

With rents down or flat in most markets across the country, it makes sense that owners would want to focus on their properties’ expenses. Reining in expenses preserves net operating income and buys an owner time until the market allows for rent increases. However, according to the September Yardi Matrix Bulletin, Multifamily Expenses Rise As Insurance, Other Costs Soar, multifamily expenses grew by 9.3% over the 12-month period ending June 2023. The biggest culprits for the outsized increase include insurance (+18.8% increase), repairs and maintenance (+14.2%), administrative (+11.8%), payroll (+7.8%), and utilities (+7.8%). While not at the same percentage increases, these are the exact categories that have uncharacteristically risen in our portfolio.

Insurance is a big one, and we’ve experienced the gamut. In Texas, a property of ours was impacted by the severe winter storm in early 2021. We, like many owners in Texas, had a significant claim from water damage related to frozen and subsequently ruptured pipes. Even if you didn’t have a claim, your insurance still increased astronomically in Texas. As shown in the chart below, Houston, San Antonio, and Dallas all exceeded the national average for insurance premium increases. In Dallas-Fort Worth, we just purchased a property where we underwrote insurance of $800 per unit. That level of insurance is double what we would’ve underwritten just 12 months ago.  


Multifamily Expenses Rise As Insurance, Other Costs Soar

On the other end of the spectrum, we own a mid-rise property in downtown Minneapolis. Our premium there actually decreased. Usually, midwestern markets are plagued by wind and hailstorms that raise premiums annually, like clockwork. Perhaps years of filing no claims finally worked in our favor. Another trend we’ve observed in recent years is, if you have a property with any amount of aluminum wiring in the electrical system, regardless of whether it has been professionally retrofitted, good luck getting a reasonably priced policy. We’ve seen estimates from $750 to $1,000/unit for insurance at properties that were recently paying as low as $325/unit. Insurance carriers have been able to get out entirely of certain geographic markets, property types, and properties with characteristics they no longer want to insure. This has been the biggest change to our underwriting. 

Other operating expenses where we have seen outsized increases are repairs and maintenance (R&M), payroll, and administrative expenses. There are many smart contractors out there who have used inflation to their benefit. The cost to paint units, repair plumbing issues, or do monthly landscaping have all increased. At the same time, wages have increased such that maintenance technicians are some of the hardest people to employ. Without them, there’s an additional reliance on outside vendors, and they know they have pricing power. Payroll for the office staff has also increased. With so many new properties delivering or in lease up, the luxury apartment market can pay property managers more. Also, a new property doesn’t have the same level of maintenance calls and legacy tenants to deal with, providing additional perks for the property manager. Because of that, we’ve had to adjust the compensation structure, and the time it takes to find qualified candidates is elongated.

Administrative costs are one category that would seemingly be easier to control. However, managers and owners like the latest and greatest technology to lease and operate their properties. For example, many owners like us have seen an uptick in fraudulent applications by prospective tenants. To combat that, we use a service called Snappt to detect falsified documents such as paystubs. There are a host of ancillary services a property can deploy, and they each seem to cost $1-2 per unit per month. That doesn’t sound like much, but they all add up. Also, management companies have expanded their own capabilities and bill back at a greater level for services that once were encompassed in the management fee. Just like there are stories of fee creep for tenants, there’s significant fee creep that managers are imposing on owners.  

Unfortunately, we don’t anticipate this higher expense load to recede. Insurance companies will have to see numerous years of fewer claims to even consider meaningful reductions in premiums. According to the National Oceanic and Atmospheric Administration, there were 18 weather-related incidents in 2022 that resulted in $175 billion in damage. This has a ripple effect across the country. Payroll will only increase as everyone fights for a finite talent pool, and technology will increasingly play a meaningful role in operating an apartment property. What I’m most interested in is how technology can play a role in reducing expenses in the future. Yes, it’s an amenity to have a smart home and owners charge for that, but reductions in utilities, payroll, repairs and maintenance, and administrative costs could have an even bigger impact. Real estate, and apartments specifically, is a high touch, physical business that operates with considerable inefficiencies. Until the industry finds a way to leverage technology to stunt or even reverse expense growth, expenses will continue to grow.  


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