Prices are rising on just about everything. From labor and gas to building supplies, insurance, and utilities, inflation is driving up the cost of virtually every expenditure Americans face these days.
In the multifamily world, that means a significant increase in operating costs and—at least for most properties—quite the ding to profitability.
“The costs are rising way faster than our ability to cover them,” says Karlin Conklin, principal and co-president of Investors Management Group, which owns 21 multifamily properties nationwide.
That sentiment is true for many multifamily owners and operators. While growing rents certainly help ease the sting, they aren’t always enough to make up the difference—particularly while inflation remains high.
“The costs are going up—definitely higher than the revenue stream can go up,” Conklin says. “That’s just the dynamic we are in today.”
Where exactly is inflation hitting multifamily properties hardest, and what are some strategies operators can take in response? Let’s take a look.
Where Operating Costs Are Up the Most
Most operators agree that inflation’s reach is wide. As Jeff Klotz, CEO of The Klotz Group, puts it, “Just about everything is more expensive today. We are seeing rising operating costs across the board.”
Klotz’s company owns over a dozen multifamily properties across Florida and South Carolina, and at those, he says, every area of operation is getting hit hard.
“It feels like nothing is safe from this economy we live in today,” he says.
Building materials and supplies are certainly no exception, and Klotz and other owners say it’s one area that’s been particularly problematic in recent years.
According to the National Association of Home Builders, building materials are now up nearly 20% compared with last year. It’s making new developments significantly more expensive to build, and it’s posing a problem for renovations, repairs, and even general maintenance of existing buildings, too.
“We have seen a sizable increase to our repair and maintenance budgets—anything from the cost of materials to pricing for third-party contractors to complete unit turns,” says Tess Gruenstein, senior vice president of acquisitions and portfolio management at Bailard Inc.
Bailard’s properties are no outliers either. Other operators say labor costs have hit their budgets hard as well.
“The biggest operating cost to just get our arms around and manage right now is payroll,” Conklin says. “We are stretching in order to attract the best people and to continue to pay them at the market rate.”
Because inflation is rising, workers need higher wages to account for higher costs of living. But, according to Gruenstein, even paying those higher wages isn’t enough sometimes. And finding workers—from contractors to property managers—continues to be a challenge.
“We have been struggling to find quality candidates even at higher price points,” she says. “Maintenance positions, in particular, are really tough to fill.”
Beyond labor, multifamily owners are also seeing major spending jumps on insurance and property taxes.
Last year alone, insurance premiums jumped anywhere from 20% to 40% for most properties, according to Jeremy Burr, vice president of sales at Insurance Office of America.
On the property tax front, the problem is three-pronged. First, inflation, supply chain issues, and labor shortages are driving up the price of rebuilding properties. On top of this, natural disasters are also on the rise, which increases risk and pushes up premiums.
Finally, many jurisdictions saw significant financial losses during the pandemic—particularly amid the days of lockdowns. Now, those places are looking to offset those through increased tax revenue.
As Klotz explains, “Counties and municipalities across the nation are aggressively raising property taxes to cover their operating cost increases and loss of revenue during COVID.”
Offsetting Skyrocketing Operating Costs
Higher costs might be inevitable during times of inflation, but that doesn’t mean multifamily operators are taking them lying down. Many are finding ways to reduce their costs, offset them, or, in some cases, make up for them entirely by adding additional revenue streams and services.
With prices on the rise on virtually everything, operators say being strategic with sourcing is critical—both on supplies and with labor. Buying in bulk, for example, is one strategy properties are employing. Gruenstein says Bailard’s properties have stockpiles of hard-to-find items like washers, dryers, and kitchen appliances. This protects them from future price hikes and allows them to avoid potential monthslong delivery delays.
Jaime Hinojosa, senior managing director at Palladius Capital Management, says sourcing from other markets can help, too—especially for properties in higher-cost locales.
“The higher costs and inflation have really hit some markets differently than others,” Hinojosa says. “We will actually bring in contractors from other markets—whether that’s flying them in or having them drive in—where labor is cheaper. Putting them up in a hotel is sometimes part of the contract, too.”
The firm also uses this approach with supplies and building materials.
“Even with the costs of shipping and travel that come with the contractors and the material, we’re still able to utilize significant savings,” Hinojosa says. “It’s a unique environment right now. Even if you bring crews in from 1,000 to 1,500 miles away, you’ll still see upward of a 20% to 30% reduction in some of these costs.”
Focus on Efficiency
Becoming more efficient is also helping properties reduce their expenditures. As Klotz puts it, “Our first strategy in combating higher costs is to respond with increased pressure on operating efficiency and productivity. If we can get better at performing our job, it will cost less to do our job.”
There’s no hard-and-fast solution for increasing efficiency, but technology can certainly help.
Sean Barry, chief operating officer of RentPath, recommends setting up a virtual leasing center, especially if labor costs are of concern.
“Tapping into a virtual leasing center helps offset the costs of adding additional staff in the leasing office and can eliminate the need to fill a vacant position,” Barry says.
He also recommends automating repetitive manual processing like appointment and tour scheduling and using chatbots to reduce call volume and answer commonly asked questions.
“Keeping up with technology improvements helps us trim operating costs,” says Karen Charde, managing director at Sentinel Real Estate Corp. “We see a large savings by primarily advertising digitally, rather than using printed advertising materials.”
Making a property more energy efficient is another way to cut costs and reduce spend, too. At Sentinel’s properties, for example, all common areas are outfitted with LED lightbulbs, which can reduce overall energy usage and cost. The firm also uses drip irrigation systems to cut down on water use.
Retain Your Existing Employees
For properties where labor costs are getting out of hand, Charde says focusing on retention can help.
“The approach we are taking to the rising payroll costs is to continue treating our employees as the valuable assets they are and to further nurture their talent,” she says.
Part of that five-star treatment involves expanding training programs and focusing on employee well-being.
“Investing in our employees is always at the top of our list, and prioritizing resources for training is more important than ever,” Charde says. “We’ve expanded our training programs to include training beyond industry-specific programs. By adding well-being training courses such as empathy, leadership, stress management, motivation, and time management, among other topics, we are making efforts to increase their chances of success within our company. Thus we limit employee turnover and reduce payroll instability.”
Improve Services and Amenities
Enhancing a property’s amenities or adding new services can also aid in the fight against inflation. In many cases, these add-ons can improve retention and reduce vacancies. Many also add an extra revenue stream—either through cost-sharing or direct payments—or allow property owners to charge higher amenity fees and rents.
Hinojosa says package delivery and dog-walking are common cost-sharing services with Class A and B properties. Purchasing bulk, high-speed internet services is also a lucrative strategy.
“Thanks to the scale of the whole community, we can get cheaper pricing than the residents can on their own,” Hinojosa says. “Then we can charge back the residents for these in amenity fees.”
It’s a price most residents are willing to pay, too—especially because it usually saves them money in the long run.
“We find that not only can we provide much greater bandwidth to the resident, but it’s also at a lower price than what they can find if they go to their local internet service provider and do it one-off,” Hinojosa says. “In some cases, we can provide gig-speed internet for cheaper than they can get 400-megabyte speed on their own. “
Klotz says his group’s properties are also adding things like grab-and-go stores, tended bars, child care, and pet care facilities on site.
Work-from-home services are also an avenue many properties are exploring. This might look like rentable conference rooms or even full-on co-working spaces that can be leased out on a daily, weekly, or monthly basis.
“A lot of our residents are now permanently working from home or working from home one or two days a week,” Conklin says. “So, they want more from their home experience and out of their building experience. It plays into this whole new paradigm and this new dynamic that we have post-COVID.”
And playing into those wants delivers twofold. It offers an opportunity to increase rents, amenity fees, and overall income, and it also improves the resident experience, which, in turn, increases retention.
“We’ve been trying to focus on the big picture here,” Gruenstein says. “In an environment where we have strong renter demand and attractive rent growth, we want to make sure we are delivering the best physical product and best-in-class service to our residents as we can.”
At the end of the day, costs are rising on everything—and for everyone. While there are ways property owners can mitigate the impact of those increases, it may mean dealing with lower returns for a while.
Adjusting to that reality—and ensuring all stakeholders do as well—just may be the key to weathering the storm.
As Conklin explains, “We’re prepping our investors so that they understand that, because of this inflationary time, their returns are probably going down. The costs have just increased demonstrably.”