Rising operating expenses continue to hamper multifamily owners and property managers. According to Yardi Matrix’s 2024 Multifamily Outlook, the average multifamily expense per unit increased 9.3% on a trailing 12-month basis through midyear 2023.
Insurance has been the most notable cost hike for the industry, but operators also are navigating increases in costs for labor, marketing, turnovers, repairs, and maintenance.
According to Yardi Matrix, as income growth slows, maintaining occupancy, operating efficiency, and cost-cutting will be at the forefront for multifamily operators.
“We hope to see the cost of items level out with recent economic predictions for 2024,” says Sara Maxwell, vice president of management services–operations at Landmark Properties. “However, we are realistic and do expect to continue to see labor costs and payroll costs increase in 2024.”
Several multifamily owners and managers share some strategies they are employing to combat the increases to their budgets.
Insurance Initiatives
Insurance remains the largest cost increase for most operators and can be challenging to offset.
Los Angeles–based Universe Holdings has most of its portfolio in California, where several of the largest insurance carriers have exited over the past year.
“California’s vulnerability to natural disasters like earthquakes, wildfires, and floods has had a direct impact on increased insurance costs,” says CEO Henry Manoucheri. “To help navigate these increases, we’ve looked at shopping for better rates as well as other strategies to mitigate these costs. These include improving property conditions to qualify for lower premiums and bundling insurance policies for multiple properties by sharing the expense.”
Western National Property Management also has the majority of its portfolio in the Golden State.
“There are several ways to minimize the impact of rising financing premiums for owners, including investing in our own in-house team of credentialed risk management experts, which oversees our loss control program; environmental health and safety monitoring; frequent property inspections; maintenance and facilities training; claims management; regulatory compliance; and insurance negotiations, to name a few,” says president Laura Khouri. “These illustrate the tailored approach we take with every single owner and each property we manage.”
Castle Lanterra, which has properties in Florida, also is taking a proactive approach to rising insurance costs.
“We are now reviewing multiple bids, reviewing every contract with an eye toward out-of-the-box solutions that may be less expensive, and estimating the risks before protecting for something that may not be worthwhile; for example, a roof nearing the end of its life may have minimal payback in case of a claim but add significant premium cost to the policy,” says founder and CEO Elie Rieder.
Ancillary Income
While rent growth is slowing, Chris Simon, senior vice president of operations for RADCO, says it has become more imperative to put a larger focus on expense management while combating the increasing costs of goods and services.
“To find a balance, we are having to roll out creative income generators that are worth the expense for residents,” he explains. “We typically see these income generators being related to enhanced customer service offerings, which is a worthwhile benefit to the resident.”
Landmark Properties’ Maxwell says in order to combat the increased expenses, the team has been intentional about putting a focus on ancillary revenue. “[As of December,] we had seen a 5% increase in other income compared to the anticipated 2023 budget.”
Line-Item Approach
For Denver-based DB Capital, it took an aggressive approach to reining in every line item for its 2024 budgets.
“Our goal in working through budgets was to have a reduction/optimization strategy developed for each line item that we would execute over the next year,” says managing partner and CEO Brennen Degner.
For example, DB Capital engaged utility consultants to do a deep dive on the utilities across its portfolio and find savings through economies of scale as well as renegotiating billing rates. The consultants also are able to assess historic billings and find reimbursements for billing errors and negotiate when they see excess billing due to items like water leaks.
“On the same note, we are rebidding all of our trash, landscape, snow removal, and security contracts to ensure we get the most out of every contract service and leverage economies of scale,” he says.
Mitigation Efforts
Stephanie Brock, managing partner, property management, at Waterton, says repairs and maintenance increased related to weather events in 2023 where work was required but below insurance deductibles as well as an escalation of material costs due to supply chain and demand.
“Given that materials and labor increases occurred in part to weather-related events, we reviewed each community for opportunities to install mitigation methods, such as leak detection, insulation, automation alerts, and simply increasing the knowledge of the mechanics of the building to prepare for the unique circumstances we have experienced the past two years,” she says.
Preventative Maintenance
Landmark Properties also shifted its focus to preventative maintenance in the second half of 2023. “Properties with a focus on preventative maintenance are more energy efficient, have reduced repairs, and enjoy longer life cycles,” says Maxwell.
One of the strategies Landmark has deployed is shifting its quarterly inspection process to a weekly rotation. “Instead of spending one full week per quarter inspecting all the units and changing furnace filters, we changed the approach to walking six to 10 units a week on a quarterly rotation, still inspecting each unit on a quarterly basis, just not all at the same time,” she says. “We have found this beneficial from a cost perspective because it allows us to correct damages and make repairs throughout the year on a consistent basis versus waiting for an assigned timeframe or until the annual turn.”
She notes that this new process also has aided in maximizing its team’s bandwidth by shifting to a weekly cycle in order to make the walks and correct the required repairs.
Centralization Strategies
Many companies are looking to centralization and automation to help control expenses and be more efficient.
According to Simon, RADCO has centralized its assistant manager position, with that person overseeing three to five assets and reducing payroll.
“We will continue expanding upon the centralized team’s responsibilities throughout 2024, which could potentially further eliminate staffing count on-site,” he says.
Simon adds that many of its processes, such as leasing and collections, have artificial intelligence assistance to help minimize the time spent by on-site team members, allowing the firm to further eliminate associate count while generating more consistency across its portfolio.
“We foresee automation of processes and programs to continue being an integral part of expense management,” he adds.
Brock also notes that Waterton is piloting centralization around tasks that are cyclical and repetitive. “This will allow for many opportunities, including career growth for our associates, more efficient use of technology, processes, and training resulting in stronger and more consistent results,” she says.
