How to Tackle Rising Expenses
By Les Shaver
As costs go up, operators are working harder to keep expenses under control.
Regardless of the sector of commercial real estate, owners and operators have seen expenses rise during the past few years. Student housing is no different, according to many operators in the space.
Labor, taxes, utility and marketing are driving student housing costs. Even though many of these increases are inevitable, proactive student housing operators are looking for ways to limit their damage.
Eddie Moreno, Executive Vice President, Cardinal Group Management, has seen onsite expenses rise from low single digits to five or seven percent, depending on the market.
While insurance costs have risen on the general liability side, Moreno points to taxes and payroll as the two biggest offenders in cost creep. Together, he says these two items account for 55 to 60 percent of overall operating expenses.
“A lot of that [the increase in expenses] was driven by taxes and some of that was driven by the payroll,” Moreno says.
On the payroll side, Moreno says the tight labor market is driving up salaries in both the leasing office and the maintenance shop. “There have been pressures from other industries to pull folks out of our industry or to make our industry cross competitive,” he says.
Labor costs are rising for operators through the student housing business, particularly for those who operate renovated communities. “The cost to acquire skilled talent goes up each year, as this group of individuals becomes more and more sought after,” says Aryne Bailey, Portfolio Director for The Dinnerstein Cos. “A niche skillset is needed to successfully operate the assets that are being repositioned with value-add capital improvements.”
David Ramirez, Vice President of Property Management at Fountain Residential Partners, says payroll has been his most challenging expense to maintain in student housing. To compete, Fountain is trying to be creative by maximizing its bonuses and tying strategic key performance indicators and ongoing benchmarking metrics to ensure every payroll dollar is being maximized. The company is also offering housing incentives on vacant apartment homes to employees as added benefits.
“Hiring high-caliber talent is becoming more and more expensive,” Ramirez says. “Employees are going where the money is and more companies are offering aggressive monthly commissions, performance bonuses and benefits costs.”
Like payroll and taxes, utilities are also a mandatory expense that is tough for operators to reign in. “Utilities continue to rise for us,” Ramirez says. “Water consumption at all-inclusive communities tends to rise when residents don’t have to pay for it. We’ve implemented water consumption caps to help offset the cost. At one deal we are implementing a per resident water cap of $10 and installing water meters in each unit to be able to bill back the difference.”
While not an essential expense, such as taxes or utilities, a strong community needs to market in this increasingly competitive environment. “We’ve seen increases in marketing,” Moreno says.
A lot of this marketing money is being spent in different ways than it was one or two decades ago.
“Digital marketing costs are skyrocketing,” Ramirez says. “As more operators are flocking to a more customized and creative digital marketing approach, click-through rates and cost per impression rates are rising.”
To control these costs, Fountain is moving away from “one size fits all” campaigns and strategically targeting its demographic with customized ad messaging. “Our ad reach is more effective,” Ramirez says. “We are also leveraging more property participation to get a lower service charge.”
To ultimately corral marketing costs, Cardinal is spending more money. Specifically, it has invested more than $1 million in a data platform.
“We're taking all of our disparate operating systems, including our core operating system, pulling all of that data together, normalizing it and then surfacing it through our business intelligence platforms,” Moreno says. “We're looking at trending performance up and down the marketing funnel, whether it’s the efficiency of our ILS partners in driving traffic, our SEO [Search Engine Optimization] and SEM [Search Engine Marketing] efforts, our social efforts all the way down through our lead conversion and follow-up percentages.”
Moreno says the company is also seeing expenses increase because it is investing in technologies that will make various functions, such as payment processing and lease workflow, more efficient. “Some of the increase in expenses really may end up being a reallocation of expenses,” Moreno says.
Increases in expenses may be hitting operators of luxury communities extra hard as it becomes more difficult to offer that high-end experience.
“As we’re delivering Class A assets in top tier markets, the expenses are added to actually operate the deal, to ensure we’re able to command the top tier rate in which is being charged,” Bailey says. “No longer are the days of small-scale resident events. Instead, student renters are accustomed to free Starbucks coffee 24/7, with upscale resident events including but not limited to catered brunches and dinners and pool parties that no longer just feature hotdogs and hamburgers.”
If operators skimp on these amenities, Bailey says the residents will notice. “This generation of renter is savvy enough to know when communities are cutting costs and will quickly tell you that this is not what they signed up for,” she says. “On top of that, the cost to operate a higher-end deal increases just to keep the facilities in pristine condition at all times. A true luxury experience requires constant attention to common area and amenity spaces to ensure prospects and residents truly see that their future home is being tended to.”
Despite the rising costs, Bailey says the spend is worth it for Dinerstein. “The increased cost is well worth it in the end, as we see these assets continue to produce year-over-year rent growth, while also preleasing faster than the competitive set,” she says.
To learn more about overall apartment industry expenses, check out NAA’s Income and Expenses report found here.