Costs from taxes, insurance and salaries add up. Here are steps to take to trim back.
Expenses are becoming a more critical issue in the apartment industry.
In the 2019 NAA Survey of Operating Income & Expenses in Rental Apartment Communities, expenses rose 9.8 percent, their highest year-over-year increase during this cycle.
Operators have a lot of strategies for combating expense creep, but Alan Dooley, Senior Vice President, Heitman thinks any plan starts with careful monitoring.
“The more control you have over measuring expenses, the more you can know what expenses to cut and what expenses to add,” Dooley said at NAA’s recent Maximize Conference in Atlanta.
Taxes ranked as a huge cost, constituting 32 percent of expenses per unit in garden-style communities and 40 percent in mid- and high-rise apartments, according to the Survey of Operating Income & Expenses. The strategy to battling tax increases is pretty simple, according to Dooley. “Protest like crazy,” he says.
When fighting taxes, it is essential to hire a firm with the experience and connections to be effective. “I would encourage apartment operators to use local experts who have the track record and relationships with the locality,” says Deborah Gaffney, Vice President, Asset Management-East, Trammell Crow Residential (TCR).
Gaffney also said that TCR has been successful buying development sites, such as brownfield remediations, that have tax relief attached to them. “Look for rebates with land buying,” she says.
Expense savings becomes even harder for operators when they figure in the tight labor markets and having to pay higher salaries to attract and keep talent. Salaries and personnel constitute 25 percent of operating expenses in garden apartments and 21 percent in mid- and high-rise apartments, according to the Survey of Operating Income & Expenses.
Gaffney suggests that sharing onsite staff among nearby communities and limiting hours can save costs. “If certain communities have high occupancy, we will let them close on Sunday,” she says.
Once onsite talent is in place, it often costs a lot more to let employees leave than to spend an extra $10,000 to keep them. “By measuring [performance], you know which [ones] people are in vital roles,” Dooley says.
Utilities constitute 6 percent of expenses in both garden and mid- and high-rise communities. Doug Root, Co-founder and Managing Partner, BlackFin Real Estate Investors, says installing systems that can detect water pipe and roof leaks can help to limit those costs.
Operators are also seeing large increases in insurance premiums, which constitute 4 percent of expenses in mid- and high-rises and 6 percent in garden style. Dooley says Heitman’s internal insurance expert is quoting 5 percent to 7 percent increases, though he has heard of premiums rising by as much as 20 percent from friends at other companies. “These are big numbers,” he says.
After hurricanes damaged certain communities managed by Blue Ridge Cos., Susan Passmore, Executive Vice President, Multifamily Property Management at the company, also saw insurance premiums increase. “You always have to renegotiate or appeal,” she says.
While relatively small, marketing expenses can also add up. In garden communities, they constitute 3 percent of costs and in mid- and high-rise apartments they represent 5 percent of costs.
Marketing expense can be an easy target for cuts, but Root says that sometimes operators can go too far. “The trap we fall into with the marketing budget is thinking that we don’t need to have a platinum package and that we can get by with the bronze,” he says. “Then, no one shows up [at the property].”
Like Root, Gaffney says finding expense savings is more art than science. If an operator comes in just to make cuts, there could be intended consequences, such as an increase in bad debt. “Marketing, service contracts, keeping your community clean and doing extensive screening will benefit your bottom line in the long run,” she says. “We are open to to paying competitive salaries for strong operators and top talent.”
For more information check out the NAA Income & Expenses Survey is the most comprehensive rental housing operations data available, allowing you to make the best budgeting and forecasting decisions for 2020.