Dive Brief:

• Expenses at multifamily properties grew 9.3% in the trailing 12-month period that ended in June 2023, according to a new report from Yardi. That was a 63% increase compared to the previous 12-month period, in which costs increased 5.7%.
• For the average U.S. apartment property, expenses jumped $740 per month on a monthly basis during the 12-month period. Annually, expenses rose to $8,694 per unit. Overall, operating costs rose between 5.0% and 14.9% in 85% of U.S. multifamily communities, the report said.
• Asking rents rose 1.5% year-over-year as of August, their lowest rate since 2011, meaning there is less income to offset cost growth. Still, the industry is in a pretty good place after a decade of growth, with rents rising 59% since 2013. 

Dive Insight:

Overall, operating expenses represent about 43% of gross income. For the 12-month period ending in June 2023, net operating income increased by $838 per unit nationally — almost $100 per unit more than expenses, according to Yardi.

Insurance, which saw an 18.8% increase on average over the 12 months ending in June 2023, was the major cost driver for apartment owners. Repairs and maintenance (14.2%), administrative (11.8%) and utilities and payroll (7.8% each) also saw significant increases. Taxes, at 5.9%, came in below these other costs.

“The rapid growth reflects national inflation trends, such as the increasing number of weather-related events that cause property damage, the tight labor market that is driving up employee wages, growing energy costs and supply-chain issues that increase the cost of materials and appliances,” Yardi said in the report.

Some of these expense increases may be temporary, but others could be part of a long-term trend. “Labor costs, for example, could continue to increase as the U.S. faces a shortage of prime-age workers due to the aging population,” Yardi said in the report.

Even though it has been three years since COVID-19 first hit, apartment operators are still having difficulty finding workers, which drives up costs. 

“Labor is probably the No. 1 issue that everybody is up against,” Allyson McKay, managing director and executive vice president of management services at San Antonio-based developer and manager Embrey Partners, told Multifamily Dive. “I think it’s just being diligent in ensuring that we know the markets and are paying competitive compensation. We do a lot of recruiting in-house, which helps significantly.”

Yardi also noted that insurance increases may be here to stay, due to a trend of more volatile weather. In 2022, for instance, there were 18 weather-related incidents in the U.S. that caused a total of $175 billion in damage, according to The National Oceanic and Atmospheric Administration.

Apartment owners and developers in hurricane-prone areas have been hit especially hard. 

“The other particular Florida issue is insurance costs,” Jack Weir, president of Palm Beach Gardens, Florida-based Eastwind Development, told Multifamily Dive. “They have gone up around the country, but in many places in Florida, they’ve close to doubled in the last year. So that depresses NOI and sales prices.”

Depending on whether they’re located, apartment operators could see moderation in other costs. For instance, companies that own in Texas may soon see tax relief due to early July legislation signed by Texas Gov. Greg Abbott.

Houston-based Camden, which has a sizable portfolio in its home state, expects taxes to fall 4.8% on its properties in the state due to the new law. “We have assumed some rate rollbacks in Texas in our prior guidance, so this reduction is not dollar-for-dollar to the bottom line,” CFO Alex Jessett said on the REIT’s second-quarter earnings call in August.

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