A Bright Future Ahead
Nearly four years out from the start of the pandemic in the U.S. and so much has changed, so little has as well. The cost of doing business has increased due to rapid inflation; that rate of increase has since cooled. Technology has advanced as technologies do, but at the same time, different tech has been enhanced at different rates. New solutions have been invented for problems that never existed. And new business plans and models have been adapted to flow with workforce and building developments. Companies are evolving and implementing at their own pace new standards of operations as well as these new technologies and business models.
Increased Costs
Prices have increased across the board for many throughout the world including those in the rental housing industry. While some costs have leveled off and inflation is easing, planning for price increases is vital. “As we look to budget for 2024, we are managing for a typical 3% increase on property expenses across the board in all categories and in many cases, we are holding certain expense categories to no increase,” says Dave Brackett, Senior Vice President of Property Operations at Milhaus. “However, because inflation is so prevalent, we are always looking for new ways to lower our expenses year over year.”
Yet, some firms like Castle Lanterra are feeling portions of the impacts of increased costs. “Inflation on the OpEx side is now surpassing the ability to generate rent/renewal increases, and so the bottom line is hurting,” says company Founder and CEO Elie Rieder. “Rising interest rates are also making it difficult for some owners to fund capital improvements and for developers to finance new multifamily construction projects.”
And the impacts of rising costs is trickling down from the corporate level to the property level. That can range from companies not being able to staff onsite as well as a multitude of other examples, “whether it be third-party contracts for landscaping, snow removal or unit turns and property insurance,” says Ryan Swingruber, Principal at Heyday. “Labor is harder to come by in all these business lines, so it’s inevitable it is going to impact operations. This has challenged us to look at all operations more than ever before and try to identify inefficiencies.”
Also at the community level, “The most notable impact has been observed in staffing, as the surge in labor costs and the appealing alternative of remote work has made it difficult to recruit and maintain fully staffed onsite positions across all roles,” says Derek Graham, Principal and Founder at Odyssey Properties Group. “To remain competitive in the labor market, there has also been a need to increase salaries to attract new employees and retain existing employees, resulting in additional operational costs.”
Student housing operators also feel the squeeze from employees. “At the property level, the biggest impacts are from growing staff salaries as well as supplies, and make-ready vendors,” says Jonathan Bove, EVP Acquisition and Management Services, Landmark Properties. “This has been mainly concentrated among positions with traditionally lower starting salaries, but certainly not limited to those roles. Many of us in the student housing sector are exploring options for centralization in order to offset some of these expenses.”
Depending on the company’s business model, inflation and rising costs are impacting in different ways. “As costs for utilities, materials, insurance and labor have increased, it has been necessary for Avanath, along with many other owners and operators, to utilize effective property management strategies to help navigate this challenge,” says Carly Stevenson, Executive Vice President of Property Management, Avanath Capital Management. “However, given we are an affordable housing owner and operator, our commitment to controlling these expenses so as not to have a lasting impact on our residents is even more crucial.”
Among the ways Avanath is fighting back is with a national buying power to negotiate contracts and prioritize different partner relationships. “We combat utility cost increases by retrofitting our communities to be more efficient through procuring long-term fixed energy contracts where available,” says Stevenson. “The added benefit to fixed-rate energy contracts is that you can often procure renewable energy, which lowers the overall emissions of our portfolio while also saving money.”
It’s important for those in the rental housing industry to find new ways to help combat the increases. “Today’s high inflation and rising costs are driving multifamily owners to seek out innovative ways to increase NOI without sacrificing quality and service to residents at their communities,” says Laura Khouri, President of Western National Property Management. “In this uncertain economic environment, apartment development owners are increasingly partnering with experienced property management teams to address operational inefficiencies, boost cash flow and preserve capital, while ensuring residents receive the high quality and service they have come to expect.
“Seasoned property managers who understand the market where the property is located, the resident demographic and how to position the property for success can prevent excess vacancy, keep communities operating efficiently and minimize risk for stakeholders. This allows owners to optimize their income stream and satisfy both investors’ and residents’ expectations, regardless of the economic climate,” she adds.
The rise of prices has been felt significantly in New York. “Fuel, utilities, labor, maintenance, administrative costs, insurance and taxes in rent-stabilized multifamily buildings rose by 8.1% from April 2022 to March 2023,” says Shimon Shkury, President and Founder of Ariel Property Advisors. “However, the Rent Guidelines Board voted in June to increase rents on one-year leases by only 3%. The combination of inflation and regulations has forced rent stabilized building owners to defer maintenance and building improvements to cover rising costs.”
Going Green
Residents and consumers are often searching for the next best item for their home -- often that’s new and improved technology or a better way of completing a process. For residents at apartments, this can be front and center like a smart thermostat or behind the scenes such as a low-flow toilet. But like all things real estate, it’s about location. “We are continually working to find new green strategies and calculate the return on investment (ROI) for green infrastructure for our communities at large; however, what works in some markets may not work for others,” says Brackett. “For example, we have successfully implemented solar in our Phoenix market, but it may not be as fruitful across our Midwest properties. Across all markets, there are new green regulations coming to fruition each year; it’s important to stay up to date with local officials and plan for changes within your strategies.”
While not as flexible in the ESG game as others, says Max Sharkansky, Managing Partner, Trion Properties, Los Angeles, Calif., as a value-add operator, they are given some opportunities to go back in and make some changes. “Generally, we participate when the government-sponsored enterprises offer green programs and we standardize our value-add process with environmentally conscious improvements such as energy efficient windows, regulated water flow toilets and showers and maintain property upgrades and repairs with eco-friendly components.
Technology
Smart home devices that can be controlled through one mobile device are all the rage -- dimming lights, changing their color, unlocking the front door and changing the thermostat have made their way to the rental housing marketplace. These technologies are keeping residents in their apartment homes longer through retention efforts as well.
The rental housing industry is typically slower to adopt newer technology compared to other sectors like retail, but “this is rapidly changing as professionals realize the incredible value the right technology can deliver,” says Stevenson. “As an example, our maintenance teams utilize tablets that allow them to review and complete work orders from anywhere on our properties. The additional bonus to this type of software is it gives us great data we can analyze to ensure efficient staffing models. Further, we’re testing the idea of utilizing AI to assist in our rent collections. With moratoriums lifting, the burden is quite heavy on the teams to execute many of the administrative tasks that come with account management, we’ll use AI in a way the removes this burden and allows our people to be present for our residents in the ways they need to.”
Sharkansky also says artificial intelligence (AI) can help smooth operations. “Operators should pay close attention to the ongoing adoption of AI-driven platforms specifically designed for multifamily. The technologies currently offered largely focus on improving operations and resident satisfaction, but we can expect there to be some form of innovation to support purchasing in the future.
“At Trion, we’re actively integrating technologies across our entire portfolio to heighten efficiency and improve long-term investment potential. We have implemented various AI-based technologies to streamline property management and leasing… and fully integrated chatbots into each individual property website. These integrations have already demonstrated significant improvements this year in operations, leasing, collections and returns. The seemingly simple addition of chatbots has drastically enhanced both resident and prospective [resident] communications. By effectively directing inquiries, these technologies allow for shorter response times and more efficient follow-ups, ultimately improving the consumer experience and reducing the burden of onsite management.”
Brackett is using AI for resident interactions. They use a third-party product “for lead nurturing, utilizing chatbots and AI to respond quickly and intelligently to our leads,” he says. “In regard to the development side of our business, we are still in the infancy stage of testing technology to determine how we perform and construct properties, but we are optimistic that AI will play a vital role in the property management industry as software develops.”
It’s important to implement technology because it will create a solution instead of just having the technology for the sake of technology, says Khouri. “We evaluate proptech on a case-by-case basis to determine which products enable us to streamline operations while aligning with ownership’s current and future goals.
“We also utilize our own proprietary data system to track the markets where we manage multifamily communities and the performance of those properties. In fact, we apply this tailored approach to everything we do, which distinguishes us as a company that truly cares for its clients and residents.”
The Road Ahead
Rents have stabilized dramatically compared to the boom that was seen during the pandemic, and new units are expected to come online soon. “Over the course of 2024, we will see a lot of apartments that began construction over a year ago open for leasing,” says Brackett. “The surplus of units coupled with a possible economic slowdown could lower demand at stabilized properties, driving rents down and increasing concessions. However, optimistically, this should be a short-term challenge with the hope of [residents] absorbing these new units by the end of 2024.” With that said, he expects development to slow down during the first quarter of 2024. This is due in part to investor demands and higher interest rates, among other factors.
Swingruber also mentioned interest rate increases. “We are addressing this by providing preferred equity investment options to our LP investors and identifying partners that are willing to invest in a longer-term hold strategy that believe in the long-term growth and demand for the SFR housing we are developing.”
Raising debt and equity along with absorption are common themes moving forward in 2024. The thoughts of a recession are still fresh in some executives’ minds. Also of note is mortgage maturities. “As the wave of loan maturities accelerates in Q1, lenders continuing to work together with borrowers will ease the burden of navigating the unstable environment and avoid potential defaults,” says Sharkansky. Meanwhile, in New York, Shkury says, “Because of the higher cost of debt, owners unwilling or unable to inject more funds into a property they are refinancing may be forced to sell. In some cases, lenders will take the properties back and/or sell notes.”
Along the same vein is shifts in regional lending, which Shkury says is “undergoing a significant transition and balance sheet lenders are experiencing increased scrutiny stemming from the bank failures in H1 2023.” Lenders will continue to be more cautious, creating a space for private and alternative capital.
“As builders and developers deal with high interest rates and increasing costs for labor and materials, apartment construction may level off in the near term, especially in Southern California,” says Khouri. “This will increase the value of existing multifamily properties, which along with the high cost of debt could further hamper the ability to complete sales transactions.
“That said, there is a fair amount of multifamily deliveries expected in many markets over the next several months, which will help meet renter demand while preventing the regions in which these deliveries are located from becoming overheated.
“Owners will continue to be challenged to boost NOI in the current environment. By partnering with experienced property management teams with proven strategies for maximizing value and minimizing risk, stakeholders can temper the effects of an uncertain economy and thrive for the long term.”
Stevenson says they are fortunate to have Fannie Mae and Freddie Mac to help access debt, especially in the affordable housing space.
On top of the economic pressure of a potential recession, Graham also mentioned loan maturities. “To avoid a repeat of 2008, many are optimistic that lenders may be inclined to work collaboratively with borrowers to navigate this complex scenario,” he says. “However, given the unprecedented nature of the situation, with a massive number of maturities coming due, lenders’ postures may surprise us as the year goes on. Optimistically, the focus will remain on preventing defaults on multifamily properties, considering that lenders will likely face larger challenges in their portfolios such as office properties.
“The most obvious solution to avoid a repeat of the Great Financial Crisis is for lenders to work with their good borrowers and operators and assist them as they navigate loan maturities. In this cycle, a huge segment of the lenders consists of debt funds, who often also act as operators, enabling them to step into a maturing loan situation, foreclose, and operate more easily than the traditional lender community. These challenges are complex, and the industry must remain vigilant and adaptive to tackle what’s next.”
Sharkansky says, “The most significant challenges the industry might face in Q1 will be related to available supply and loan maturities. Some regions experienced huge supply growth over the past few years and are now suffering from oversupply challenges. Yet, in other regions, there is still a great need for housing. Developments are in the pipeline, but much of that supply is delayed and may not be delivered until later in the year.”
ESG in Real Life
"Avanath creates ESG processes from the ground up.
ESG is extremely important to Avanath. A few years ago, we established +Amplify, an ESG platform devoted to furthering our sustainability initiatives. Through +Amplify, we set the goal of reducing our greenhouse emissions by 50% by the year 2030 in accordance with the 2015 Paris Environmental Treaty.
Earlier this year, we created an ECM (Energy Conservation Measure) survey that was used to find energy-saving opportunities at each of our properties. My property management team worked closely with leadership executives on this survey to distribute, fill out and analyze the results, and we achieved an incredible response rate of 100%. The survey itself enables us to determine which projects we need to undertake at each property and how to execute them. These projects range from installing LED lighting to replacing antiquated equipment with energy-efficient systems, and so much more.
Looking ahead, we are focused on purchasing energy from green suppliers, installing solar panels on the roofs, replacing antiquated low-efficiency HVAC systems and electrifying our properties to move away from fossil fuels. We continue to upgrade outdated equipment to reduce our energy use and associated greenhouse gas emissions, and to work closely with our ESG consultant to identify other areas where we can improve. We look forward to continually reducing our greenhouse emissions, which also creates a better community for our residents and generates an accretive return for our investors."
— Carly Stevenson
Michael Miller is NAA’s Managing Editor.