Utilities Too Are Driving Up Multifamily Operation Expenses

Trepp CRE Research has been running a series of reports on multifamily operating expenses. The reason is that even if, as expected by most, interest rates eventually start to drop, increased regular expenses are driving up the cost of operating multifamily properties and pushing down net operating income, as Moody’s Analytics has pointed out.

Higher prices from inflation likely won’t drop when cost increases from inflation come down to the target 2% annual rate. Insurance prices that have risen due to climate change-driven natural disasters may be up there for good. Taxes have continued to rise. Construction costs for new buildings, rehabs, and repair have been up more than 40% since 2019. All those expenses will be something lenders will look at closely when considering if debt service coverage ratios are in a safe range. Plus, it means less profit ultimately.

Trepp has looked at a number of the cost drivers in detail, like property insurance being up about 13.6% on average across the country from 2021 to 2022 — a single year’s jump — and as much as 28% in some metros. Or tax increases that have run as much as 15.3% per unit between 2021 and 2022.

The newest report from Trepp is on utilities, including electric, water, gas, telecommunications, and “other essential services,” they wrote. “Derived from Trepp’s property line-item financials, these utilities averagely account for 15-20% of the overall operating expenses for a multifamily property.”

In the 15 metro markets that have seen the largest year-over-year increases in utility costs, the range has been from 11.4% in New York-Newark-Jersey City, NY-NJ-PA to 19.7% in Buffalo-Cheektowaga-Niagara Falls, NY.

The average change over the top 50 metros was a “record-high” 10.7%. Given that utilities are 15% to 20% of overall operating expenses, that means anywhere from a 1.6% to 2.1% increase in operating expenses aside from any others.

The higher numbers are in areas that saw significant increases in gas or oil bills because of heating. The winter in 2022 was particularly cold, but while energy prices had dropped significantly as inflation has slowed, they have seen significant jumps of late, meaning that there will be upward pressure on all energy prices.

Looking ahead at utility prices, “it is clear that the largest contributing factor to this rise was the increase in natural gas prices,” Trepp wrote, adding that “this trend is likely to persist, as natural gas production has diminished, according to the US Energy Information Administration.” And higher natural gas prices don’t just mean heating. Gas is one of the major fuels used to general electricity.