Skyrocketing Multifamily Expenses Are More Than Insurance

A year ago, Moody’s research said expenses like insurance, utilities, and property taxes could experience inflation that exceeds revenue growth, straining net operating incomes.

The situation hasn’t improved in 2024, according to Moody’s latest analysis. Multifamily valuations are tied to revenue growth and management of operational expenses. Costs have become a critical factor for owners given that annual effective revenue growth is expected to stay below 2% this year. Growth of expenses over revenues puts pressure on NOI, which is key to valuations. And valuations support the ability to refinance. “On top of this, some property owners are struggling to get coverage or maintain the requisite coverage in their loan agreements, which leads to rippling implications for lenders,” they wrote.

As expenses have increased, landlords have raised rents so revenue can balance out expenses and the average operating expense ratio has remained at about 45% in recent years, including pre-pandemic. That leaves renters to bear the burden, Moody’s wrote. And when rents push up faster than in the past, so does the shelter portion of inflation, which then helps keep overall inflation higher than the Federal Reserve’s target range, meaning that interest rates also remain elevated. With higher delivery of new multifamily inventory, expecting rent growth to continue with greater supply and less demand is unrealistic.

Another approach to maintaining operating expense ratios is to control those increases. To that end, property owners need to understand and begin to control expenses. Moody’s analyzed data from more than 3,500 apartment properties with CMBS data available in 2022 and 2023.

Insurance has been one area of sharp growth, according to a separate study by Moody’s. In some markets, year-over-year insurance growth in some markets has shot up to more than 17%. On average, property insurance has exhibited a 7.6% increase since 2017.

Outside of that, the three major median growth expense areas from 2022 to 2023 have been payroll and benefits, utilities, and repairs and maintenance. That is consistent across each revenue quartile. On a per-unit basis, payroll and benefits are up about $75; utilities, $55, and repairs and maintenance, about $35, for the lowest quartile. For the highest quartile, payroll and benefits are pushing $120, and about $95 each for utilities and for repair and maintenance.

“Averaging the median changes YoY from 2000 to 2023 shows that the trend is also consistent over time, where average YoY changes in Payroll & Benefits comes in first at $36/unit, followed by Utilities at $25/unit and Repairs & Maintenance at $18/unit,” Moody’s wrote.

However, while expenses increase over time, the jumps since 2021 have been “unparalleled in recent history,” the research group said. For payrolls, utilities, repairs, and insurance, the annual dollar growth is double-to-triple that of the previous decade.

Moody’s says that a data-driven approach to watching trends will become a basic tool so property managers and investors can increase efficiency.