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Inflation continues to saddle consumers with higher costs for nearly everything: groceries, gas, transportation, medical care and shelter. Though the year-long trend has depressurized somewhat, its impact remains clear. We’re paying more everywhere, including in the multifamily housing market.

Multifamily property managers expect to build 2024 budgets requiring more capital for building materials, labor, insurance and taxes, all of which are rising. However, high occupancy rates and rent growth have helped mitigate these increases, providing property managers with a kind of inflation relief valve. Multifamily operators who maintain and upgrade their properties wisely, budget smartly, and lean into informed investments can find success in this market. 

We’ve seen some multifamily companies beat budget projections and increase net operating income during inflationary times. For many, this has been a positive market to be a multifamily owner. That’s not new. Many investors consider multifamily housing to be a strong inflationary hedge.

According to Berkadia, multifamily’s one-year compound return topped 24 percent in the first quarter of 2022, when the inflation rate topped 8 percent. The reasons were complex but distilled to one key point: People need places to live.

So how can forward-thinking property managers mitigate the effects of inflation? It requires informed strategies and creative thinking. Here’s our approach.

Be smart with costs

Homebuilders and property managers turned their budgets inside out in 2022, when the Producer Price Index reached as high as 11.7 percent, according to the U.S. Bureau of Labor Statistics. Those rates have cooled, but property managers still are budgeting for higher costs in 2024. A chief budgetary concern is property insurance, whose rates ballooned 26 percent year-over-year. 

We’ve written before about cost-control measures, but this bears repeating. Property managers can bridge budget issues with some simple considerations:

• Revisit the bidding process: Good contractors are valuable, even those that charge more. However, accessing multiple bids revives the competitive process, perhaps leading to better deals even with long-time vendors.
• Shop for insurance carriers: Insurance is the largest cost driver for property owners, who often consider increasing deductibles before shopping for new policies. Instead, solicit bids from new carriers.
• Pause non-essential projects: Cosmetic and superficial property work can wait until budget constraints loosen.
• Don’t skip preventative maintenance: How do we avoid costly and painful root canals? By brushing our teeth and undergoing regular dental checkups. Likewise, the best way to prevent crushing maintenance outlays is to follow a consistent property maintenance plan.
• Appeal tax assessments: Property values and taxes rose during the pandemic. Assessment appeals could lead to tax savings.

Tackle inflation through investment

According to the National Apartment Association, U.S. occupancy rates have normalized to about 94.5 percent. Regional and submarket occupancies differ, of course, but the market is benchmarking as relatively balanced. Some property managers are taking advantage of this period by investing in their spaces.

Renters crave properties with remodeled kitchens and bathrooms, upgraded appliances and countertops, and amenities such as common workspaces, recreation and residential experiences. And some renters are willing to pay more for these properties. With year-over-year wage growth at 4.6 percent in June 2023, some renters can pay more as well.

Property managers certainly must be cautious about raising rents. The BLS reported in its October CPI report that shelter costs rose 7.2 percent year-over-year and were the “largest contributor to the monthly all-items increase.”

Delivering value, however, offers a thoughtful approach to rent increases. Residents benefit from upgraded spaces, and operators gain longer-term renters that guarantee a return on investment.

Take advantage of a growth market

Housing starts rebounded somewhat in September but still were 7.2 percent below 2022 levels. One reason: mortgage rates keep climbing. The 30-year fixed rate averaged 7.79 percent in October 2023, more than doubling since the beginning of the decade. As a result, a $400,000 mortgage (with 20 percent down) costs $825 more per month now than it did in 2020. 

“Purchase activity has slowed to a virtual standstill, affordability remains a significant hurdle for many and the only way to address it is lower rates and greater inventory,” said Sam Khater, Freddie Mac’s chief economist.

Fewer homes mean more renters, particularly in tighter regional markets where new construction has stalled further. Rents are growing in several markets, including single-family housing rentals, upscale apartments, and college housing. Property managers can capitalize in these markets through, again, thoughtful rent increases or acquisitions. At MZ Capital Partners, we see buying opportunities and are developing a pipeline of existing properties as potential value-add purchases. 

We’ve written before about multifamily real estate as an inflation hedge. As a need-driven asset, multifamily housing wasn’t subject to the pandemic volatility of other commercial real estate classes. There’s more liquidity, tax benefits related to the Tax Cuts and Jobs Act (which sunsets in 2025), and higher appreciation rates. We’re currently seeing more growth opportunities.

Multifamily housing has been one of the few post-pandemic bright stars, and a preferred asset class, of the commercial real estate market. But we can’t count on multifamily’s continued growth. Inflation could substantially outpace wage growth, depressing renter demand. Or interest rates could lower, prompting home buyers to take the mortgage plunge. 

Ultimately, Fannie Mae projects a “cautious outlook” for the multifamily sector, suggesting vacancies will rise and rent growth will normalize in 2024. “Nevertheless,” Fannie Mae writes, “we believe that demand for multifamily rental housing will remain stable over the short term due to home affordability constraints.”

Property managers have options, and opportunities, to fight inflation in the multifamily housing market. Ultimately, multifamily housing is a resilient sector, and smart investors can benefit even in inflationary environments.

Michael H. Zaransky is the founder and managing principal of MZ Capital Partners in Northbrook, Illinois. Founded in 2005, the company deals in multifamily properties.

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• Source: https://www.inman.com/2023/10/30/heres-how-property-managers-can-fight-the-effects-of-inflation/