Karlin Conklin

Aggressive rent hikes have dominated our news feeds for years. And what a story it’s been. Average national rents in 2021 posted a new record at 15 percent year-over-year, with 2022 coming in second at over 6 percent, according to Yardi Matrix.

With rents projected to trend flat-to-slightly-increasing this year, investors and operators need to shift to a new paradigm. We’ve left the “double-digit rent growth” chapter and entered the era of expense management.

Operating expenses have steadily increased in recent years. For many multifamily owners, that has tempered what would have been tremendous growth in NOI. Additionally, interest rates escalated rapidly during 2022 as the Fed aimed to curb inflation. This forced cap rates to rise from all-time lows. It also had an immediate impact on asset values, in some areas resulting in value loss of 12-18 percent. A sharp focus on increasing NOI is critical to recapturing asset values.

The Other Side of the Story

As economic drags from the pandemic eased in 2021, rent growth trends that were already in place accelerated. Rents moved up quickly in nearly every market, especially across the Sunbelt. Many firms—mine included—expanded their portfolios in these markets that were increasingly attractive to residents seeking affordable housing, lower taxes and a higher quality lifestyle. But for firms with little-to-no asset management oversight, higher income masked problems with rapidly rising expenses that weren’t being monitored well. A few operators were simply raising rents instead of creating renter-focused business plans.

Fundamental to understanding real estate operations is knowing that NOI is a function of income and expenses. Focusing exclusively on income, or solely on expenses, misses the mark. While income ran up over the past two years, expenses—many of which are difficult for an operator to control—started taking big bites out of NOI.

Insurance costs, property taxes, construction materials, and onsite wages have climbed at a pace even greater than inflation. If operators weren’t paying attention, record property revenues didn’t make it to the bottom line. Their NOI may have increased positively but not impressively. This pattern wouldn’t have been an issue in a normal market. But interest rate increases have shaken market values, underscoring the importance of NOI with new emphasis.

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