OPERATING EXPENSES
In addition to the rising cost of development, rental
builders must also evaluate the expenses associated
with operating the future building once complete when
determining whether or not a project is viable. As
operational costs rise, it becomes more difficult to make
long-term investments in building rental property as
it reduces the projected Net Operating Income (NOI).
Scenario 3 illustrates that projected operating expenses
have risen substantially since 2019. This is due to
increases in annual property taxes, insurance, salaries
& wages of onsite management and staff, the costs
of repairs, and increases in utilities, such as gas or
electricity.
These expenses are expected to continue to rise
over time, however once units are constructed and
are tenanted, rents can only go up by the maximum
allowable amount each year until unit turnover. Due to
the COVID-19 pandemic, rent increases were frozen
for 2020 and 2021, and only beginning in 2022, were
increases permitted, up to 1.5% per year. Rental
providers have very little ability to control most of these
expenses and cannot consume less of these operating
services. Building management will still be required -
even if salaries rise - insurance and utilities must be paid
and routine maintenance completed.
If operating costs continue to rise much faster than
rents it will make it more difficult to operate rental
housing, and this pressure is part of the decision as
to whether rental builders and lenders go forward
with a new project. If the expenses are increasing
more than the rental rates, the value of the completed
building over time may be insufficient to support the
construction cost and financing.
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What do rising costs mean? | 7