The Cost of Providing Rental Housing is Too Damn High

It’s never a good sign when your business costs are skyrocketing while your revenues are declining. Yet this is the exact scenario rental housing providers operating in Suburban Maryland currently face. 
 
Emerging from the COVID-19 pandemic, rental housing owners and managers find themselves in a decidedly negative economic market.  Influenced by numerous external factors outside of their control, many housing providers find their once reliably sustainable investments now losing money, burning through their reserves, losing value, and slowly dying on the vine. 
 
Contrary to popular sentiment, the rental housing industry operates on very narrow margins, resulting in an average rate of return that is half the historical average for the stock market.  

Approximately 95% of rent collected goes directly to the cost of maintaining, managing and operating the property and funding the local jurisdiction via real estate taxes. 

The list is long: mortgage payments and interest; payroll for staff, who live and work in our communities; rising utility costs; business licenses, fees, and other taxes; hazard and liability insurance; routine repair and maintenance; contract services like waste collection and janitorial services; maintenance of mechanical systems, boilers, air conditioning systems, elevators, and fire suppression systems.  This is not to mention replacement reserves for major repairs to windows, masonry, roofs, elevators, plumbing, electrical, and HVAC. 

All of these line items have been growing at a pace beyond inflation for a decade and have experienced significant increases since the pandemic.  Costs are even higher for older buildings, which require constant reinvestment to maintain safe and healthy living conditions.  This is especially pertinent in Montgomery and Prince George’s Counties, where more than half of multifamily housing units are located in buildings more than 30 years old. 

The Effects of Rising Operating Expenses on Housing Affordability

The folks who provide housing to our communities rely almost exclusively on rent as a revenue source.  Unlike other types of businesses, housing providers do not have the ability to balance losses with other revenue categories.  Unexpected cost increases (and rent losses for that matter) may only be managed through an increase in rent, a reduction in services to residents, or a deferral of planned capital investments. 

Pictured above are just a few of the major cost drivers for rental housing that saw exponential increases in the wake of the pandemic.   Each of these expense items has risen well beyond measures of inflation (currently listed at around 2.5%).  However, the major market shock caused by the pandemic and ensuing supply chain disruptions led to extreme additional surges in several cost categories.  Other line items, such as taxes and utility rates, also jumped wildly during the last five years.  For example:

• Combined water and sewer rates increased by approximately 60% effective July of 2024. 
• Natural gas commodity prices nearly doubled in October of 2022, rising from 63 cents per therm to $1.13 per therm; an increase of 79%.
• Collectively over the three year period between 2020 and 2023, Pepco’s increased electricity costs increased customer bills by roughly 51.5%.  While distribution costs increased by 13-22% during that time, generation costs nearly doubled.  
• Real estate tax bills for multifamily properties in Montgomery and Prince George’s Counties have also grown.  Though Prince George’s County adopted a flat real estate tax for Fiscal Year 2024, property assessments for apartment buildings increased by 14%.  Montgomery County multifamily rental properties saw assessment increases of 23%, which were only compounded by a rate increase of 5% (4.7 cents per $100 assessed value).
• According to HUB International, multifamily property insurance rates increased by roughly 26% in 2023.
• Each of the prior two years (2021 and 2022) saw increases of more than 20%.

While interest rates have come down of late, they saw exponential increases during 2022 and 2023; increased interest rates can result in millions in additional expenses over the life of a multifamily loan.

As one can easily deduce from this, rent caps tied to CPI fail to come even close to capturing the actual costs of operating and maintaining rental housing.  Moreover, they can’t account for expenses specific to each individual building, particularly at a time when the costs of financing repairs for building systems – either planned or unexpected – are through the roof.  

Escalating operating expenses place upward pressure on rents or, in the case of rent-controlled properties, significantly reduce revenue available to cover operating costs, leading to deferred maintenance. This exacerbates our housing affordability crisis, increasing financial pressure on housing providers and their residents.