There is an inherent risk of financial loss in the multifamily industry that comes as a result of damages, evictions, and skips. However, nationwide occupancy is high and vacancies are low, meaning there are fewer opportunities to gain new renters and a greater need to keep existing ones. Depending on how protected properties are, increased risk exposure can lead to revenue loss that erodes asset value margins—which are already under pressure.
The current macroeconomic picture puts owners at a higher level of risk than in recent years, presenting fresh challenges for property managers. To overcome these challenges and reduce risk to client margins and operating income, property managers should develop and deploy strategies to mitigate the following economic factors:
As mortgage rates continue to rise, it will become harder for apartment landlords to pay back their loans. In the first quarter of 2022, investors spent $63 billion on apartment buildings. As those transactions continued, the prices paid for those buildings were going up faster than return rates were shrinking.
At the same time, interest rates continue to rise quickly. This leads to owners making less money on their buildings than their banks, despite shouldering more risk. If rent growth slows, owners who paid high prices for apartment buildings may be at risk as higher interest rates will lower their buildings’ values.
How to Mitigate: Rising mortgage rates create a system where owners are shouldering more risk and earning less. To make up for the decline in value, properties can implement lease insurance to determine optimal coverage, recover lost revenue from defaults and excessive damages, and therefore unlock incremental net income.
From 2010 to the first quarter of 2022, rent growth for Class A multihousing continued to surpass inflationary growth at a steady rate. Even in 2022, with inflation on the rise, that continues to be the case as rising inflation leads to higher rents.
However, assuming interest rates outpace rent growth, it could lead to declines in financial performance. The Spring 2022 Market Insights from Walker & Dunlop reports that much of the rebound in the multifamily market has to do with renters returning to areas they vacated during the pandemic, namely urban areas. But those vacancies have quickly filled up due to a lack of new multifamily buildings. Plus, shrinking returns for buyers may lead to a slowdown in both inflation and rent growth. Finding a way to make up that value is critical to any multifamily owner.
How to Mitigate: If interest rates continue to climb as rent growth slows, asset value may decrease. Lease insurance offers owners the opportunity to optimize asset value by reducing vacancy loss and final account balances. Properties can also incentivize renewals by offering residents security deposit refunds in exchange for lease insurance. This helps properties maintain occupancy and lowers the risk of unrecoverable account balances after move-out.
Groceries, gas, and rent prices have climbed, adding price pressures on renters. Surveys like the one conducted by Freddie Mac of 2,000 US consumers show that 62% of people are somewhat or very concerned about being able to pay for housing while 58% say they’ve had apartment rent increases.
The surges in both consumer inflation and rent prices have led to 1 in 5 renters saying they’re likely to miss a payment, putting properties at higher risk of major rent loss. And while security deposits were designed to mitigate revenue loss due to damages and skipped rent, they leave properties with insufficient coverage. In fact, 65% of operators surveyed in the 2021 Apartment Visionaries Survey said that the expenses tied to unit damage exceeded the security deposit amount. To fully reclaim lost revenue, owners and operators have begun seeking solutions that offer smarter loss protection—while giving residents financial flexibility.
How to Mitigate: As inflation spikes, residents still struggle to pay rent and may leave properties with excess loss. Lease insurance–fueled by risk prediction–maximizes financial protection by optimizing coverage against loss while also providing a better move-in experience for residents struggling to pay a large upfront deposit. For properties looking to boost renewal revenue and resident satisfaction, lease insurance can be implemented upon renewing their lease. This sets up both parties for a smoother move-out process free of high account balances or deposit disputes.
Both renters and owners are feeling the pinch, leading to less valuable and efficient properties. When security deposits fail to properly mitigate the risk of rent loss and damage, collections can be a go-to response for many owners. However, recovery rates are typically 10% or lower, leaving owners with $100-200k of bad debt per year. This is a short-term solution at best and doesn’t truly optimize protection against loss.
To achieve this, multifamily owners must rethink loss protection. Rather than just alleviate financial loss, owners need opportunities to turn unpredictable rent loss and damage into dependable net operating income and greater asset value. This means taking advantage of new opportunities, like a lease insurance renewal incentive that gives residents immediate financial relief and flexibility while returning revenue to owner and operator pockets in the long-run.
Interested in our security deposit refund incentive? Learn more here.
Regardless of macroeconomic climate, the data and tools exist to make asset margins more resilient to market changes. If your organization does not already have a strategy and product roadmap in place to reduce financial risk of loss and recapture lost revenue, the time is now. To learn more about how you can use the latest financial risk technology to better protect against loss and boost property performance, get in touch here.