Tag Archives: ClientSuccess

How Will Multifamily Operating Expenses Affect NOI in 2025?

by: Dalton Morgan

Multifamily properties have long been considered one of the more resilient real estate asset classes. However, rising operating expenses are posing challenges to profitability. Factors such as high inflation, wage growth, and increased material costs due to supply chain disruptions are driving up these expenses. As operating costs rise, net operating income (NOI) is directly impacted, diminishing investment returns. Read on to see what we think the impact will be next year.

Rising Operating Costs

Operating costs have historically risen over time, but since 2021, the growth has accelerated. According to Moody (2024), expenses like payroll, utilities, repairs, and insurance are increasing at two to three times the rate of the preceding decade. For example, payroll and benefits have risen by $75 to $120 per unit annually, utilities by $55 to $95, and repairs and maintenance by $35 to $95 per unit depending on the market quartile (Globe St., 2024). 

Key Drivers of Cost Increases

Inflation: Rising prices for goods and services are significantly impacting multifamily properties. Utilities, which account for 15%-20% of overall operating expenses, have risen by an average of 10.7% across the top 50 U.S. markets, increasing total operating costs by up to 2% (Matthews).

Construction Materials and Labor: Prices for materials like timber, steel, concrete, and copper have surged due to high demand, supply chain issues, and inflation. Labor shortages are exacerbating the issue. As of May 2023, there were 396,000 job openings in construction (NAIOP). To attract skilled workers, companies are raising wages, which in turn increases development costs, further impacting NOI.

Insurance Costs: Insurance premiums for multifamily properties have risen 33% year-over-year, amounting to an additional $180 per unit (Matthews). This increase is driven by the heightened risk of natural disasters such as hurricanes, floods, droughts, and wildfires, which collectively cost the U.S. between $179.8 billion and $496 billion annually (Center for Disaster Philanthropy).

Impact on NOI and Rental Market Dynamics

Net operating income growth has slowed significantly, achieving only 2.8% in Q1 2024 compared to 24.8% in late 2021 (Globe St.). Owners may attempt to offset rising expenses by increasing rental rates, but market competition and tenant affordability concerns limit rent growth. The oversupply of multifamily housing is another factor. In June 2024, private-owned housing completions rose by 10.4% to a seasonally adjusted annual rate of 1.71 million units, with 656,000 being multifamily units (Globe St.).

With supply outpacing demand and mortgage rates keeping homeownership costly, property owners face limited room to raise rents. Moody’s forecasts asking rent growth in the low- to mid-1% range for 2024, while the gap between asking and effective rents exceeds $90 per unit. For a 100-unit property, this translates to $9,000 in unrealized rental income, while expenses remain elevated.

These factors also put pressure on debt service coverage ratios (DSCR), which generally need to be in the range of 1.20x to 1.25x. Rising expenses reduce the cash flow available for debt payments, heightening the challenges of refinancing and the risk of default, particularly in an unpredictable economic environment. At Lever Capital Partners, we understand the obstacles many investors encounter when acquiring or refinancing multifamily properties. Contact us today for a prompt analysis of your unique situation, so we can provide a customized solution that aligns with your investment strategy.

Future Outlook

Some factors may provide relief for multifamily property owners in 2025:

  • Onshoring and Supply Chain Adjustments: The push for onshoring could stabilize material costs over time. Infrastructure enhancements may balance supply and demand, potentially reducing construction expenses.
  • Interest Rates: Mortgage rates are expected to remain in the low 6% to high 5% range throughout 2025, a notable improvement from the 7% national average in 2023 (US News). Additionally, loan rates from Fannie Mae, Freddie Mac, CMBS, and other sources could drop by 1%-2% due to Federal Reserve rate cuts, easing borrowing costs.
  • Inflation Trends: Inflation is projected to slow to 2.4% by late 2025 (Goldman Sachs). However, potential tariff policies could push inflation closer to 3%.

While the outlook suggests possible improvements, the timeline and effectiveness of these changes remain uncertain. Multifamily investors must navigate ongoing challenges and adapt strategies to preserve NOI amid fluctuating operating costs and market conditions.

Secrets to Client Success: Leveraging Expertise and Strategic Partnerships

by: Adam Horowitz

In our years of experience, we’ve observed key factors that distinguish successful deals from unsuccessful ones. By studying what works, we’ve identified some core strengths of our clients that consistently lead to successful outcomes. Let’s explore three key strategies that have contributed to these successes. We’ll look at how one of our retail clients creates value before a deal even closes, how an industrial client leverages deep local knowledge, and how a multifamily client rigorously examines underwriting.

1. Creating Equity Before Closing

Over recent decades, many sponsors have turned away from retail investments, favoring multifamily and industrial sectors. However, the shift away from retail has presented valuable opportunities for those who remain. One of our retail clients has excelled in finding value-add assets in this sector by identifying spaces where they can secure tenants that the previous owner couldn’t. They’re highly selective, reviewing a large number of deals but quickly zeroing in on properties where their unique strengths will allow them to secure signed tenant contracts before closing. This ability to reduce vacancy and increase asset value even before a transaction is finalized is a powerful way to build equity upfront.

2. Knowing the Market—Down to the Street Level

When evaluating a property, having an in-depth understanding of the market can make all the difference. Often, lenders or LP investors will scrutinize location details, down to the side of the street. A client of ours in the industrial sector has a level of market knowledge that turns this type of analysis on its head—rather than hearing why investors have concerns, he explains to them why his choice of location is optimal. Knowing a market this intimately builds credibility with lenders and investors, who are more inclined to back a developer with this level of insight.

3. Trusting the Numbers—Rigorous Underwriting in Multifamily

Every proforma looks good on paper, especially when an exit cap is set low. But are the numbers realistic? Are they thoroughly tested, or simply optimistic estimates? One of our multifamily clients takes an exceptionally rigorous approach to underwriting, testing various scenarios across economic shifts, index changes, and local market dynamics. This client refuses to close on a deal unless it meets stringent criteria. By modeling both the upside and downside possibilities, they go into each project with a high degree of confidence in their decisions. This approach doesn’t just minimize risk—it allows them to make informed decisions they can stand by.

Leveraging Expertise and Strategic Partnerships

While each of these clients brings specific expertise to the table, they don’t attempt to handle every aspect of the process themselves. Instead, they focus on what they know best and outsource other critical components, like financing, to experts like us at Lever. By doing so, they streamline their efforts and ensure each element of a transaction is handled by a specialist. When these clients come to Lever, they trust us to manage the financing so they can focus on other priorities, secure in the knowledge that their deals are in capable hands.

This delegation enables them to hit their projected numbers consistently and sometimes exceed them. They rely on their strengths, whether that’s in creating pre-close equity, mastering their market, or rigorous underwriting, and turn to us to handle the financial aspects seamlessly. They know that the right financing partner can make the difference in a competitive market, allowing them to achieve their goals more efficiently.

Why a Client Relationship Matters

The distinction between having a client versus a customer is significant. Our clients bring all their financing needs to us because we know their business inside out, which enables us to represent them effectively. We’re prepared to answer lender questions without needing to consult our clients constantly. This deep understanding allows them to capitalize on the cost of our services within each deal, letting them concentrate on what they do best without distractions.

Our Client Exclusive Program exemplifies this approach. By working exclusively with Lever, our clients benefit from a dedicated, knowledgeable partner who handles the financing end with as much diligence and care as they apply to their own areas of expertise. Our collaboration allows them to pursue their vision confidently, knowing they have a financial partner invested in their success.

If you’re interested in exploring how our Client Exclusive Program could benefit your business, please reach out to us via email at [email protected]. We’d be happy to discuss how we can help you focus on your strengths while we handle the financing to bring your deals to a successful close.