As Multifamily Rents Begin to Flatten, It’s Time to Look at Utility Expenses
After “a record 32 straight quarters of annual rent growth on average,” according to Laura Kusisto in the Wall Street Journal, multifamily rents are beginning to flatten. A combination of excess supply and waning demand due to shifting trends is softening the market. Increasing rent has been a key lever over the past few years for property owners to grow their net operating income (NOI) and bolster their bottom line. As the balance of power shifts to renters, owners and managers will need to look at curbing expenses as a means to boost their NOI.
With the budget season upon us, reviewing old balance sheets and evaluating historical costs is a good way to identify trends and pinpoint areas for cost cutting. Utility expenses can be one of the highest budget line items for properties. Numerous projects may be considered as a result. For example, rising water costs may lead to consideration of new water-efficient landscaping or irrigation systems. Growth in electricity expenses may lead to the evaluation of energy-efficient lighting and windows, particularly in common areas.
When analyzing utilities as a whole, one of the most effective levers for property managers to control costs is charging residents for their utility usage. Charging residents not only helps to stabilize a property’s financials, it also leads to conservation and an overall reduction in energy usage. Plus, $1 added to a property’s bottom line has effectively the same impact, whether it’s a result of increased rent or recovered utility costs.
Flat Fees for Utilities
Some properties think they have their utility costs covered by charging residents a flat fee. Flat fees are often determined based on historical data, and/or using that historical data to forecast utility charges going forward. The problem with this scenario is that because there is not a tie to actual utility costs in a given month, the property ends up either under-charging, or over-charging during seasonal utility usage fluctuations. If under-charging, money is being left on the table. Unfortunately, if a property manager is under-charging, they will be stuck in a cycle of losing money, because due to regulatory restrictions, properties are prohibited from revising their flat fees. If over-charging, the property is likely breaking the law, as most local regulations dictate that it is illegal to charge more than the actual bill. To complicate matters further, charging a flat fee means residents are essentially getting an “all you can eat” model. And what does one do in this model? Yes, you end up eating more. In other words, there is no incentive for conservation when they pay the same amount every month. For more details on the issues with a flat fee model read our blog: “5 Reasons You Should Rethink Charging a Flat Fee for Resident Utilities.”
Allocation or Usage-Based Utility Billing
In order to maximize the potential returns from utility recoupment, and to provide the best, most fair option for residents, property managers should consider usage or allocation-based billing. Where possible, utility submeters are excellent for directly tying usage to each unit.A property’s water, gas or electricity meters can be “submetered” to bill tenants for individually measured utility usage. Benefits of submeters include highly accurate measurements and charges, maximized utility recoupment for a property, and increased visibility and conservation by residents. Although submeters come with an upfront capital investment cost (which typically has a payback period of less than a year), the cost is highly outweighed by the additional revenue they generate which adds to the property’s overall value.
Where submeters are not an option, an allocation-based billing system such as RUBS (ratio utility billing system) can be used to estimate usage by certain factors such as each unit’s size, and/or the number of occupants. Utility billing partners can help to select, implement and manage the right recoupment structure based on the jurisdictional regulations and desires of each property. In addition, they can determine what deductions may need to be taken for common areas, and what may be billed.
Taking Advantage of Resident Utility Billing to Overcome Stalling Rents and Grow NOI
In a competitive environment with apartment supplies growing and demand stalling, property managers should be hesitant about raising rents. For those covering utilities as part of market-rate rent, they are often leaving money on the table when compared to their neighbors who separate utility charges and are charging the same market rent. As utility costs rise, it will remain difficult to raise the rents high enough to cover the increasing costs to a point where the rent is much higher than the market-rate.
A fair, long-term alternative for boosting NOI is the idea of holding residents accountable for their utility usage. The benefits of allocation or usage-based utility billing, which are growing rapidly in popularity, include:
- Increased NOI by recouping utility costs
- Stabilized financials and relieved burden of rising utility costs
- Reduced overall utility usage and increased resident conservation
- Enhanced resident satisfaction with a clear, equitable utility billing model
There are many ways to undertake a resident utility billing program. Read our white paper, Easily Recoup Utility Expenses and Increase Net Operating Income, to learn more. Or, if you want a personalized consultation, contact us at PayLease to discuss your unique situation.