How Do I Budget for 2021?

How Do I Budget for 2021?

Elaine Simpson

The National Apartment Association recently published their 2020 NAA Survey of Operating Income and Expenses for Rental Apartment Communities.  Survey results for income and expenses are based on pre-pandemic results from 2019. Following are some of the highlights from their Executive Summary that might help you with your 2021 budget:

The effects of the pandemic and disruption of the longest-running economic expansion in U.S. history on the apartment industry have varied by market class and asset class.  Rents have declined in some larger “coastal” markets and increased in some smaller, more “isolated” areas.  Delinquency rates are basically normal for larger institutional-grade communities but rising in older, smaller communities.  Eviction moratoriums still pose risks to the industry into 2021.

NAA has done several surveys since April to gauge the effects of Covid-19 on owners and operators.  For example, in July, a survey asked about the 2021 Budget Process.  Some members are:

1. building in decreased rents and income,
2. putting freezes on CAPX,
3. planning on increased delinquency, vacancy and operating expenses,
4. making property-specific assumptions
5. budgeting for increased wages
6. building in increases in turnover costs because residents are spending more time at home.

In September owners and operators were quizzed about staffing levels and other expenses:

1. Sixty-two percent of participants said there had been no change in staffing,
2. Fourteen percent were hiring,
3. Twelve percent were laying off or furloughing staff members.
4. Anticipate increases up to 50% for PPE, cleaning supplies and virtual tour/leasing technology
5. Expect increases for amenity monitoring and scheduling
6. Consider expenses for reconfiguring common spaces to allow for social distancing
7. Add expenses for improving central air filtration and/or HEPA filtration systems
8. Examine touchless technology
9. Invest in package lockers

Before the influences of the pandemic, the increase in operating expenses per unit for 2019 were just under 4%, about the same as 2018.  Property taxes experienced the greatest increase year-over-year at 7.6% on average.  Personnel costs by nearly 3% on average. Market rent garden properties less than ten years old reported the highest operating expenses due to increases in taxes and payroll costs.  As expected, the highest increase in CAPX was for properties 20 years or older driven by renovation costs. NOI (net operating income) increased 6.3% year-over-year in 2019.  Increases in amenity, parking and pet fees were the drivers of other revenue growth. Fewer concessions were offset by slight increases in vacancy and collection losses.  Turnover rates dipped down to 49%, below the 15-year average of 55%.

Charting the course for 2021 is definitely a challenge.  Predictions vary with rent at zero growth to increasing four percent and occupancy stabilizing but not returning to pre-pandemic levels until after 2022.  The full NAA report includes income and expenses for 65 metropolitan areas and 791,170 units in 2,974 properties. It is available at https://www.naahq.org/news-publications/2020-income-expenses-survey.  Check it out for over nine additional pages of charts and graphs broken out by property type, age and location. 

View Full NAA Report

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