To access your subscriber or participant resources: LOG IN NOW
Sometimes it's just a lemon
Published March 27, 2014
Have you ever heard the expression, when life hands you lemons make lemonade? Well, sometimes you just have to accept that it’s nothing more than a lemon. There has been a lot of talk in the media lately about how fast rents are climbing. But oddly, nobody wants to talk about the real elephant in the room. We started to in December. Now here’s some more detail.
We just finished our annual audit of year-end operating statements for over 100,000 units in the region. Real estate taxes and utility costs in apartments jumped 9.6% last year.
Real estate taxes and utilities have climbed faster than collected revenue over the past ten years, and probably longer than that. This is a problem. These are the two fastest growing expense items and investors seem to be unable to reign them in.
Between 2000 and 2013 collected revenue went up 3.7% a year while operating costs rose a little over 4% a year in King County. It’s never great when costs climb faster than revenue.
But now consider this. Taxes and utilities combined went up almost 6% a year compounded annually. So how does that actually work out in the long run? Good for investors? We think not.
Let’s take a look at what happens over the long term. We admit this is a really long term, longer than investors think about. But maybe they should change their thinking.
It’s really not ridiculous to look at the next 100 years. Yes, we’ll probably all be dead in 100 years, but if you and future investors take care of your property, it will probably be around 100 years from now doing just what it does today. So it is worthwhile to take a look at what issues your property might face in the early 22nd century.
If operating costs, taxes, and utilities keep rising at the rate we’ve seen since 2000 taxes and utilities alone will cost more than what we project for total operating costs in just 44 years. Well that’s just not possible, so it will force total operating costs to increase faster than they have historically. Hmm, would that higher cost increase have any impact on rents? Duh. So what does this mean for investors?
It means that if tax and utility costs continue to climb at the rate they have been increasing, then at some point these two expense items alone will eat up more than 100% of the rents investors collect. Projecting these trends out a little more, we find that taxes and utility costs are greater than revenue in 80 years.
Of course that assumes rents just continue to rise at the same rate they have been increasing, and this scenario makes that impossible. The point is that these trends just aren’t sustainable. It doesn’t work.
If we can’t reign in tax and utility increases, rents will have to climb 30% faster than they have been increasing. That won’t be easy to do. In fact, it probably isn’t even possible over the long run.
As we said at the start of this story, there has been a lot of talk about how much rents are climbing. But as you can see from this little demonstration, that totally misses the point.
The real issue today is how much taxes and utility costs are climbing. Current rent increases are nothing compared to what they are going to have to be in the future if we don’t contain these costs.
Unfortunately for investors, there’s not much more they can do to get these costs under control.
Investors appeal their valuations to keep them reasonable. Investors have invested heavily in water conservation and more cost effective approaches to dealing with garbage.
And we don’t see anything in the future to suggest these costs will moderate. Quite the opposite. Seattle Public Utilities announced in December that they plan on rate increases of 5% or more for the next five or six years.
Okay, we’re finished with our rant. Please enjoy the rest of your day.
The slide show below contains the charts from this week's video.
Please give us feedback on this article and share any other information you think will be interesting and useful to people involved in the Puget Sound region's apartment market. We would be happy to quote you, adding your comments to this or other articles. We will also respect your privacy if you want your comments to be confidential. just let us know. [Click here] for our contact form.
Be sure to check back next week for a new discussion of current apartment trends for the Puget Sound region.
You can print a PDF of this article for yourself and others (see the link to the right of the article title), embed the video in your website or blog, share the video.
We hope you enjoyed this video article. If you did, here is a shameless plug. Why not subscribe to our Apartment Advisor newsletter. It is ridiculously cheap, because it is filled with so much valuable information. Since our research is our only source of business income, we need your support to keep it going. [Click here] for more information about the newsletter. Better yet, save yourself a step and just order it online now by [clicking here].
More video articles
Be sure to check back next week for a new video and discussion of current apartment trends for the Puget Sound region. Here are some other recent articles you may find interesting:
Editor's note: This is the complete article.
Today's subscriber comment
October 22, 2014
Alan Dooley: "Dupre + Scott principals are very thoughtful and diligent researchers. As investors throughout the country, it is rare to find a service as comprehensive as that of Dupre + Scott. It is also very reassuring when spending tens of millions of dollars to have the benefit of their research which covers decades worth of trends. There are very few markets in the U.S. that are as well covered as Seattle from an apartment researchers perspective." (Alan is Senior Vice President of Heitman in Chicago.)