How will inflation affect property managers’ portfolios in 2022?

Consumer price inflation rose to 7% in December 2021, the first time it’s been that high since 1982. Compounded by nationwide labor and supply shortages, prices for everything from fuel to building materials to groceries have risen dramatically.

As a result, consumers are changing their buying habits, companies are scrambling to attract enough workers, and first-time homebuyers are reconsidering their house hunts.

But for property managers and owners, it’s not all bad news. While the cost of labor and supplies is rising, so is the demand for rental properties. With the right knowledge and strategy, property managers can offset some of these costs and even find opportunities for growth.

The Bad News

Let’s start with the negative effects property managers may encounter as a result of rising inflation, and how they can mitigate those effects.

Labor and Supplies

Like most other U.S. consumers, property managers may have already noticed higher prices for supplies. The cost of repair parts, cleaning supplies, and office equipment have all gone up, leaving property management companies searching for lower-cost alternatives, or scrapping purchases altogether.

Labor shortages are compounding the problem. Property managers and their vendors are having a hard time filling vacant spots on their maintenance, groundskeeping, and construction teams. As a result, the cost of labor has gone up as employers try to attract talent with higher salaries and better benefits.

Work timelines have extended, as well. Repair and renovation projects that would have maybe taken a few weeks two years ago, are now being pushed out by months.

Vendors who are paying higher salaries will likely pass costs on to the property managers who hire them. That leaves property managers little choice: they will either have to cut services and amenities, delay non-essential work, or raise rent prices.

Taxes and Insurance

As inflation rises, so does the value of rental properties. While on its face, that seems like good news, property taxes and insurance, which are assessed by the value of a property, will most likely rise, as well.

As costs go up, owners may have to raise rent or cut costs to stay within their budget. Property managers would do well to work with owners proactively, helping them find ways to save money to offset their overhead.

New Builds

Investors are slowly building again, but the price tag to do so remains high. The price of housing materials is up 19 percent from December 2020. According to CNBC, the cost of lumber, which slipped a bit over the summer, is up again due to new tariffs on Canada and western wildfires.

Meanwhile, the labor shortage continues to hit the construction sector hard. The National Association of Home Builders predicts the industry will need 2.2 million workers over the next three years to meet demands.

Property owners and investors may have to delay or cancel new projects, which could shrink the number of properties in need of management services in a given area.

However, this is a good opportunity to focus on current properties to look for new ways to generate revenue through fees, while also offering added value to residents. For example, sales from online retailers have steadily risen over the course of the pandemic, according to the U.S. Census Bureau. If your residents are receiving more packages, there may be an opportunity to provide package lockers for a fee.

The Good News

There is a silver lining to this cloud, however, beginning with the currently slow rate of new building. While fewer rental properties may make it difficult to grow your portfolio, fewer homes for sale means more renters on the horizon.

Fewer Homebuyers Means More Renters

Building, particularly of single-family homes, is supposed to restart slowly in 2022. In the meantime, the rental market will likely remain hot for three reasons:

1. Low inventory and high demand will continue to drive the price of homes up.
2. Inflation will also contribute to higher price tags on new homes as the spending power of the dollar weakens. Higher taxes on properties caused by inflation may also put off potential home buyers.
3. To get a handle on inflation, the Federal Reserve has indicated they will raise interest rates for the first time since 2018, and they’ll likely raise them four times this year. That will make mortgages more costly.

All of those factors may put off first-time home buyers, at least for the time being. They’ll be more likely to look for rental opportunities until the market cools down and interest rates level out.

This has all the earmarks of an owner’s market, giving them the opportunity to offset their own costs with higher rent and low vacancy rates.

Fewer Available Rental Units Will Drive Up Rates

During the pandemic, many renters stayed put, afraid to make a move in a time of instability. That drove vacancy rates down to just 5.8% nationally, according to the US Census Bureau.

Property managers and property management service providers have noticed the trend, as well. “It’s been a remarkable year-and-a-half for apartment demand, and really, demand for all types of housing,” Jay Parsons, VP, Head of Economics & Industry Principals at RealPage, told Yahoo! News in January. “And so with that tightness across the board, it doesn’t look like you’re going to see tremendously more availability in 2022.”

Couple that with the possible increased demand for rentals, and you have the makings of an owner’s market with an opportunity to raise rents.

More Affluent Renters

We’ve talked about the rising costs of living and doing business. But there is another, more positive, impact inflation and labor shortages are having on workers themselves: incomes are increasing.

According to Forbes, average income should increase by 3.3% in 2022, which means raising rents may not affect vacancy rates.

Parsons agrees. “We saw [that] the average apartment renter made about $70,000 last year. It was up 12% compared to the year before,” he said. “This is for new incoming renters. And so, you know, while the overall kind of tone on rentals has been fairly negative through the pandemic, the reality is the data has pointed to a much more favorable story, where market rate rentals have really benefited from deep-pocketed renters, who are in stronger financial shape than ever.”

Appreciation Offsets Inflation

The average national rate of appreciation on real estate is between 3% and 5%, YoY. However, more desirable locations can see appreciation rates much higher than that. For example, Boston, MA has experienced an average appreciation rate of 7.6% over the last 10 years.

So, if an owner bought a single-family rental unit in the Greater Boston Area last year for $200,000. The current price of the unit would be worth $215,200. If you calculated the cost of the unit by simply looking at inflation, it would be about $216,000.

While there is still a difference of $800, remember that owners are also collecting rent on those properties, which offsets inflation, as well.

Bottom Line: This year will not be without its challenges for property managers and their owners. Inflation, supply shortages, and labor shortages will make it difficult to provide top-notch service without raising rates. And the slow recovery of the construction industry may give property managers little opportunity to expand their portfolios.

But the news isn’t all bad, and there is room for growth, with a little creative thinking. The key is to look for ways to cut unnecessary costs while increasing rents and fees where you can.

If you’re looking for alternative solutions to simply raising rates, you can check out Buildium’s report, Property Managers’ Plans for Growth in 2022 & 2023 to get ideas from property managers across the country.