An analysis of operating expense control within US multifamily properties
Abstract
Purpose
The purpose of this paper is to determine the effect that ownership and management structures have on ability to control operating expenses. For individual investors, intensity of management experience is also explored as a possible explanatory variable for operating expenses. For property management services that are contracted out, the level of the fee is investigated as a possible cause for movements in operating expenses as well. Finally, operating expenses are used as a possible explanatory variable for a property’s lease-up performance during the year.
Design/methodology/approach
The analysis consists of a series of regression models performed on data provided by the 2012 Rental Housing Finance Survey (RHFS) in the USA. The RHFS is a unique data set that covers a wide degree of information on multifamily properties. The RHFS represents 2,260 properties in total, and covers various aspects of the apartment industry, including financing and operational cost measures. Control variables used as independent variables include number of units, year of property acquisition, and age of building.
Findings
Individual ownership and self-management proved to be statistically significant drivers in driving down log operating expenses. Hours spent by individuals performing property management roles on their own properties had a slightly positive association with operating expenses. For professional managers, the fees devoted solely to the manager or management company had a highly significant and positive effect on other operating costs. Finally, when separating out the individual components of operating expenses, only two variables had significant effects on tenant lease-ups: management expenses (positive) and security expenses (negative).
Research limitations/implications
The data set is potentially biased toward those properties with less than 100 units, and thus it would be problematic to assume that these findings are generalizable to the population at large. There are also no geographic coding indicators within the RHFS data set, which eliminates the potential to control for various market factors and rural/urban differences.
Practical implications
The research provides an understanding of some of the basic factors behind increases in operating expenses, which ultimately has implications for performance benchmarks such as net operating income and property market value.
Social implications
The reasonable controlling of operating expenses ultimately has potentially positive implications for low- to moderate-income populations, who would ultimately experience lower rents as a result.
Originality/value
This research represents one of the first known uses of the RHFS database.
Keywords
Acknowledgements
The author would like to recognize the efforts of two anonymous referees, whose editorial comments and suggestions helped to improve the quality of this manuscript. In addition, the author would also like to thank Nikki Williams for her adept and enviable skills as a copy-editor. Drs Patryk Babiarz and Kim Love also provided helpful methodological advice throughout the process. The author also is indebted to Dr Dustin Read and others at the American Real Estate Society Conference in Denver in April 2016 for helpful comments that they provided to help improve this manuscript. Finally, the author acknowledges Shawn Buchholz of the US Department of Housing and Urban Development and Elizabeth La Jeunesse of the Harvard University Joint Center for Housing Studies. Their familiarity and expertise with the RHFS data set proved helpful at varying stages of this analysis.
Citation
Carswell, A. (2017), "An analysis of operating expense control within US multifamily properties", Property Management, Vol. 35 No. 1, pp. 48-66. https://doi.org/10.1108/PM-10-2015-0053
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited