How to Improve Multifamily Performance Using Market Benchmarks

Every multifamily operator has an internal benchmark that they are trying to achieve from an expense perspective. Sometimes these figures are more strategic goals such as achieving a 35% expense ratio, or keeping third-party contract services under $400/unit.

For the savvy investor, looking at operating expense data from comparable assets is the best way to backup your own assumptions and maximize operating performance. Before drawing to a conclusion on how to operate your asset, it is important to know what underlying data is used as a basis of your comparison.

Take for example, the National Apartment Association (“NAA”) and Institute of Real Estate Management (“IREM”). While each publish the annual results of national multifamily operating expense surveys, the problem you might encounter is that these benchmarks do not always provide an apples-to-apples comparison of your property.

The line item Repair and Maintenance (“R&M”) when surveyed in Dallas, reported significantly different benchmarks:

• According to the 2017 IREM expense survey, elevator buildings in Dallas spend $862 per unit annually on Repairs and Maintenance. This average was calculated using 12 buildings with an average of 276 units and 275,419 net rentable square feet (“NRSF”).

• According to the 2017 NAA expense survey, mid-high rise buildings in the Dallas-Plano-Irving area spend $543 per unit annually on R&M. This average was calculated using 45 buildings with an average of 312 units and 274,489 NRSF.

Which should you use?

Suppose you own a 295 unit elevator building in Dallas, and you currently spend $703 per unit on R&M. If you use IREM, you are very efficient, spending less than the benchmark. If you choose to use the NAA survey, you are inefficient. In fact - you are overspending by just as much.

If you understand how to use multifamily operating expense benchmarks effectively, you can use them to optimize your performance.

1) Read the Methodology Before Reading Anything Else

The first and most crucial task before you begin analyzing benchmark operating statements is understanding how the benchmarks are calculated. There are many key differences in how surveyed line items are calculated and these differences can be an accounting nightmare when different operators use conflicting methods.

Depending on how you allocate staff costs among line items in your operating expense statement, you may find discrepancies in your expense allocation. For example, IREM asks survey respondents to include staff related costs within R&M and other line items, while the NAA asks respondents to exclude them as a separate “Salaries and Personnel” line item. This explains why the IREM R&M cost outlined above is so much higher than the NAA survey.

Interestingly, IREM also asks respondents to include a “Payroll Recap” line item outside of the NOI calculation that summarizes personnel/staff costs. If you read the methodology behind both studies, you will find that Payroll Recap from IREM is synonymous with “Salaries and Personnel” from NAA, so that you can compare both line items effectively in your analysis.

In any case, before you choose an appropriate benchmark, you need to evaluate whether it is a fair comparison.

2) Use Reliable and Comparable Data

If your building has 25 units with an average size of 600 square feet, it would not be accurate to compare benchmarks against a property with 275 units and an average unit size of 1,200 square feet.

For each line item and data point outlined in these reports, there is a number of actual buildings used to generate the averages. Both sources provide the number of properties used, as well as the average number of units and average net rentable square footage of the properties in the sample.

Using multiple sources can be helpful to compute data for larger properties (NAA) as well as smaller assets (IREM). Look at your property in the context of unit and square foot averages to determine if the benchmark is usable.

3) Compare Per Unit, Per Net Rentable Square Foot, and Percentage of Effective Revenue

Different line items in an expense statement use different conventions. For example, R&M and Real Estate Taxes are typically quoted by unit, and management fees are almost universally designated using a percentage of Effective Gross Revenue (“EGR”).

Since conventions can vary significantly based on the region and the size of the property, you should not just look at costs per unit or a percentage of EGR. The best way to account for these conventions is to compare your operating expenses to the market averages on all three dimensions.

Additionally, you might not want to use an average of the three, but it is good to look at each one and establish an acceptable range for your line item. If you scale these figures appropriately by the number of units, NRSF and the gross potential revenue, you will have a good idea of where your expenses should be.

The Bottom Line

Multifamily operating statement benchmarks can be incredibly helpful if you are trying to optimize your own operating expenses. However, you should first understand the methodology of the expense survey, determine whether the data is relevant, and establish an acceptable range for benchmarks before you make a business decision.