Most savvy multifamily owners, operators and marketers will no doubt have completed their 2024 apartment community budgets by this time. In fact, many begin the budget-preparation process months in advance, some as far back as June of each year. But before you finalize your budgets, it’s always wise to circle back and take a fresh look at your numbers.
Why, for example, should you start 2024 with a budget based on the 95-percent occupancy rate you had in the third quarter when your current occupancy is 92 percent? Or base your expenses on an insurance quote you received in June when insurance premiums are so erratic?
“Revisit your budget because a lot changes between August and November, and it’s a great time to take another look back to see if any new conditions have cropped up,” said Lisa Gunderson, vice president of asset management for Bristol Development Group in Franklin, Tenn. “Then you can refresh it before it goes into effect in January.”
Here are five factors to consider before finalizing your 2024 apartment community budgets.
Current market conditions
Make sure you reevaluate current market conditions before finalizing your budgets to ensure that the assumptions you made are still correct. For example, are your projected rents for 2024 valid in view of the fact that the rate of rent growth is slowing in many markets? Will you have to give concessions to hit your occupancy targets in 2024?
What about new apartment construction? How many new units are expected to be delivered in your market in 2024? According to Yardi Matrix, apartment developers delivered 1.2 million new apartments nationally over the past three years, and another 460,860 are slated to hit the market by the end of 2023. How will this affect your occupancy rates and rents in 2024?
These are just a few of the market conditions—interest-rate forecasts are another—you should check and re-check before finalizing your budgets.
“We try to get some statistical data, (such as) population growth in the market that we’re in, to try to gauge what demand will be compared to inventory,” Gunderson explained. “We also look at consumer price index forecasts so we can assume property tax increases of X, or I’ll get feedback from my asset manager cohorts to compare notes on insurance increases to budget for.”
Actual vs. budgeted variances
Take a look at your 2023 budget to determine areas where your projections were incorrect. Are there expenses you need to adjust for in 2024?
A review of the 2023 budget for Bristol Development’s Main and Clay community in Louisville, Ky. found that payroll was budgeted for incorrectly. Twice a year, there are three payroll periods in a month, rather than just the two budgeted for. “Getting this correct takes time, effort and input from the management firm’s accounting group,” Gunderson said.
Line items subject to fluctuation
Be sure to review and refine the estimates you made, especially for expenses you expect to increase dramatically, such as insurance. “Be realistic,” said Michael H. Zaransky, managing principal of MZ Capital Partners in Northbrook, Ill. “Because of inflation, operating expenses, salaries, maintenance and supplies have escalated. Be sure to adjust them to today’s prices plus an increase for next year.”
For insurance in particular, some multifamily operators circle back to their agents to verify quotes they received previously—or to get new ones for 2024.
Be aware that you might be subject to new fees in 2024 that you weren’t paying before. “People should be mindful of, not unlike the airlines where it costs you to carry your bag on, that ancillary fees are finding their way into some of our contracts,” said Lynn Bora, executive vice president of WinnResidential.
Bora said she’s seeing delivery fees, processing fees and invoicing fees being added to contracts from suppliers such as electrical and plumbing contractors, trash and recycling companies and cleaning companies in some areas.
Communication with staff at all levels
Whether your 2024 budgets are drafted by your accounting professionals or by on-site managers, it’s important that staff at all level review them and buy in. After all, it’s the on-site managers who are operating the community and who have to live within the limits of the budget.
“We have the managers of the properties weigh in,” Zaransky said. “Without them, it would be really difficult.”
Be realistic. Your budget should be based on facts and reasonable assumptions and estimates, not aspirations.
“Remove your own personal beliefs and let the facts speak,” said Mark Wolf, founder and chief executive officer of AHV Communities in San Antonio. “Don’t believe your own hype. You can’t claim you’re the greatest and expect to be successful. Sometimes the market is just bigger than you.”
“The most common error I see in budgets is trying to make the numbers fit into a box of what you want it to be, instead of the reality of what is going on in your industry or your specific market,” noted Cristy Andrews, a certified public accountant with Warren Averett in Montgomery, Ala. who regularly works with multifamily companies.
According to Andrews, apartment developers often feel pressure by venture partners, investors or even lenders to hit certain targets and that those goals can, if they’re not careful, be reflected in budgets they prepare. “It may be intentional or unintentional,” she said. “But the whole purpose of a budget is to plan for your operations and run your business better, so you have to be realistic as well.”
Read the November 2023 issue of MHN.
