Rising Costs and Shrinking Margins: Insights for Property and Asset Managers

The property and asset management industry has witnessed unprecedented vagaries since the onset of the pandemic. Factors impacting the industry and investor returns include increasing management and operating costs and declining revenue, resulting in shrinking margins. These factors, coupled with the increase in the cost of capital resulting from the interest rate hike imposed by the Fed, have resulted in huge challenges in managing assets for both property and asset managers.

The current economic climate poses challenges for property managers trying to curb their operating costs. A 3.0% growth in expenses, typically considered to be a representative figure, no longer holds true with the rise in the cost of goods, payroll, and fixed expenses. The industry now considers variable cost growth ranging from 8.0% to 10.0% to be more representative. Insurance premiums have also experienced a steep hike, ranging from 25.0% to a whopping 150.0% based on the risk profile of the property.

Geopolitical factors, inflation, and labor shortages have largely contributed to the increase in operating costs. Property managers have identified keeping up with maintenance requests, identifying the right help to manage maintenance issues, managing admin work, including maintaining tenant records, and identifying the right tenant as the key challenges post-COVID.

Rental rates have remained largely stagnant across most markets and have witnessed a decline in a market that has experienced layoffs. The performance of office properties has been impacted by layoffs and the hybrid work culture adopted by companies. Most office markets with a high concentration of software and banking services experienced vacancies crossing 19.0%. Multifamily properties considered a safe bet have also faced adverse effects due to unemployment. This, coupled with the eviction moratorium, has resulted in a decline in income. This decline in income with increasing expenses has squeezed operating income margins for investors and owners alike.

Property managers quote, Identifying and leasing spaces or units to tenants with credible credit histories, ensuring all lease-related documents are available and indexed, rent collection, and managing maintenance issues are additional challenges.

The Fed’s continuous interest rate hikes to curb inflationary pressures have resulted in an increase in the cost of capital, posing challenges for asset managers in ensuring that investors are duly compensated. The silver lining to the increase in the cost of capital is the reduced purchasing power for single-family homes, with a consequential increase in demand for rental properties; however, rental growth has not compensated for the huge increase in operating costs.

Adapting to fast-paced economic changes remains key for most asset managers. Adopting alternative investment strategies with a relook at their portfolio composition, including increasing the share of self-storage, warehouses, and the emerging property of data warehouses, is critical. With shrinking margins, the shine on net-leased properties has waned.

The property management industry has been one of the early adopters of technology, with opportunities to embrace technology to optimize operations, enhance tenant experiences, and achieve better financial outcomes. A vast majority of the tasks that are repetitive in nature provide opportunities for collaboration and partnerships, offering a competitive advantage in a complex, cost-sensitive market. Outsourcing and business process management (BPM) provide avenues for efficiency and cost savings. By monitoring market trends with in-depth knowledge, embracing technology, fostering collaborative relationships, and exploring outsourcing and BPM opportunities, stakeholders can navigate challenges and capitalize on emerging opportunities. Delivering value in an evolving landscape requires a proactive approach and resilience. While the road ahead may be challenging, it also holds possibilities for those with adaptability and a strategic mindset. A comprehensive approach incorporating technology, collaboration, and strategic decision-making is key to success in the property management industry.