For years, rent growth helped mask inefficiencies in apartment operations. As rents increased, many owners could absorb higher expenses without materially impacting returns. That dynamic has changed. Across the United States, multifamily operating expenses are rising faster than rents in many markets, compressing margins and forcing owners to reassess hold strategies, refinancing plans, and exit timing.
This article breaks down why operating costs are increasing, when rent growth stops being enough, and how owners and investors should evaluate performance in today’s environment.
Understanding Multifamily Operating Expenses
These include all recurring costs required to operate a property, excluding debt service and capital expenditures. These expenses directly reduce net operating income, which drives value and refinancing ability.
Typical multifamily operating expenses include:
- Property taxes
- Insurance
- Utilities
- Payroll and third-party management
- Repairs and maintenance
- Contracted services such as landscaping and pest control
When these expenses rise faster than rental income, net operating income declines even if gross rents increase.
Why Multifamily Operating Expenses Are Rising
1. Insurance Premium Increases
Insurance has become one of the fastest-growing multifamily operating expenses, especially in coastal and storm-prone regions.
According to data from the National Multifamily Housing Council, property insurance costs rose by double digits nationally between 2022 and 2024, with significantly higher increases in Florida, Texas, and Louisiana.
Key drivers include:
- Higher reinsurance costs
- Increased frequency of weather-related claims
- Insurers exiting high-risk markets
External reference: National Multifamily Housing Council Insurance Cost Trends
2. Property Tax Reassessments
Many properties purchased or refinanced during peak pricing periods are now facing higher assessed values. Local governments rely heavily on property taxes, and reassessments often lag transaction prices.
As a result:
- Newly acquired properties see tax resets at higher values
- Appeals take time and are not always successful
- Tax growth often outpaces rent growth in flat or slowing rental markets
3. Labor and Management Costs
Staffing costs have increased materially since 2020. On-site managers, maintenance technicians, and contracted vendors are all commanding higher wages.
Factors contributing to rising labor costs include:
- Wage inflation tracked by the Bureau of Labor Statistics
- Skilled labor shortages in maintenance trades
- Higher third-party management fees tied to revenue rather than profit
External reference: Bureau of Labor Statistics Employment Cost Index
https://www.bls.gov/eci
4. Utilities and Service Contracts
Utilities such as water, sewer, and electricity continue to rise due to infrastructure costs and regulatory changes. Service contracts for waste removal, landscaping, and security have also increased.
In many cases, properties built decades ago are less energy-efficient, making utility expense growth difficult to control without capital investment.
When Rent Growth Stops Working
Rent growth can offset expense growth only when demand supports meaningful increases. That becomes challenging under certain conditions.
Signs rent growth is no longer enough
- Market rent growth falls below annual expense growth
- Concessions increase to maintain occupancy
- Renewal increases face resistance from tenants
- Regulatory pressure limits rent adjustments
According to CoStar and Freddie Mac multifamily outlooks for 2024 to 2025, national rent growth slowed significantly compared to expense growth, particularly in markets experiencing new supply deliveries.
External reference: Freddie Mac Multifamily Market Outlook
https://mf.freddiemac.com/research
Impact on Net Operating Income and Value
When multifamily operating expenses grow faster than revenue, net operating income declines. Since commercial property value is derived from net operating income and cap rates, even modest NOI erosion can materially reduce value.
Example:
- 3 percent rent growth
- 7 percent operating expense growth
- Flat or declining NOI margin
This scenario often results in:
- Lower refinance proceeds
- Inability to meet debt service coverage ratios
- Increased pressure to sell or recapitalize
Asset Types Most Affected
Expense pressure affects all multifamily assets, but certain profiles are more vulnerable.
These include:
- Older properties with deferred maintenance
- Workforce housing with limited rent elasticity
- Assets in high-tax or high-insurance jurisdictions
- Properties under aggressive floating-rate debt
In contrast, newer assets with energy efficiency, expense pass-throughs, and strong tenant demand may weather cost inflation more effectively.
Strategic Responses for Owners
When rent growth cannot offset rising multifamily operating expenses, owners typically evaluate one or more of the following options:
- Expense audits and vendor renegotiation
- Utility sub-metering or expense pass-throughs
- Capital improvements with measurable payback
- Equity infusion to stabilize operations
- Sale of the asset before further margin compression
Each option carries trade-offs related to time, capital, and execution risk.
When Selling Becomes the Rational Choice
In some cases, selling is not about distress but about preserving equity. Owners may choose to exit when future cash flow projections no longer support the current capital structure.
At Gulf Coast Property Group, multifamily owners often reach out when operating costs have materially shifted and refinancing options are limited. Understanding expense trends and buyer underwriting expectations is critical before making that decision.
Internal reference:
https://www.gulfcoastpropertygroup.com/commercial-real-estate
Rising multifamily operating expenses are not a temporary anomaly. Insurance, taxes, labor, and utilities reflect structural changes in the cost of operating real estate. When rent growth slows, these pressures surface quickly in net operating income.
Owners who track expense growth with the same rigor as rent growth are better positioned to act early, whether through operational changes, recapitalization, or a well-timed sale.
