INCOME AND EXPENSE REPORT.

EXECUTIVE SUMMARY

The National Apartment Association (NAA) has resumed its independent production of the Survey of Operating Income and Expenses in Rental Apartment Communities. Major findings in this survey of the professionally managed rental apartment industry show further improvement in Net Operating Income (NOI) and more success in the continuing quest to control operating costs.

A total of 2,298 properties containing 588,654 units are represented in the report. Reporting of the data is composed of 1,975 market-rent properties containing 537,543 units and 323 subsidized properties containing 51,111 units.

The report presents data for four types of properties, including garden and elevator structures, which are each segmented further into properties with individually metered and mastered metered utilities. Responses are dominated by garden properties with individually metered utilities. They represented 89 percent of the market-rent properties and 69 percent of the subsidized properties. The analysis is therefore centered on the garden properties with individually metered utilities. Averages sizes of these garden properties were 268 units for the market-rent units and 144 units in subsidized units. Rentable floor area averaged 874 square feet for market-rent apartments and 811 square feet for the subsidized units.

The report contains detailed data summarized for six geographic regions and metropolitan areas with at least 10 properties reported. Fifty-four metropolitan areas met the separate reporting requirement for market-rent properties. Sufficient numbers of subsidized properties were submitted for eight metropolitan areas. Data are presented in three forms: dollars per unit; dollars per square feet of rentable floor area; and as a percentage of gross potential rent (GPR).

MARKET-RENT PROPERTIES

Net Operating Income (NOI)

Respondents reported a healthy rental apartment market based on their operating, income, and expense data. NOI averaged 56 percent of GPR in individually metered garden apartments reported in the survey. NOI has risen throughout the 1990s and is well above the 43.8 percent recorded a decade earlier in the NAA survey for 1988 data. In dollars per unit it was $4,456 and $5.10 on a dollars-per-square-foot basis.

Gross Potential Rent (GPR)

GPR approximates contract rents. Average GPR was $7,963 per unit ($664 monthly), or $9.11 if translated into a per-square-foot of floor area. Median GPR did not vary significantly from the average--$7,540 ($628 per month). The range went from a high of $22,881 ($1,907 per month) to a low of $3,650 ($304 per month).

Rent Revenue Collected

Rent revenue collected is a function of levels of rent received minus vacancies, rent delinquencies, and rent write-offs. It tends to follow the pattern of GPR. Rent revenue collected averaged $7,136 per unit annually last year ($595 per month). Measured on a per-square-foot basis, rent revenue averaged $8.16 last year among individually metered garden properties.

Other Revenue Collected

Other revenue collected from operating sources includes receipts from on-site laundries, cable, telephone systems, parking fees, and other charges for services and amenities. These other operating revenues averaged $375 per unit (43 [cts.] per-square-foot unit) for individually metered garden properties reported in the survey. Other non-rent operating revenues ranged from a low of $6 per unit to a high of $2,363. Median other operating revenues was $363 per unit.

Total Operating Expenses 

Rental apartment management firms have devoted extensive efforts toward controlling operating expenses in the 1990s to enhance profits and increase competitiveness. Total operating expenses for individually metered properties in the survey averaged $3,055 per unit ($3.50 per square foot). These expenses accounted for 38.4 percent of GPR, down from 44.3 percent in NAA's survey for 1995 data.

Economic Vacancy 

Economic vacancy is a measure of potential income not realized over a given period of time (one year in this survey). A 10.39 percent economic vacancy rate was calculated for all individually metered garden properties in the survey. This is somewhat high in historical terms and contrasts with the very positive NOI. Economic vacancy in NAA's independently produced surveys reached a low of 8.34 percent for 1995 data. During 1998 it was closer to the peak level of 11.84 per cent reached in 1990, a recession year.

Turnover Rates

Turnover rates averaged 63 percent of total units among the individually metered garden apartment properties reported in the survey. Move-outs have been increasing over the past two years as the economy continues to improve and the homeownership rate increases. Turnover had reached a low of 59 percent in NAA's last independently-produced operating and income survey for 1995 data. A peak turnover rate of 69 percent occurred during 1990. The high rate in 1990 reflected the apartment market and national economic recessions.

Size of Property

Scale economies for total operating expenses measured on a dollars-per-unit basis did exist for the market rent garden properties with individually metered utilities. Measured on a dollars-per-square-foot basis the pattern was not consistent. Properties with less than 100 units had total operating expenses average of $3,130 per unit. Operating expenses declined throughout the other three size categories. Those properties with 500 or more units had a $2,996 per unit average. This is a modest 5 percent a difference, using the dollars-per-square-foot basis, the smallest properties still had the highest average at $3.59, and the other three had lower averages that were close together. NOI in all three measures did rise as the size of properties increased.

Age of Property

A decline in NOI measured in percentages of GPR is the most pronounced result of the tabulation of the data by age of properties. It is the highest at 61.1 percent for properties less than five years old. It then drops to 59.4 percent for those five to nine years old, then to 56.6 percent for those 10 to 19 years old, and the lowest for those 20 or more years old at 50.6 percent. For the most part, this comes from the levels of GPR. GPR and total operating revenues are the highest for the newest properties and they then drop through each of the age categories, with only small differences. Total operating expenses do not vary widely between the age categories.

SUBSIDIZED PROPERTIES

Revenues

GPR for subsidized properties averaged $6,384 ($7.87 per square foot) annually. This is 20 percent less than the $7,963 ($9.11 per square foot) for their market rent counterparts. Rental revenues averaged $6,000 per unit ($7.40 per square foot). Other operating revenues in subsidized properties are significantly less than those for market-rent properties. They averaged $195 per unit (24 [cts.] per square foot) for the subsidized properties versus $375 per unit (43 [cts.] per square foot).

Operating Expenses

Operating expenses in subsidized properties tend to be higher than for market rent properties. Subsidized properties reported in the survey had total operating costs averaging $3,493 dollars per unit ($4.31 per square foot). The market-rent property average was $3,055 per unit ($3.50 per square foot). They are higher on a per-unit and a per-square-foot basis in all expense categories with the exception of real estate taxes and marketing costs. It could be expected that market rent properties would have the higher costs in those areas.

NOI

Subsidized properties, with their lower rents and higher operating costs, will have lower NOIs. NOI for subsidized properties in the survey averaged 42.3 percent of GPR versus 56.0 percent for the market rent properties. The comparisons on a per unit basis were $2,702 versus $4,456, and $3.33 per square foot versus $5.10.

Economic Vacancies

Economic vacancy rates tend to be lower in subsidized properties because of their lower rents. A 6.02 percent average rate was calculated for the subsidized properties versus 10.39 percent for market-rent units.

Turnover Rates

Occupants of subsidized apartments have lower income and fewer housing choices in most local markets and are less likely to move. The turnover rate in subsidized units was 37 percent versus 63 percent for market-rent units.

Sheehan is president of Regis J. Sheehan Data and Forecasting Service, McLean, Virginia, and serves as NAA's consulting economist.