Market shows modest softening, according to NAA's income & expense survey. (Building Blocks).

NAA has completed its Survey of Operating Income and Expenses in Rental Apartment Communities for 2002, based on data for 2001. Major findings in this survey of the professionally managed rental apartment industry show some modest softening in the market rent rental apartment market. But there were some positives.

A record total of 3,905 properties containing 878,316 units are represented in the report. Data from 3,255 market rent properties that contain a total of 772,326 units and 650 subsidized properties that contain a total of 105,990 units are included in the report.

The report presents data from four types of properties. Garden and high-rise structures are segmented into individually metered and mastered metered utilities properties.

The responses from garden properties with individually metered utilities dominate the survey, representing 84 percent of the market rent properties and 48 percent of the subsidized properties. The analysis is, therefore, centered on the garden properties with individually metered utilities.

The average size of these garden properties is 235 units for the market rent units and 173 units in subsidized units. Rentable floor area averaged 864 square feet for market rent apartments and 840 square feet for the subsidized units.

The report contains detailed data summarized for six geographic regions and for metropolitan areas with at least 10 properties reported. Seventy-three metropolitan areas met the separate reporting requirement for market rent properties. Sufficient numbers of subsidized properties were submitted for 16 metropolitan areas.

For the first time, this report includes tables for the "other" properties in states with at least seven properties located in metro areas that did not meet requirements for separate reporting and in non-metro areas. Tables for market rent properties are given for 20 states, and among subsidized properties there are tables for 19 states.

Data is 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

Economic Vacancy. Economic vacancies in the current survey were 9.69 percent of gross potential rent for individually metered garden properties in the survey. This signifies an increase from the 8.75 percent rate that was recorded in the 2001 survey. Economic vacancy is a measure of potential income not realized during a given period of time per year in this survey. It offers a useful measurement of the economic vitality of a property and local markets. It is defined as the difference between rent revenue collected and GPR expressed as a percentage of GPR.

Net Operating Income. Respondents reported a rental apartment market that was relatively healthy based on net operating income (NOI). NOI averaged 57.8 percent of gross potential rent in individually metered garden apartments reported in the survey. NOI in last year's survey averaged 57.7 percent. NOI in the current survey in dollars per unit was $4,944 and was $5.72 on a dollars-per-square-foot basis. The NOI's measured dollars per unit and dollars per square foot were at record levels. NOI regionally measured in percent of GPR terms ranged from a high of 63.8 percent in the Northeast part of the country to a low of 53.2 percent in the Southwest part of the country.

Gross Potential Rent. GPR in the survey data tables is defined here on a post fiscal year basis. It is the sum of rent revenue collected and revenue losses. Average GPR for individually metered garden apartments was $8,555 per unit ($713 monthly) in this year's survey versus $8,335 per unit ($694 monthly) a year ago.

GPR averaged $9.51 per square foot of floor area ($0.79 per month) in this year's survey. Median GPR in the current survey is $7,709 ($642 per month). The range went from a high of $27,395 ($2,283 per month) to a low of $2,794 ($253 per month).

Rent Revenue Collected. Rent Revenue Collected averaged $7,728 per individually metered garden property unit annually in the survey. Measured on a per square foot basis, rent revenue averaged $8.95. The respective averages for the 2001 survey were $7,606 per unit and $8.65 per square foot of floor area.

Revenue Losses. Revenue losses rose to 9.5 percent of gross potential rent from 8.7 percent in the 2001 survey. Data for revenue losses was reported in three categories: those due to vacancies, collections and concessions. Vacancy losses for individually metered market rent garden properties averaged 6.4 percent of GPR ($546 per unit in the property, $0.63 per square foot). Collection losses averaged 0.8 percent of GPR ($70 per unit, $0.08 per square foot). And losses from rent concessions averaged 2.5 percent of GPR ($214 per unit in the property, $0.25 per square foot).

Other Revenue Collected. Other revenue collected from operating sources includes receipts from onsite laundries, cable, telephone systems, parking fees and other charges for services and amenities. These other operating revenues averaged $442 per unit ($0.51 per square foot unit) for individually metered garden properties reported in the survey.

Other non-rent operating revenues ranged from none to $5,918 per unit. Median other operating revenues were $352 per unit.

Total Operating Expenses. Rental apartment management firms continued to successfully control operating expenses last year. Total operating expenses for individually metered garden properties in the survey averaged $3,226 per unit ($3.73 per square foot) versus $3,210 per unit ($3.66 per square foot) in the 2001 survey. They represented 37.7 percent of gross potential rent down from the 38.5 percent a year earlier.

Insurance costs were the problem segment of operating expenses. They jumped 40 percent to $121 per unit from $89 a year earlier. It can be expected that a further sharp rise will be seen in next year's survey as the aftermath of the September 11 terrorist attacks on insurance premiums.

Turnover Rates. Turnover rates at 65 percent of total units were unchanged for the last three surveys in the individually metered garden apartment properties reported in the survey. Turnover remains in the 59 percent to 69 percent range recorded over the history of this survey.

Age of Property. NOI measured in both dollars per unit and dollars per square foot declined as properties aged. It declined from $6,555 per unit for properties less than 5 years old to $4,035 for those 20 or more years old. The comparable averages for dollars per square foot were $6.71 and $4.68, respectively.

NOI in terms of percentages of gross potential rent was the lowest for the oldest properties that are reported. It was relatively the same for the three other age groups used in this analysis. Properties that were 20 or more years old reported an average NOI of 52.7 percent. The highest occurred in properties 5 to 9 years old at 61.5 percent for those followed by 59.9 percent less than 5 years old and 58.7 percent for those 10 to 19 years old.

Much of the trend in NOI by age of property can be attributed to the spreads in GPR. Average GPR in dollars per unit terms fell from $10,949 per unit for properties less than 5 years old to $7,514 for those 20 or more years old.

It can be expected that repair and maintenance costs could rise with the aging of a property. A low average of $299 per unit ($0.31 per square foot) was reported for properties less than 5 years old. A high of $371 per unit ($0.43 per square foot) occurred for those 20 or more years old. Capital expenditures also were significantly lower for the newest properties. They averaged $311 per unit ($0.31 per square foot for those properties less than 5 years old. The highest average was reported for properties 10 to 19 years of age at $647 per unit ($0.75 per square foot).

Size of Property. NOI did not fully rise as the size of properties on a dollars-per-unit basis increased. Average NOI was lowest in properties with fewer than 100 units at $3,562 per unit, $5.28 per square foot. It was highest in properties with 250 to 499 units at $5,173 per unit, or $5.88 per square foot.

Presence of scale economies in apartment properties would be evident if operating costs were to decline as the size of properties increases. Survey results did not show the scale economies fully. The lowest operating costs were in the smallest properties (those with less than 100 units) at $2,603 dollars per unit. The highest occurred in those with 100 to 249 units at $3,306 per unit, and then declined to $3,249 in those with 250 to 499 units and to $3,213 in those with 500 or more units.

Subsidized Properties

Subsidized garden apartment properties with individually metered utilities tend to have fewer units and less floor area. They contained an average of 173 units vs. 235 units for market rent properties of the same type. These subsidized properties had an average of 840 square feet of floor area versus 864 square feet for the market rent properties.

Revenues. GPR averaged $7,637 ($9.09 per square foot) annually. This is 11 percent under the $8,555 per unit ($9.90 per square foot) for their market rent counterparts. Rental revenues averaged $7,062 per unit ($8.41 per square foot). Other operating revenues in subsidized properties are smaller than those for market rent properties. They averaged $354 per unit ($0.42 per square foot) for the subsidized properties compared to $442 per unit ($0.51 per square foot) for the market rent units.

Operating Expenses. Operating expenses in subsidized properties were close to those for market rent properties. Subsidized properties reported in the survey had total operating costs averaging $3,192 per unit ($3.80 per square foot). The market rent property average was $3,226 per unit ($3.73 per square foot).

Net Operating Income. Subsidized properties with their lower rents had lower NOIs than those for the market rent properties reporting in the survey. NOI for subsidized properties in the survey averaged 55.3 percent of gross potential rent vs. 57.8 percent for the market rent properties. The other comparisons were $4,224 vs. $4,944 on a per unit basis, and $5.03 vs. $5.72 on a per square foot basis.

Economic Vacancies. Economic vacancy rates tend to be lower in subsidized properties with their lower rents and relatively tight supply. A 7.53 percent average rate was calculated for the subsidized individually metered garden properties vs. 9.69 percent for market rent units.

Turnover Rates. Occupants of subsidized apartments have lower income and fewer housing choices in most local market and are less likely to move. The turnover rate in individually metered subsidized units was 50 percent vs. 65 percent for market rent units.

BUILDING BLOCKS

INDIVIDUAL METERED PROPERTIES

                                         Total

Number of Properties                      2824
Number of Units                         664460
Avg. No. of Units/Property                 235
Avg. No. of Square Feet/Unit               863
Turnover rate in %                          65%

                                $ Per    $ Per     % of
                                Unit    Sq. Ft.    GPR

Revenues

Gross Potential Rent             8607     9.98    100.0%
Rent Revenue Collected           7777     9.01     90.4%
 Losses to Vacancy                549     0.64      6.4%
 Collection Losses                 70     0.08      0.8%
 Losses to Concessions            214     0.25      2.5%
Other Revenue                     452     0.52      5.3%
Total Revenue                    8229     9.54     95.6%

Operating Expenses

Salaries and Personnel            836     0.97      9.7%
Insurance                         122     0.14      1.4%
Taxes                             779     0.90      9.1%
Utilities                         373     0.43      4.3%
Management Fees                   272     0.31      3.2%
Administrative                    144     0.17      1.7%
Marketing                         137     0.16      1.6%
Contract Services                 256     0.30      3.0%
Repair and Maintenance            329     0.38      3.8%
Total Operating Expenses         3248     3.76     37.7%

Net Operating Income             4981     5.77     57.9%

Capital Expenditures              648     0.75      7.5%

MASTER METERED PROPERTIES

                                         Total

Number of Properties                       431
Number of Units                         107866
Avg. No. of Units/Property                 250
Avg. No. of Square Feet/Unit               905
Turnover rate in %                          58%

                                $ Per    $ Per     % of
                                Unit    Sq. Ft.    GPR

Revenues

Gross Potential Rent             9990    11.04    100.0%
Rent Revenue Collected           9047    10.00     90.6%
 Losses to Vacancy                638     0.70      6.4%
 Collection Losses                 97     0.11      1.0%
 Losses to Concessions            209     0.23      2.1%
Other Revenue                     590     0.65      5.9%
Total Revenue                    9637    10.65     96.5%

Operating Expenses

Salaries and Personnel            922     1.02      9.2%
Insurance                         136     0.15      1.4%
Taxes                             834     0.92      8.4%
Utilities                        1006     1.11     10.1%
Management Fees                   348     0.38      3.5%
Administrative                    193     0.21      1.9%
Marketing                         136     0.15      1.4%
Contract Services                 319     0.35      3.2%
Repair and Maintenance            424     0.47      4.2%
Total Operating Expenses         4319     4.77     43.2%

Net Operating Income             5318     5.88     53.2%

Capital Expenditures             1006     1.11     10.1%

INDIVIDUAL METERED PROPERTIES

                                        Garden

Number of Properties                      2747
Number of Units                         646248
Avg. No. of Units/Property                 235
Avg. No. of Square Feet/Unit               864
Turnover rate in %                          65%

                                $ Per    $ Per     % of
                                Unit    Sq. Ft.    GPR

Revenues

Gross Potential Rent             8555     9.90    100.0%
Rent Revenue Collected           7728     8.95     90.3%
 Losses to Vacancy                546     0.63      6.4%
 Collection Losses                 70     0.08      0.8%
 Losses to Concessions            214     0.25      2.5%
Other Revenue                     442     0.51      5.2%
Total Revenue                    8170     9.46     95.5%

Operating Expenses

Salaries and Personnel            834     0.97      9.7%
Insurance                         121     0.14      1.4%
Taxes                             770     0.89      9.0%
Utilities                         370     0.43      4.3%
Management Fees                   269     0.31      3.1%
Administrative                    143     0.17      1.7%
Marketing                         137     0.16      1.6%
Contract Services                 256     0.30      3.0%
Repair and Maintenance            327     0.38      3.8%
Total Operating Expenses         3226     3.73     37.7%

Net Operating Income             4944     5.72     57.8%

Capital Expenditures              637     0.74      7.4%

MASTER METERED PROPERTIES

                                        Garden

Number of Properties                       375
Number of Units                          90980
Avg. No. of Units/Property                 243
Avg. No. of Square Feet/Unit               903
Turnover rate in %                          58%

                                $ Per    $ Per     % of
                                Unit    Sq. Ft.    GPR

Revenues

Gross Potential Rent             9237    10.23    100.0%
Rent Revenue Collected           8352     9.25     90.4%
 Losses to Vacancy                588     0.65      6.4%
 Collection Losses                101     0.11      1.1%
 Losses to Concessions            196     0.22      2.1%
Other Revenue                     530     0.59      5.7%
Total Revenue                    8882     9.84     96.2%

Operating Expenses

Salaries and Personnel            873     0.97      9.5%
Insurance                         135     0.15      1.5%
Taxes                             759     0.84      8.2%
Utilities                         989     1.10     10.7%
Management Fees                   324     0.36      3.5%
Administrative                    186     0.21      2.0%
Marketing                         132     0.15      1.4%
Contract Services                 300     0.33      3.3%
Repair and Maintenance            423     0.47      4.6%
Total Operating Expenses         4122     4.57     44.6%

Net Operating Income             4760     5.27     51.5%

Capital Expenditures              960     1.06     10.4%

INDIVIDUAL METERED PROPERTIES

                                        Mid & Hi-Rise

Number of Properties                           77
Number of Units                             18212
Avg. No. of Units/Property                    237
Avg. No. of Square Feet/Unit                  830
Turnover rate in %                             56%

                                $ Per       $ Per        % of
                                Unit       Sq. Ft.       GPR

Revenues

Gross Potential Rent            10442       12.59       100.0%
Rent Revenue Collected           9507       11.46        91.0%
 Losses to Vacancy                650        0.78         6.2%
 Collection Losses                 74        0.09         0.7%
 Losses to Concessions            210        0.25         2.0%
Other Revenue                     826        1.00         7.9%
Total Revenue                   10333       12.45        99.0%

Operating Expenses

Salaries and Personnel            925        1.11         8.9%
Insurance                         155        0.19         1.5%
Taxes                            1104        1.33        10.6%
Utilities                         466        0.56         4.5%
Management Fees                   357        0.43         3.4%
Administrative                    183        0.22         1.8%
Marketing                         170        0.20         1.6%
Contract Services                 281        0.34         2.7%
Repair and Maintenance            395        0.48         3.8%
Total Operating Expenses         4035        4.86        38.6%

Net Operating Income             6298        7.59        60.3%

Capital Expenditures             1034        1.25         9.9%

MASTER METERED PROPERTIES

                                        Mid & Hi-Rise

Number of Properties                           56
Number of Units                             16886
Avg. No. of Units/Property                    302
Avg. No. of Square Feet/Unit                  917
Turnover rate in %                             56%

                                $ Per       $ Per        % of
                                Unit       Sq. Ft.       GPR

Revenues

Gross Potential Rent            14045       15.31       100.0%
Rent Revenue Collected          12788       13.94        91.1%
 Losses to Vacancy                903        0.98         6.4%
 Collection Losses                 78        0.08         0.6%
 Losses to Concessions            276        0.30         2.0%
Other Revenue                     916        1.00         6.5%
Total Revenue                   13705       14.94        97.6%

Operating Expenses

Salaries and Personnel           1187        1.29         8.5%
Insurance                         139        0.15         1.0%
Taxes                            1239        1.35         8.8%
Utilities                        1097        1.20         7.8%
Management Fees                   480        0.52         3.4%
Administrative                    230        0.25         1.6%
Marketing                         157        0.17         1.1%
Contract Services                 421        0.46         3.0%
Repair and Maintenance            426        0.46         3.0%
Total Operating Expenses         5377        5.86        38.3%

Net Operating Income             8327        9.08        59.3%

Capital Expenditures             1254        1.37         8.9%

Purchase the Ssurvey

NAA's Survey of Operating Income and Expenses in Rental Apartment Communities for 2002, based on data for 2001, is available by calling NAA at 703/518-6141. Or, you may download an application form from NAA's Web site at www.naahq.org and then fax the form to 703/518-6191.

Robert J. Sheehan is President of Regis J. Sheehan Management and Economic Consultants in McLean, Va., and serves as NAA's Consulting Economist. He can be reached at 703/8939185 or via e-mail at [e-mail].