Inflation and Property Management and Maintenance Costs
January 15, 2023
The COVID-19 pandemic has disrupted many aspects of daily life, and even now that the health impacts of the pandemic have lessened, the economic impacts have persisted. Inflation has reached the highest levels we have seen in about 40 years, and basic goods like gas and groceries have increased in price significantly. Virtually every industry is feeling the effects of inflation, and the housing industry perhaps more than most.
During times of inflation, real estate tends to provide a buffer as it will continue to appreciate. However, property taxes and insurance rates will likely also increase in step with the property’s appreciation. Mortgage rates have also risen significantly, moving homeownership out of reach for many households. Building material costs have increased, due to a combination of inflation, supply chain disruptions, and incidences such as wildfires on the west coast driving up lumber costs. And on top of all of this, labour shortages have delayed maintenance and construction timelines, and further driven up construction project costs as salaries increase. Understanding how these changes will impact new builds and the maintenance of existing buildings, and adapting quickly to maintain steady revenue, all while continuing to provide a positive experience for tenants, is a difficult undertaking.
Labour and Supply Costs
Supply chain disruptions and higher prices for materials have drastically impacted the housing industry, as both routine maintenance and capital projects have much higher costs and longer timelines associated with them. Compounding the issue is the fact that there is a significant shortage of skilled labourers to carry out the work. This has in turn further driven up the cost of labour, as salary increases and benefit options are used to attract and retain employees.
Unfortunately, these increased costs and timelines are largely unavoidable where they impact a tenant’s utilities or required living facilities. I.e., if a tenant has a pipe burst in their unit, the plumbing work needs to be completed as soon as possible, regardless of the increased cost, as landlords are legally required to maintain a unit’s plumbing. This is a good opportunity for landlords and property managers to look at alternative options for materials and vendors where possible to lower costs. Negotiating vendor contracts to lock in prices for a certain period of time, for instance, might be a good way to offset any continued inflation increases.
While procurement can be used to lower costs in some cases, further savings can be found in other areas, such as improving operational efficiency. Thought should also be put into how to retain employees, as it is far less expensive to maintain a current workforce than to recruit and train new hires.
During the pandemic, most new builds were delayed, and in many cases were even cancelled, due to a combination of municipal health restrictions, increasing construction costs, supply chain disruptions, and labour shortages. New construction is picking up again now, even despite the higher costs and lack of skilled workers, but the higher costs and longer timelines can certainly be a deterrent to investors.
Combined with the slowing rate of home sales, the delays in constructing new housing projects creates a surplus of renters in the market.
With a surge in demand for rental units across the province, and given that fewer new builds are being constructed than planned, vacancy rates are relatively low across the province. Notably, household incomes are on the rise, leading to an influx of more affluent renters to the market. This makes newer private rental units an affordable option for more households. However, those households who would normally move from rental housing into homeownership largely cannot afford buying a home in the current economy, continuing to drive up demand in the rental market.
Residential units have generally always been a sound investment, with property values going up steadily for several decades. And following the pandemic, as construction has begun to ramp back up, apartment buildings developed in the next few years will be particularly smart investments. To meet the ever-increasing demand for apartment units in Ontario, the provincial and federal governments have developed programs to ensure the development of 1.5 million units over the next ten years, and there is already a long list of prospective tenants waiting for them. Prospective landlords and current landlords looking for new investments will find excellent investment prospects cropping up across the province in the coming years to watch out for.
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