May 2023 Average Expenses

Last month we took a deep dive into effective rents along the MS Gulf Coast and the insane cost of insurance this year. In this update we will examine the average expenses by category, and as promised, we are adding south Alabama data to our report.

Why is this critical?  Over half of the $2.9 trillion of outstanding commercial mortgages are maturing in the next 2 years. Many of these loans were last refinanced 3 to 5 years ago.  The prime interest rate in June of 2018 was 5% and in June of 2020 it was 3.25%. Today it sits at 8.25%. Your lender, and loan docs/covenants, require you to maintain a minimum Debt Coverage Ratio (NOI/Debt Service = DCR). The cost of insurance has increased by an average of 99.46% so far this year which is having a significant negative impact on NOI. This combined with higher mortgage payments could be the proverbial perfect storm that could cause you to have to bring more equity to the table when refinancing.  Most lenders require a 1.25 DCR.

Because of this, we are meeting with owners and conducting an analysis of their current DCR and, more importantly, what the DCR will be based on current interest rates and the loan balance at maturity. Then we are helping them develop a plan to mitigate the impact of the out-of-control insurance costs combined with rising interest rates. At the very least, we want to remove the stress and surprise elements from the equation and, in the best case, eliminate the need for them to bring more equity to the table or to be forced to sell in a down market.

Before I share the expense data, I have to say that typing the above words was painful. That is because I am an optimist and that felt so negative.  The late great Zig Ziglar used to claim that he was so optimistic, that he would “go after Moby Dick in a rowboat and take the tartar sauce with him.”  I can relate to that.  I know that it is going to get better.  The top insurance professionals tell me that these high rates are not permanent, and we should begin to see them deflate in the next 9 to 12 months. I am also optimistic that the prime interest rate will drop to the low to mid sixes in the next 12 to 18 months. So, for most owners who are interested in selling now, our advice (except in rare instances) is to hold on for 9 to 15 months and they should do much better.

It is now more important than ever to make sure you are paying attention to the expense side of the ledger. For example, I have had success getting property taxes reduced simply by showing the tax assessor’s office similar properties in the area with much lower taxes.  And it is so easy to find out what other owners are paying in taxes online.  I bring up taxes because that is the expense that seems to have the most variance from property to property.

The below expenses are from calendar year 2022.  I have not included payroll and related expenses because they vary so much by size of portfolio.  Nor have I included management fees as many properties are self-managed and the numbers would skewed and of little value.  It should also be noted that the cost of insurance is up 99.46% in the first 4 months of this year on average.

Mobile/Daphne MSA Average Expenses

Gulfport/Biloxi/Pascagoula MSA Average Expenses

If you would like a complimentary loan and DCR analysis, or if we can be of any help, please don’t hesitate to contact me by phone or email.

Thank you for taking the time to read this edition of our Multifamily Market Minute. We welcome your comments, questions, or future topic ideas. Feel free to forward this to anyone who you feel may be interested in this information.  The Molyneaux Group exists to help real estate investors maximize their investment returns while minimizing their risk.