Profit under pressure: Strategic moves multifamily operators need to make now

The balance sheet of a multifamily operator is very different today than pre-pandemic. The rising costs of the last five years, including the enormous leap in insurance premiums, have been compounded by consumer financial pressures, not to mention sharp increases in economic uncertainty.

However, there are steps an operator can take to protect revenue and be positioned to make the most of opportunities, said Christy Metz, Vice President of Strategic Account Services at TheGuarantors.

“By adopting straightforward strategies and making the best use of technology on the market, operators can secure their profitability,” she said. “It all boils down to leveraging the right tools to effectively manage the bottom line and avoid bad debt.”

The most burdensome operating expense in recent years is the surge in insurance premiums. Since 2018, property insurance costs have risen 129% nationally to an average of $636 per unit. While premiums have seen a slight decline in the last quarter, they are still at record high levels. Panelists at our recent webinar with Bisnow discussed how decreases will come, but will take a long time to come down sufficiently.

Insurance-related expenses have risen across the board, not just in premiums. Operators now face a growing burden from all types of insurance — from general liability coverage to policies addressing climate-related risks, Metz said — but legal costs are adding to these challenges.

“As consumers face financial pressures, frivolous claims are going to increase while the threat of class action lawsuits means operators need to build capital reserves,” she said. “Getting back to basics and communicating compliance expectations to the field staff can help avoid unexpected and unnecessary costs.”

Other threats to profitability include the rising cost of labor and spending affected by the ongoing tariff uncertainty. This is driving up the price of the equipment and supplies needed to manage apartments, such as repair materials and cleaning products, as well as pushing construction costs even higher.

Steven Nelson, Director of Ancillary Services at RAM Partners, said that although his business is expanding, rising costs are leading to stagnation across the sector. Construction costs could lead to a shortage of apartments in the next few years.

“Tightening of underwriting, slower lending opportunities and steady interest rates are all slowing the ability of operators to reposition or refinance, so what do you do?” he said. “You just sit still and you try to increase your ability to operate to compensate for the higher costs.”

Rising consumer costs are compounded by the increasing potential for renter defaults, Metz said. Currently 77.4% of families carry household debt, with the median household owing more than $80,000. The average U.S. household currently has credit card debt of $6,580, while the volume of people missing payments on car loans is at its highest level in decades.

In areas such as the Sun Belt with a high level of multifamily supply, many operators feel they have no option but to lower screening standards and take on these higher-risk renters to fill apartments and meet occupancy goals, Metz said. Lowering approval criteria, reducing deposits and offering high concessions may help in the moment, but can mask whether the renter can actually afford to live in a community.

Nelson said that renter fraud is partly due to laws not having caught up with the sophistication of fraudsters. AI is giving them new abilities to mask their identity.

However, the challenge is that tightening laws to combat fraud could also restrict more people from being able to afford to rent which compounds another challenge, he said. When asked, 93.3% of operators reported experiencing fraud in a 12-month period.

Rather than relying on risky methods to maintain occupancy and offset high costs that can expose operators to renter fraud or higher chances of renter default, operators might consider looking at more strategic alternatives, Metz said. The first is to take a new approach to lease renewals.

“Rather than setting rents and filling apartments property by property, some companies are looking at dynamic pricing on a portfolio basis,” she said. “New technology is starting to emerge to manage this shift, which could reshape the industry in terms of how to balance supply and demand.”

Panelists at our recent webinar with Bisnow discussed how some operators are experimenting with smarter concession strategies, such as spreading offers over a resident’s first and second lease. They can also consider offering flexible payment options to renters.

To avoid loosening applicant criteria and renting to risky residents, operators should ensure they are working with a really good fraud detection partner, Metz said. The methods renters are using to commit renter fraud are evolving quickly along with AI and detection methods need to evolve just as quickly.

As RAM Partners has a large portfolio of more than 80,000 apartments, the business is able to use a thorough third party fraud detection service that addresses fraud at scale.

To have greater control over costs, some operators are bringing more functions in house and centralizing for scalability, Metz said. This includes teams from development and leasing to core management operations such as accounting – all aimed at providing deeper and real-time insights into the company’s profitability and performance.

Finally, instead of filling units with risky renters or offering concessions, leveraging a solution such as TheGuarantors can provide an additional safety net, Metz said. The business’s solution secures rent roll and protects rental income against losses from defaults, damages, vacancies, holdover, and more – at no cost to the owner-operator.

“Instead of adopting a strategy which may mask renter affordability issues down the road, you can buy rent protection for the same amount and enjoy peace of mind,” she said.

RAM Partners uses TheGuarantors to “shore up some of the risk with our ownership groups,” Nelson said. When the team has a potential renter who may not have the strongest credit profile, but could still be a great resident for the community, TheGuarantors covers the gap.

All these strategies share one goal, Metz said: to empower operators to protect and strengthen their bottom line. With high costs and economic uncertainty showing no signs of slowing, the time to act is now. Operators who proactively adopt smart, data-driven solutions will be the ones best positioned to safeguard profitability and thrive, even in a challenging market.