At Issue DC - Housing Costs Continue Grow Far Beyond the Rate of Inflation
The Washington metropolitan region is fully embroiled in a crisis of affordability, driven by a stark imbalance between our existing housing supply and that needed to accommodate current and future projected demand. Compounding this dilemma further are the skyrocketing costs of providing rental housing. As a result, even affordable housing providers, who have access to various sources of public financing, are struggling to access capital and financing needed to conduct major building-wide repairs and subsequently deciding to sell properties.
DC, Maryland and Virginia have all seen policy debates in the last year around restricting rent increases and limiting them to some function of inflation as measured by the Consumer Price Index (CPI). While this is intended as a nod to ensuring that property owners are able to sufficiently reinvest in a property to prevent the degradation of our housing stock, the needs of each building can vary widely, and CPI is a poor reflection of the costs of operating and maintaining rental housing.
CPI and CPI-W are used to track the changes in the price of consumer goods and services. While a helpful tool in predicting broader economic conditions and the costs of goods and services everyday consumers rely upon, one cannot directly extrapolate from it the costs of providing a particular service such as housing. In reality, the hyperinflationary conditions ushered in by the pandemic have driven up the costs of providing housing at a rate far beyond the Consumer Price Index (CPI) and other traditional measures.
Housing providers rely on rent as a sole income stream to fund the operations of the property, including mortgage payments and interest, payroll, utilities, business licenses and other taxes, hazard and liability insurance, in-apartment routine repair and maintenance, contract services like waste collection, janitorial services, maintenance of mechanical systems, boilers, air conditioning systems and elevators, and fire suppression systems. Some may additionally be set aside for very costly replacement reserves for major system replacement and repairs to windows, masonry, roofs, elevators, plumbing, electrical and HVAC. Costs are even higher for older buildings, which require constant reinvestment to maintain safe and healthy living conditions. This is especially pertinent in Montgomery and Prince George’s Counties, where more than half of multifamily housing units are located in buildings of more than 30 years in age. For these buildings, CPI represents a bare minimum for reinvestment to stave off deterioration and adequately plan for upgrades to building systems.
Highlighted below are just some of the major cost drivers for rental housing that have increased well beyond the CPI.
Operating Costs Continue to Vastly Outstrip Inflation
Many of the rental housing industry’s primary cost drivers have grown at a rate far in excess of CPI (listed for 2023 at 6.9%).
- Pepco distribution and transmission charges are set to increase by 20.4% in the next year.
- Collectively over the last three years, increased electric distribution rates have increased customer bills by roughly 67%.
- According to HUB International, multifamily property insurance rates increased by roughly 26% this year and are projected to increase up to 50% in 2024.
- Each of the prior two years (2021 and 2022) saw increases of more than 20%.
- Washington Gas rates are anticipated to increase in the first quarter of 2024. In the ongoing rate case, Washington Gas has requested a $53.0 million annual revenue increase, which represents an average increase in distribution service charges for firm service customers of 34.3%.
- Water and sewer rates are both set to increase by 34% effective October 1.
- Interest rates have increased by over 2100% in the last 14 months; a measure which can result in millions in additional expenses over the life of a multifamily loan.
As reflected above, CPI fails to come even close to capturing the actual costs of operating and maintaining rental housing. Moreover, it can’t account for expenses specific to each individual building, particularly at a time when the costs of financing repairs for building systems – either planned or unexpected – are through the roof.
Restricting rents by any measure inherently constrains the ability of property owners and managers to reinvest in the property and can even imperil the refinancing of a community. In addition to the myriad well-documented negative consequences of such policy approaches, rent regulation ultimately risks a degradation in the quality of, and even an outright loss of critically needed housing stock.