For the first time in decades, serious inflation has reared its ugly head. Costs for nearly everything—including the goods and services needed to operate and maintain multifamily properties—are up an average of 10 percent. Some sectors, particularly energy, are up nearly 20 percent. Co-op corporations and condominium associations are in the same boat as individual households, just at a larger scale. Everything is suddenly more expensive. The question is, how to pay for it?
Inflationary Pressure Cooker
“Inflationary pressures affect many aspects of the real estate industry, and it’s top of mind for co-op and condo owners, board members, and managers,” says Ajo Kurian, a senior vice president with AKAM Management, a real estate management firm based in New York City and Florida. “The results of inflation and rising costs are seen everywhere, from basics such as cleaning supplies, to labor costs—consider the recent 32BJ contract for building workers in New York City—and equipment and materials for capital projects.”
Price pressures are amplified by ongoing global supply chain issues caused by the pandemic. Despite governmental efforts, those issues have been difficult to mitigate, and have been even further exacerbated by the war in Ukraine. “Frankly,” says Scott Wolf, CEO of Boston-based BRIGS Property Management, “we’re seeing more issues caused by the broken supply chain and the lack of available staff at vendor firms than with pricing increases due to inflation. Everyone is aware of inflation now, so it’s not a big surprise when you get the bill. Most are expecting it. The bigger issue for us is how long we’re waiting for necessary parts, equipment, etc., to be delivered. In addition to costs having risen, appliances are delayed and building materials don’t come on time. Asphalt, for instance, is much more expensive because it’s petroleum-based. Finding materials in general has become tricky.”
Staffing is another problem facing vendors, managers, and by extension boards, particularly when it comes to capital projects. The pandemic led to what is now referred to as the ‘Great Resignation,’ and companies across the board are struggling to hire and retain workers. That situation is pushing labor costs and ultimately vendor bids upward—and employment watchers say it’s unlikely to change in the immediate future.
“It’s harder to find people to work the smaller jobs,” says Wolf. “There is clearly a labor shortage at the moment. Overall, there are just fewer people in the trades. A recent graduating class from a local plumbing school was composed of 25, down from 100-plus previously on an annual basis. Some tradesmen left what they were doing during the pandemic, changed fields, and didn’t come back.”
“While vendors and contractors have adjusted pricing and services accordingly,” says Kurian, “co-op and condominium boards should plan to remain very prudent when it comes to budgeting and planning for projects. In addition to higher costs, timelines for repair and renovation projects have extended as well.”
“Fuel is knocking budgets for a loop,” adds Wolf. He points out that it’s both a direct and indirect cost increase. “An indirect result of the increase in fuel prices is that we see all the vendors increasing their vehicle surcharge,” he says. “Monthly billings are really starting to [reflect] that now. We thought this fuel price jump would be short term, but it’s not. Any vendors coming to properties we manage are passing higher vehicle charges on to their customers to cover the increase in their fuel costs.”
Controlling Costs…Where Possible
So we’re in a price/cost crisis at the moment—that seems to be a given. But how do we manage it? “We highly recommend accounting for a five to seven percent increase in line items like materials and supplies for future budgets whenever possible,” says Kurian. “While this amount is double the typical forecasting, conservative budgeting will help cover any unexpected costs, even as we move towards more stability.”
According to David A. Levy, a CPA based in Needham, Massachusetts, given that boards and managers can’t forecast future costs based on prior information, “Budgeting during inflation can be tricky. However, by taking into consideration reasonable inflation rates such as the Consumer Price Index (CPI), budgets can be forecasted with more accuracy.”
“The availability and pricing for products affected by supply chain issues (except oil) can shift at a moment’s notice,” Kurian adds. “Co-op and condo boards should be thinking about their most critical building system services and supplies, and purchasing in bulk wherever possible. As a matter of course, seasonal supplies like calcium chloride (for melting snow and ice) and other winter-specific goods are typically purchased in advance and in bulk, and that will certainly be the case for the upcoming season.”
It’s also a good idea to assess your books for ‘financial leakage’—smaller, less obvious expenditures that may fly under the radar, but can really add up over time. According to Avi Zanjirian, a partner with accounting firm Czarnowski & Beer who works with clients in New Jersey and New York, “You might be paying electric, water usage, and repairs, and all are within budget. But at the same time, you may not be looking at all the line items regularly to make sure they’re working efficiently.” Zanjirian recommends taking a hard look at every line item in your budget on a year-to-year basis, and assessing whether you’re getting the most for your money (or even just getting what you’re paying for) from your community’s vendors and service providers. “Do you have the best vendors, contract terms, etc.?” Zanjirian asks. “As contracts expire, you should be checking this.”
Karen Sackstein, principal with The Condo Queens, an accounting firm in New Jersey, agrees and adds that “financial leakage can come from two directions: the income side, and the expense side. On the income side, associations sometimes absorb costs that really are the responsibility of individual unit owners. This is more common in high-rise buildings. Associations should always look at their governing documents to determine what their common elements are, what the association is responsible for maintaining and repairing, and what should be paid for by owners.”
That said, Sackstein continues, “the larger piece of the puzzle is on the expenditure side. Contracted vendors may be performing additional work and charging for it—and that should be covered under the contract. It’s critically important to be specific in contracts so you don’t get overcharged. Another area to consider is competitive bidding. If you’ve had a contractor for a long time, check the market. Are you getting maximum services at the best price? Every so often, go out into the market to check bids.”
Budgeting for the Future
“The 2022 budgets were set at the end of 2021, before this [current inflation wave] hit,” says Jayson Prisand, a partner with Prisand Mellina Unterlack & Co, an accounting firm located in Plainview, New York. “There were trends at that time, but no one expected these spikes. In some cases, some of the boards we advise are taking a look at their first quarter versus where they are now, and considering whether they may need a short-term or one-time operating assessment to bridge the gap for this year. And in some cases, they’re even considering a second full maintenance increase, mid-year. To do that is not always popular.”
Prisand suggests that a one-time assessment may correct a current cash flow problem, or act as a stopgap measure. “For 2023 though,” he says, “we are observing how this year plays out.” If inflationary pressures continue as they have, co-op corporations and condominium associations may have no choice but to level high single-digit or even double-digit increases. “It’s about monitoring things,” says Prisand. “Most buildings have this year’s results through May. It’s still too early for budget planning for 2023, but we recommend boards keep on top of it.”
“Although we are seeing increases overall,” says Kurian, “it will be difficult to pinpoint precisely which goods or service areas will be impacted by higher pricing and availability in the near future.”
That lack of precision and certainty about how things may trend going forward also applies to reserve funding, says Levy. “Reserve funding is more complicated, because not only are prices going up, labor and supplies are harder to purchase with current supply chain issues. You might have the funds for a new HVAC system, but the unit might be backlogged for six to ten months. This needs to be addressed in the reserve fund budget analysis.”
Wolf and his colleagues recommend transparency as the best policy for explaining to shareholders and owners what is happening and what may well happen in the coming year(s). “If the association is over budget,” says Wolf, “the board should let the community know, and why. If they budgeted for ‘X’ last year for a project or line item, they have to come clean and say that costs, etc., have risen.” In terms of affordability and the ability of association members and corporation shareholders to absorb higher monthly costs, Wolf adds that “the association must collect what it needs. If there is a one-time assessment, payment plans are an option, but ultimately the community needs the funds.”
Ultimately, there is little to nothing co-op and condominium boards and managers can do to control inflation, supply chain issues, and labor shortages that are plaguing the economy now, as we emerge from the worst global health crisis in a century. We will have to ride this out. But good management and attention to detail can help to defray some of the costs. No matter the circumstances, vigilance and planning are your best tools.
A J Sidransky is a staff writer/reporter for CooperatorNews, and a published novelist. He can be reached at email@example.com.