For multifamily owners & operators, an unstable economic environment can compromise cash flow. What can you do to protect your revenue both in this economy and in the longer-term?

The bumpy U.S. economy

If you think about the last few years as a commercial flight, the multifamily industry pre-pandemic was taxiing on the tarmac. Then, the plane took off as rent prices surged in 2021. Nationally, the cost to rent an apartment rose by 17.6%, and continued to climb throughout 2022 to a cruising altitude (with median rent increasing by 3.8%).

Then we hit turbulence. A combination of repressed consumer demand, supply chain disruptions, and a tight labor market launched us to the peak of inflation. Now, the Federal Reserve's aggressive rate hikes, which are meant to cool the economy, might tip us into a recession.

Brace yourselves for impact

While a number of sectors were affected by these opposing forces, the rental and real estate markets saw the most dramatic impact. By the end of 2022, inflation, high interest rates, and economic uncertainty resulted in rent decline. There was a slowdown of leasing that was beyond seasonality and negative absorption.

In the event of a sudden loss of cabin pressure on a commercial flight, oxygen masks descend from the ceiling. In the event of an economic recession, after record-breaking rent growth, what are the implications for multifamily companies, and how can they prepare and protect themselves?

Protect multifamily revenue against 8 major risks

Multifamily companies must now focus on revenue protection and portfolio optimization measures to weather the economic storm. With the inability to increase rent becoming a possibility, companies must consider cost-cutting initiatives, revenue protection technology, and additional revenue drivers. Let's examine how to mitigate and solve for 8 risks to multifamily revenue in an unstable economy.

Risk #1: NSF Returns, payment errors, & chargebacks

Transaction errors and fraud pose a significant risk during rent collection cycles, particularly during recessions. According to the NAA, property managers lose around $17,000 annually per property to collections, and when you consider the hours spent managing collections, reconciling accounts, and balancing the books, the impact is far greater.

Using payment technology tools to minimize fraud and returns can help reduce revenue loss and save time. These tools can instantly verify bank account information and ensure there are sufficient funds to cover payments. Additionally, chargeback defense teams can achieve an 82% win rate. Recession-proof your rent collection process and save your staff time by using a digital suite of revenue protection features.

Risk #2: Delinquent rent

Delinquencies negatively impact cash flow and productivity, diverting valuable time and resources towards managing challenging collections and evictions. With Americans spending a greater percentage of their income on rent, and housing supply struggling to meet demand, delinquencies are becoming a significant risk.

Implementing programs to protect against delinquencies is critical, such as offering flexible rent payments, verifying prospective residents' IDs, and proactively helping renters find rental assistance programs. By partnering with a flexible payments provider, you can get paid in-full and on-time by the provider, while your residents gain the flexibility to pay rent in installments to the provider that works best with their budgets and cash flow. Fraud detection providers like CheckpointID can verify IDs in real-time, eliminating the potential for fraud before a lease is signed.

Risk #3: Paper-based payment processing

Manually processing paper-based rent payments delays cash flow and increases the risk of theft. Despite this, 42% of rent payments are still made with a check and 16% with money orders. This is because some residents are unbanked, unwilling to break their check-writing habits, or want to avoid digital payment processing fees.

Advanced companies have stopped accepting checks at their management offices and rely on their digital payment portal paired with a modern Lockbox solution to serve those who prefer to pay with a check.

For communities that receive money orders, a digital cash payment solution allows residents to make cash payments for their rent at a retail location like Walmart. Their transactions are digitized and instantaneously integrated into your software.

Risk #4: Paying utility invoices without auditing them

Utilities are already a major expense for apartment communities, and recent inflation has made costs soar. However, this presents an opportunity to save significant amounts of money. At least 17% of utility invoices contain errors, which can cost businesses hundreds of thousands of dollars if left unchecked. Catching issues early can save your business from headaches and costly repairs.

To do this, establish a consistent and standardized process for utility invoice audits and assign a day of the month for the team to conduct them. If you lack the time or resources, consider outsourcing to a provider that will manage the entire process for you. This will free up your team to focus on more important tasks.

Risk #5: Suboptimal utility cost recoupment

Energy prices skyrocketed with inflation to the point where they have outpaced the price of goods and services – in certain cases at double or triple the rate. While there are a variety of factors driving this current trend including supply chain disruptions, the war in Ukraine, and domestic policies, the utility market has always been volatile. And, including utilities in rent or charging a flat fee for utilities leaves cash flow vulnerable to rate fluctuations.

Resident utility billing allows you to create an additional line item on your resident ledger, which creates a new revenue stream for your property. This added revenue increases NOI, and after factoring in cap rates, companies see a spike in property value.

Risk #6: Neglecting resident turnover costs

The cost to replace just one resident that moves out is nearly $4,000. And 82% of renters plan to move within a year, making it essential for management companies to improve the resident experience. Dissatisfaction with community management is the second most common reason residents move out of their community (behind seeking lower rent).

To improve retention, multifamily operators should enhance key touchpoints, such as package management and maintenance requests. Other strategies include hosting community events, gathering feedback, offering discounts, and empowering residents to manage all aspects of community living through a single app. Additionally, incentivizing renewals by offering discounts, locked rates for longer terms, unit upgrades, and automating the process can help increase retention rates.

Risk #7: Foregoing additional revenue streams

Multifamily owners and operators should consider ancillary revenue opportunities that improve the resident experience and help protect their assets in the event of an economic downturn.

Paula Munger, NAA Assistant VP for Industry Research & Analysis suggests evaluating potential revenue streams, such as parking fees, storage units, and short-term rental partnerships. Other ideas include selling moving kits or cleaning supplies, installing vending machines, and renting out carpet cleaners and power washers to residents. Class A multifamily communities have experienced a demand for concierge programs that bundle together hotel-like amenities and services such as grocery shopping, dry-cleaning, in-home package delivery, housekeeping, wake-up service, pet and plant care, and more.

Insurance admin fees can also generate additional revenue. By partnering with a multifamily insurance provider, administrative fees can be set for each unit per month.

Risk #8: Making decisions without data

Not being able to pull data and identify trends across key aspects of your business like these is like flying blindly. To make informed business decisions that help protect your revenue and optimize your portfolio, you need the right data. As the rental market shifts, insights and reporting become valuable tools to help companies adjust and thrive. "If you own and control your data, you're about as future proof as you can be," says Donald Davidoff, Co-founder and CEO of Real Estate Business Analytics.

By using reporting tools, companies can monitor resident behaviors and engagement, identify behaviors impacting renewals, track payment data and analytics, and benchmark utility metrics and recoupment rates across their entire portfolio. With access to this data, real estate companies can make informed business decisions to help them adjust and thrive in an ever-changing rental market.