Novogradac Survey Shows Rental Income Set Record in 2021, But Increased Less than Expenses

Published by Kelly Gorman on Monday, December 5, 2022 - 12:00am

Rental income reached its highest point in the 12-year history of Novogradac data in 2021, yet the net operating income (NOI) for low-income housing tax credit (LIHTC) properties in the data set dropped.

That’s because rental income increased 0.8%, while operating expenses for LIHTC-financed properties in Novogradac’s proprietary data set saw a 4.3% increase in 2021–the second-largest year-over-year increase in the 12 years such data has been tracked (trailing only a 6.8% jump in 2019). That information comes out of the Novogradac Multifamily Rental Housing Operating Expense Report, 2022 Edition.

The combination of slower income growth and rapid expense growth in 2021 meant that NOI for LIHTC properties in the data set dropped 4.0% in 2021, although it remained the second-highest dollar amount in the 12 years for which data is available.

The median annual rental income for the more than 125,000 affordable units in Novogradac’s data set was $9,702 per unit in 2021, an average of $808 per unit per month. That was an increase from the 2020 per-month median rental income of $805, marking the third straight year properties set a record for rental income, although it was relatively flat after increases of 8.5% and 4.3% in 2019 and 2020.

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Rental income for LIHTC properties trailed other measurements of rent in 2021. Fair market rents, released by the U.S. Department of Housing and Urban Development each year, allowed an average increase of 3.4% in 2021 following a jump of 1.0% in 2020. The average rent for an apartment in the United States, as tracked by Statista, dropped 1.4% in 2020 before going up 17.9% in 2021.

For property owners and managers, the increase in rental income was more than offset by the 4.3% increase in expenses. The growth in expenses, coming the heels of a 3.1% increase in 2020, meant that NOI for properties in the Novogradac data set dropped 4.0% in 2021. That’s only the second time NOI has dropped since 2017–although this decrease was somewhat offset by the fact that NOI jumped 6.0% in 2020, giving the properties a two-year combined increase of 1.8%.

For a longer-term perspective, over the 12 years for which Novogradac has rental income and operating expenses data, operating expenses have grown at a compounded annual growth rate (CAGR) of 3.2%, while rental income has increased at a 1.9% CAGR. That combination–and the fact that income is a higher number–means that NOI increased at a CAGR of 0.4% over the period of 2010-2021.

There were several factors that kept rental income (and overall income) lower in 2021, some of which were one-year trends, while others merit continued attention. Perhaps most important was the ongoing effects of the COVID-19 pandemic and related economic issues. In both 2020 and 2021, many property owners were reticent to increase rents and some states did not allow rent increases. That trend may have already changed as we continue to emerge from the worst of the pandemic and most limitations on rent increases have gone away.

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Meanwhile, vacancy loss, which measures the cost when apartments are vacant or rent is delinquent, increased 39.5% over 2020 to its highest-ever level of $346 per unit. A large part of that was likely the combination of eviction moratoriums in 2020, along with substantial local, state and federal assistance for rent that year. Once those moratoriums and assistance ended, more tenants moved and more were delinquent in rent.

Property managers concerned that the jump in vacancy loss in 2021 is a harbinger of a longer-term trend should reconsider. The 2021 total for vacancy loss is an outlier in the category’s history. In fact, from 2010 through 2020, that category showed a CAGR of -1.5%, dropping from $287 per unit in 2010 to $248 per unit in 2020. The category did see growth from 2015 (when it was at its lowest figure) through 2019, but nothing approached the jump of 2021.

The combination of slow growth in rental income and inflation may cause concern for many property owners, but rents likely increased in 2022 and will do so again in 2023, due to a dramatic increase in many area median income figures that help determine rent limits for LIHTC properties.

However, LIHTC property owners will want to continue to track rental income and operating expenses closely to gain an understanding whether 2021’s gap between the increase in expenses and rental income was a one-year effect worsened by unique pandemic-related factors or a long-term trend that will require significant adjustments.