Wednesday, April 24, 2013

Analysis: Income & Expense study and the Price Index of Operating Costs

Last week, the Rent Guidelines Board released two studies on economic conditions for landlords: the Income and Expense (I&E) study and the Price Index of Operating Costs (PIOC).

The I&E study is culled from documents submitted by landlords to the NYC Department of Finance in the form of Real Property Incomeand Expense (RPIE) statements. The data in this study is therefore considered to be a fairly reliable and accurate accounting of landlords incomes- from rents and other sources- and expenses in the form of operations and maintenance costs. Looking at the two together yields the “Net Operating Income”, a marker of how much money landlords are making off of their property in a year. The study presents both a snapshot of this past year’s income and expense balance (the “cross-sectional analysis”), as well as a year-to-year comparison (the “longitudinal analysis”).

The Price Index of Operating Costs (PIOC) is a figure the RGB staff creates each year based on a “basket of goods and services used in the operation and maintenance of rent stabilized apartment buildings.” This “basket” is similar to those used by the bureau of labor statistics to calculate the generalized cost of living adjustment, but it is particular to the economics of rent stabilized building ownership. The staff collects data on items like oil and gas costs, property taxes, insurance, and more, and weighs them in their sample relative to their importance as a percentage of total operating and maintenance expenses. The result of the PIOC is a single percentage, which attempts to show the change in prices for items used to operate a building in New York City.

In many ways, the I&E is the superior measure of landlord’s costs because it covers both incomes and expenses, it is based on a large and fairly reliable data set, and it measures not just the prices of goods but the exchanges in goods and services that landlords actually made. While the PIOC measures prices, it does not exactly measure costs. Landlords still have a degree of choice in the operations of their building, and can choose the most cost-efficient mechanisms options available. The I&E measures the costs landlords actually took on, not just the prices of the goods available to them.

The 2013 Income and Expense report, which is based on 2011 filings, depicts a thriving market for landlords. Rental income has risen 4.4% from the previous year, and net operating incomes (incomes minus expenses) grew 5.6%. This is the 7th consecutive year of rising NOI, in a period of severe economic recession. Not only are rent stabilized landlords doing well in an otherwise sick economy, but their profits have risen dramatically over time. In inflation adjusted dollars, NOI has risen 21.6% since 1990. NOI in Brooklyn has sky-rocketed over the same period, rising 59%. In short, with income rising faster than expenses, rent stabilized building owners continue to realize a healthy profit, while many tenants struggle through a punishing economy.

The Income and Expense report also depicts a growing trend: preferential rents. While rent stabilization is generally understood to result in below market rents, the opposite is actually the case in a growing portion of the city. For the 4th consecutive year, the “collectible rent” in rent stabilized apartments is lower than the “legal regulated rent”. The most likely reason for this trend (depicted below) is that after years of RGB rent increases, rent stabilized rents have surpassed market levels in many neighborhoods, and landlords are offering apartments at lower “preferential rents.” This growing portion of landlords needs no rent increase from the RGB to meet its expenses; in fact, they are already shorting themselves a significant share of their allowable rents. This topsy-turvy market, in which regulated landlords are voluntarily lowering actual rents while theoretical rents rise, is reason enough to question the inevitability of annual RGB rent increases.

The declining share of registered rents collected suggests that
ever-rising regulated rents are outpacing market forces.
(Trend oval added by RGBlog.)

The RGB’s 2013 Price Index of Operating Costs presents a picture of rising prices for goods purchased by landlords. The PIOC inched up 5.9% this year, due largely to increases both in generalized fuel costs and in the amount of fuel landlords used in this relatively cold and rainy winter. Insurance costs also rose, possibly as a result of hurricane Sandy.

It’s important to note, however, that the PIOC is a measure of prices, not costs per se. While prices and costs are of course related, there are many things a landlord, just like any business owner or market consumer, can do to keep costs low as prices rise. Nonprofit building owners all over the city have found ways to keep costs as low as possible, while only raising rents as a last resort. Often these cost efficiencies also result in environmental benefits, and are subsidized by the state, providing even lower costs.

If you look closely at the data, there are two factors that influence the PIOC far more than others: fuel costs and taxes. While these are facts of life for property owners everywhere, they are not immutable expenses. Fuel costs can be brought down with energy efficiencies, many of which can be paid for through NYSERDA grants and other public funds (as well as MCI rent increases). Tax abatements and exemptions are also available to landlords through the J-51 program, which paid out over a quarter billion dollars in tax credits last year.

While prices may be rising, we have to ask: what are landlords doing to keep costs low? The PIOC is a measure of prices, but it is just one factor in consideration for the Rent Guidelines Board.

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