Payroll was an outlier among expense categories for low-income housing tax credit (LIHTC)-financed properties in 2021, according to a Novogradac report released this week.
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, according to the Novogradac Multifamily Rental Housing Operating Expense Report, 2022 Edition. Yet payroll saw its first-ever decrease, a 1.9% drop compared to 2020.
The increase in overall expenses in 2021 trailed only a 6.8% increase in 2019 in terms of annual increases since Novogradac began tracking such data in 2010. Among the seven major categories for which Novogradac tracks expenses, five saw increases–including a 33.5% jump for property insurance. Only administration expenses (down 0.5%) and payroll expenses were less per unit in 2021 than in 2020. The decrease in payroll had a significant impact in keeping overall expenses from going up even faster, as it involves the highest dollar amount among expense categories. In 2021, payroll cost accounted for 25.7% of all expenses.
That payroll dropped during a year in which inflation ramped up may seem counterintuitive. The average inflation rate in 2021 was 4.7%, according to the U.S. Department of Labor’s Bureau of Labor Statistics (BLS)–a number attributable to a low first-quarter number that held down the overall figure.
Still, a 1.9% decrease in payroll during a year with 4.7% inflation and a 4.3% increase in overall expenses is notable and has a potential explanation: The decrease in 2021 was likely attributable to property owners finding they could operate their developments with fewer employees, especially with new technology to assist them. Some of those changes came out of the COVID-19 pandemic in 2020 (when payroll increased 5.0%), which saw many property managers combine management responsibilities and leave many positions vacant. Some were the result of a labor shortage, where properties had positions remain open for months or longer while looking for employees. The trend toward smaller staffs that began in 2020 continued in 2021: One example cited in the Novogradac report was of a LIHTC property where pay-per-employee went up 10%, but the fact that there were fewer total employees meant payroll expenses dropped 9.4%.
Property owners looking to the future should note that wage growth usually trails inflation, which was true in 2021. According to the BLS, the year-over-year inflation rate in September 2021 (nine months into the reporting year) was 5.4%, while wage growth was 4.2% over the same period. A year later–September 2022–saw an 8.2% year-over-year inflation growth and a 5.1% wage growth.
That’s not to say wages will never catch up–inflation may cool off and wage growth may continue–so property managers should be prepared for increases in payroll. The ability to combine responsibilities to reduce workforce numbers remains a possibility, but there are limits to that.
It’s possible that LIHTC property owners who saw the benefit of less staffing in 2021 will now feel the effect of higher payroll costs.
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