One reason the real estate industry isn't preparing for the next recession is simple: it's already here. Those who don't recognize the unprecedented challenges we face simply aren't looking. The truth is, we're in for a long haul and many will not survive. Now is the time to address the cracks and innovate, or risk slipping into a worst-case scenario.
As someone who has worked in real estate technology (or PropTech) for over a decade, I believe the data we have available to us is essential to tackling many real estate challenges head-on. In industries from finance to transportation, there is value in collecting, compiling, analyzing, and using information that reflects reality and helps stakeholders with different levels of expertise navigate rough waters. If you're not leveraging the data available in your industry to improve operational efficiencies and keep up with market demands, you're missing a key opportunity.
From Wall Street to Main Street
Across the country, a harsh reality is becoming apparent in the real estate industry: Real estate agents, from the largest to the smallest interests, are struggling with rising costs in a market where capital and credit are scarce.
We've been facing a high inflation and high interest rate environment for some time now, with no signs of abating anytime soon. The average interest rate on a 30-year mortgage has skyrocketed to nearly 7%, nearly double the rate on one of the most popular mortgages.
The real estate industry is in a tough spot with operating costs soaring across the board across all assets and markets, eating into net operating profits. To put it in perspective, imagine a typical apartment complex that was paying $5,000 per year in insurance. A 28 percent increase in premiums would raise premiums to $6,400 per year. That $1,400 increase in insurance costs directly cuts into the property's profits, first and foremost.
In addition to rising insurance premiums, property taxes have soared 6.9%, utility bills have recorded their largest year-over-year increase, and construction costs for new builds, renovations and repairs have risen more than 40% since 2019. All of these factors are eating into profit margins that are shrinking by the day.
The average property management company has an adjusted profit margin of just 6 percent. Even large management companies managing hundreds of units are barely scraping by on slim profit margins. Smaller companies and landlords are struggling as well. One of the most resilient segments in this disruption is single-family rentals, which are valued for their higher per-square-foot value compared to multifamily properties. But even this segment is not immune to the domino effect of rising costs and declining profit margins.
As a result of this market uncertainty, many businesses and operators (large and small) are now being forced to secure emergency equity funding to stay in business or to mortgage owned assets to support mezzanine debt facilities. These disparities highlight the urgent need for expanded or more integrated data analytics and strategic partnerships to weather this crisis.
Embedding innovation in the real estate industry
Given today's market challenges, a key question is how real estate and property management companies can continue to operate and thrive.
In today's tough real estate industry, technology plays a key role in catering to the industry demands. As a PropTech founder, I admit to being biased, but let me explain the practical and real possibilities. Technology enables data analytics and predictive insights to help you make strategic decisions and optimize your portfolio. When implemented thoughtfully, it covers everything from leasing and maintenance to rent collection, streamlining your property operations while providing you with the resources and tools to enhance revenue stream generation.
Incorporating smart technology optimizes operations by leveraging tools and data to streamline property management processes, enhance tenant experience, and effectively manage costs according to current market conditions. A real game changer for the industry will be encouraging revenue diversification through innovative financial products such as renters insurance and flexible payment plans.
Innovative banking products offered by PropTech companies often generate higher revenues than traditional apartment management fees, demonstrating the viability of alternative revenue streams. Technologies such as embedded bank accounts increase operational efficiencies by automating reconciliation processes and provide a proportionately higher share of interest revenue, which translates directly to operators' bottom lines.
Another banking solution is a working capital line, which provides much needed liquidity when businesses need it most. These lines are usually underwritten from cash flow, making them preferable to taking out a separate lien on owned assets. Others are providing cash back to businesses to drive operational efficiencies and pay for maintenance work and consumable purchases, which have increased significantly in 2021 to date.
A key benefit of PropTech is the agility to help clients adapt to market changes: Because the operating system sits in the middle of extensive data insights, the right PropTech partner can put the pieces together to help clients read the landscape and plan their approach now and in the future given market conditions.
A recession will not only impact the real estate industry, but will likely result in a slowdown in the economy in the long term. Decades of rent increases have already made the cost of living unaffordable for many renters. PropTech allows property managers and owners to increase revenue without resorting to rent increases for similarly cash-strapped consumers. One way to achieve this is by offering resident perks packages. These are value-added services that tenants value and are happy to pay for, such as insurance policies, good credit reporting, and points credit cards for rent payments. Offering these packages within a technology platform, rather than adding random junk fees, increases revenue for operators and helps tenants. Each stakeholder wins, and operators increase revenue without increasing rents.
Most importantly, the benefit of PropTech is agility in an industry that is often bound by tradition. Incorporating technology solutions into business operations allows companies to comply with regulations and quickly adapt to market changes in a technology-backed manner. This allows companies to attract a broader tenant base, stay competitive, and optimize both occupancy and revenue, which is an absolute necessity in today's evolving environment.
After years of market conditions that have adversely affected players across the real estate market, one thing is clear: thoughtfully developed PropTech can be a lifeline in these challenging times. Real estate businesses can weather the current economic crisis and emerge stronger by leveraging data-driven insights, redefining revenue models, and fostering collaborative partnerships through the right technology platforms. Rather than spending time and money maintaining fragmented systems that fight with each other, they can become more sophisticated in their use of data driven by clear, real-time reporting. They can also rethink and redesign their business models around new offerings such as resident perks packages and down payment alternatives.
In times of prolonged market volatility and economic uncertainty, embracing innovation in property management is no longer an option, it's a necessity. PropTech is not just technology, it means resilience, adaptability and sustainable growth in a constantly evolving industry environment. We have a tremendous opportunity to deliver success with new ways and ways of doing business, forging a new era of innovation in property management and helping our clients strengthen their NOI during these volatile times and build a prosperous future.