The Inside Look with Xander Snyder - Episode 2

In the second episode of 'The Inside Look,' Senior Commercial Real Estate Economist Xander Snyder breaks down trends in CRE expense management, including repairs & maintenance expenses for commercial properties. 

Hi, I’m Xander Snyder, and you’re watching First American’s Inside Look. Chances are, if you follow economic news, you’ve heard of the Consumer Price Index (CPI) as well as the Personal Consumption Expenditures Index (PCE). These are both indices that measure inflation using different methodologies. However, you may be less familiar with the Producer Price Index, or PPI. At a very high level, the PPI measures the prices received by producers for goods, whereas the CPI measures the prices paid by consumers for goods. While this distinction may seem a bit technical—and there are nuances I won’t get into right now—the PPI includes thousands of sub-indices that track prices for all sorts of goods and services, including repairs and maintenance expenses for commercial properties, often referred to as R&M expenses.

This R&M PPI sub-index provides insight into expense trends faced by commercial property owners and operators today. With rent growth slowing across asset classes, property managers are now focused on limiting expense growth to maintain net operating income margins. On an annual basis, repairs and maintenance expenses have declined for six months for both non-residential and multifamily properties. In the latest PPI release from July, the rate of decline was 4.2% for non-residential properties and 3.3% for multifamily properties. At face value, that’s encouraging—after R&M expenses surged during the pandemic, they have not only leveled off but declined for six consecutive months.

However, the year-over-year growth rates hide the accumulated increase in R&M expenses that occurred during the pandemic. To get a better sense of that accumulated growth, we can look at the R&M PPI index levels themselves rather than the year-over-year change. In this view, the cumulative increase in R&M expenses becomes clearer: compared to pre-pandemic levels, R&M costs are now 31% higher for multifamily properties and 34% higher for non-residential properties. While this increase has been partially offset by strong rent growth during the same period, the reality remains that R&M is significantly more expensive now than it was three years ago.

If you’re interested in learning more about commercial real estate expense trends, check out the latest X-Factor on First American’s Econ Center titled “Why Operating Costs for Commercial Properties Have Soared.” Additionally, I’ll be giving a talk on the state of the commercial real estate market and offering a 2024 outlook in Milwaukee on September 20th and in Miami on October 12th. If you’re interested in attending either event, please reach out to your local First American representative.