Determinants of Operating Costs of Multifamily Rental Housing

W04-7: Operating costs are an important, but not much studied component of apartment financial performance. This paper establishes an economic framework for interpreting operating costs and uses a unique data set to investigate the determinants of operating costs. Empirical results are consistent with theory and indicate that housing quality is a strong driver of operating costs; older properties must incur more expense to achieve a level of housing quality; economies of scale in property operations are significant but top out at around 200 apartments; and a property’s operating expense/rent ratio is influenced by local area input costs and short run apartment market fluctuations. The paper concludes with a discussion of some implications for affordable housing policy…