This report will discuss three specific factors that are impacting the homeowners association (HOA) market. The three factors are: 1) the California (CA) minimum wage increases, 2) infrastructure degradation, and 3) increased competition. All three factors will bring significant financial implications to Vendors, Property Managers, and Properties (i.e., occupants) and require a paradigm shift to effectively offset costs.
- Impact of CA Minimum Wage Increases
The HOA market is a services industry (landscaping, janitorial, building maintenance, roofing, asphalt, etc.) that requires manual labor to perform the work. That being said, the single largest expense for most companies is labor, which oftentimes comprises over 50% of the operating expense budget. Most of the work requires low-skilled employees who receive a state-mandated minimum wage. California (CA) recently passed legislation for a five-year minimum wage increase (Exhibit 1).
Exhibit 1 – CA Minimum Wage Increase (www.gov.ca.gov/docs)
The CA minimum wage increase is expected to increase labor costs by 50% for employers from 2017 to 2023 (Exhibit 2). The impact of a $0.50 minimum wage increase will result in an additional $1,000+ annual labor costs per full-time employee (2,080 hours annually). A $1 minimum wage increase will result in an additional $2,000+. For an employer with 25 employees being paid minimum wage, the company will experience a $50,000 increase in operating expenses with a $1/hr minimum wage increase. The CA minimum wage increase is estimated to increase Vendors’ contract prices by 40%, which, in turn, will raise individual homeowners’ assessments by 25%.
Exhibit 2 – Impact of Minimum Wage Increase
Here are the impacts to the three primary groups involved in HOAs:
- Shrinking manual labor pool – labor is moving to higher paying construction jobs; E-Verify is reducing the illegal labor force
- Decrease in employee morale – “I have been working here for 10 years and am making the same as an entry-level employee”
- Reduction in labor hours and increased workload – decreases quality; increases burnout
- Setting expectations – Vendors waste time responding to unhappy homeowners if requests are not articulated upfront
- Declining margins
- Property Management
- Vendor turnover – increased time to generate RFP’s, interview, and onboard new Vendors
- Unhappy homeowner response – increased complaints due to decreased Vendor labor hours and quality
- Quality control – increased Property Management (PM) hours to ensure Vendor quality
- Homeowner outrage – dealing with unhappy homeowners due to assessment increases
- Disruption in Vendor relationships between PM and/or homeowners
- Increase in monthly assessments – fees must increase maintain quality as contract prices increase
- Decline in Vendor service – quality will decline if contract prices do not increase
- Owner occupancy decline – owner occupiers are leaving and investors are renting units
- Decline in PM service – most PMs oversee between 4-6 properties and Vendor turnover will reduce time for PM to focus on homeowners’ issues
- Decreased communication with homeowners from Vendors and PMs
- “We want the Ferrari but only have the funds for a Toyota”
- Infrastructure Degradation (Reserves)
- “All stakeholders, including legislators, will need to recognize the imperative for associations to conduct reserve studies and to fund reserves based on those studies. Lack of resources will remain the primary hindrance to association success until reserve funding becomes mandatory.” – Community Next: 2020 and Beyond (Community Association Institute, July 2016)
- 64% of community associations (222,500 of 347,000) were built between the years 1980 and 2000
- These communities are within the 20- to 40-year timeframe when major repairs are needed
- Major repairs include roofing replacement, plumbing infrastructure renovation, irrigation replacement, asphalt removal and resurfacing, pool resurfacing, elevator repair, tennis court renovation, compliance with new environmental and energy-saving standards, etc.
- In 2016, community associations allocated $25B in special assessments for major repairs
- As communities continue to experience common area degradation over the next decade, special assessments must increase in order to pay for the necessary major repairs
3. Increased competition
- Larger corporations (equity-funded companies) are consolidating small businesses in Vendor and Property Management segments
- Contract prices are declining as a result of the build-to-sell mentality
- Increased mergers and acquisitions are changing the makeup of the industry as customer service and quality is declining
- 2.12 average rating – over 3,000 individual Yelp and Google reviews on nearly 100 Property Management companies across four major cities in the U.S.
- How to offset costs
- Salary reductions
- Increase contracts
- Employee efficiencies
- Potential repeal of minimum wage increases
- HOA property maintenance software
In summary, economic and industry forces are bringing significant financial impacts to the commercial association maintenance market in the years to come. It is critical that Vendors, PMs, and Properties take action to offset these costs in order to maintain the status-quo. The solution starts with Vendors to determine efficiencies and other cost-cutting means to minimize the negative impacts facing this industry.
go home and be happy,
Brian & Tim (Co-Founders)