Making Your Community Inflation- and Recession-Proof

By Brad Baecht & Caronlina Serrano / Published November 2022

Florida community associations and property managers do not need an economics degree to understand that inflation—and the possibility of a recession—will have a significant impact on the costs involved with the daily operation of communities. It will be felt in the year ahead, so prudent decisions should be made now to recession-proof communities across our state.

     An inflation cycle exacerbates supply chain issues from the past few years, with everything from food to gasoline building materials, and maintenance items becoming more expensive. Association boards and managers must have proactive conversations to protect their communities from these macro-economic dynamics while maintaining a flexible approach as the cycle evolves.

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     From luxury high-rises to sprawling, single-family HOAs, qualified reserve specialists are being retained to conduct new reserve studies. These studies factor inflation into replacement cost calculations, while also accounting for fluctuations in labor and material costs. They are a pivotal first step to preventing special assessments. Such studies also must account for Florida’s new law imposing reserve requirements and mandating 25-year inspections. Many older buildings will have to embark on expensive restoration projects to comply with the law. That is where the pain of labor and material cost hikes will particularly be experienced. Bringing in third-party experts, including attorneys, to explain the post-Surfside tragedy reserve requirements can help residents fully understand the advice managers are giving. Florida communities have many seasonal residents from other states and countries, and they might not be up to speed on the law changes.

     Other important considerations and best practices for Florida’s communities include the following:

• Transparency about timetables and costs is critical. Associations must understand that items once secured within three months might now take up to six months to receive. Explain that supplies not purchased today will be more expensive three months down the road. This year our company was able to leverage strong relationships with certain suppliers to bulk purchase key items, especially disaster preparedness items such as diesel fuel and generators, for our entire portfolio at a substantial discount. The savings were passed on to each individual association. Pre-purchasing essential items now is a major step in mitigating against inflation.
• Distinguish between true priorities and “nice-to-have” expenses. A common past mistake by association boards was favoring aesthetic enhancements over investing in life-safety equipment and infrastructure repairs. These days, it is far too costly to focus on superficial touch-ups over vital goods, services, and restoration projects. Community managers should educate board members about prioritizing so that cosmetic upgrades are moved to the bottom of the to-do list and safety jumps to the top.
• Reassess agreements with key vendors and negotiate new terms as needed. Costs are also surging for vendors who service communities, so association boards and managers need to be ready for those increases to be passed through to the community level. For instance, many communities are seeing insurance rates increase by 25 to 100 percent. If the costs of certain services become simply too much to budget for, consider changing vendors. It comes down to sound budgeting practices that properly account for all ways in which inflation is changing the landscape with vendor costs.
• Take the reserve study’s conclusion to heart. The study will make it clear whether an association needs to allocate funds for—or increase existing—reserves. Credit lines or traditional loans are an option worth considering as a back-up plan. For older coastal communities with significant structural repair needs, there will be no way around special assessments to cover the millions of dollars in construction and labor costs. Those can be doled out in phases to make the immediate impact less severe.

     Association boards are not alone in this predicament.  Their property management companies should be able to assess each association’s cash flow needs and identify sources of funds, either through maintenance fee increases or securing a loan from a reputable association bank.  

     Following these steps will protect Florida communities from any near-term, inflation-related volatility and also help ensure a sound financial future.

Brad Baecht & Carolina Serrano

Vice President, KW PROPERTY MANAGEMENT & CONSULTING

     Brad Baecht and Carolina Serrano are vice presidents at KW PROPERTY MANAGEMENT & CONSULTING. KWPMC is one of Florida’s largest residential property management companies, with more than 2,000 employees and 90,000 units under management. Its portfolio includes upscale high-rise towers, townhome communities, and homeowners associations. Visit www.kwpmc.com for more information.