Each year, we as real estate managers spend countless hours perfecting our budgets for the coming year. We pour over contracts and leasing projections, trying to estimate material costs and staffing needs. For the most part, the results are straightforward and respectable, but then the inevitable happens: real life.
In 2020, real life became somewhat unreal, and most budgets weren't worth the paper they were written on. But not every year is like 2020. In other years, a bad winter or hot summer can wreak havoc on any budget. When you encounter such a year, as we all did in 2020, you quickly understand why forecasting--and reforecasting--your budget is an important aspect of any well-run property.
First, the basics
We'll start with the terms.
A forecast is typically associated with the first attempt of predicting income and expenses based on historical or known data of a specific property or budget. A reforecast is typically associated with updating the forecast for the same specific property or budget. My experience has been that most managers use the term "forecast" when creating budgets and "reforecast" when projecting a budget's changes over the course of a year or other time period.
The first time that a manager may be required to forecast is when they're creating a budget for any future period. While the term "zero-based budgeting" can sound smart or clean, the reality is that almost nothing is zero-based. At a minimum, you'll have pricing for services in place that you'd most surely rely upon. Still, when creating a budget, you're forecasting income and expenses based on a variety of factors such as leases in place, future absorption, economic climate, inflation, general services, taxes, and financing.
"If I had to pick one line item that new managers struggle with when it comes to budget forecasting," Wendy Dutenhoeffer, CPM, says, "it's understanding the revenue line items and how vacancies, concessions, escalations, other income, and lease renewal dates factor into the correct calculations for budgeted revenue."
Jay Kacirk, CPM Emeritus, CCAM, with Eugene Burger Management Corporation, sees new managers struggle with expense considerations. "Areas related to budgeted maintenance are a challenge for many. This usually improves with time as you get to know a property, but a new manager doesn't always have that perspective."
Assuming historical information is available, the first steps typically are to look back 12 to 24 months and begin the process of evaluating past expenses to forecast future expenses. This can be done by using methods such as percentage trending. With this method, you analyze the year-over-year or period-over-period increases and/or decreases in certain expenses. Having identified the "trend" in these changes, you can then apply it as either a percentage or whole number to future periods of the same corresponding length.
Examples of line items where this method is effective include property taxes, landscaping, fire protection, and other non-occupancy-related expenses. If these expenses have...