Inflation. We’ve all heard the word, and frankly, we’re all probably sick of hearing it. The reality is that many associations are still feeling the impact of the COVID-19 inflationary period, along with the ongoing rise in labor and material costs.
Prior to March 2020, we experienced a level of inflationary stability that was fairly unprecedented, ranging from 3% to 5% each year. Inflation peaked in 2022 at a national average of 8%, and while we have seen some relief in inflation rates, many costs have continued to rise into 2026.
How Are Associations Responding to Inflation?
In March of 2023, the Foundation for Community Association Research published a survey that found 91% of community associations had experienced an unexpected increase in expenses, necessitating budget increases in 2023. 58% of respondents reported a 0-10% increase, followed by 30% of associations reporting an 11-25% increase. Only 6% of associations nationwide have not experienced an unexpected rise in expenses or have not increased their budget.
An increased need for reserve funding, as shown below, goes hand in hand with higher maintenance and building safety-related costs, which are typically covered by reserve funds. So, how are associations planning to address these expense increases?
While 73% of associations plan to increase assessments, a combined 56% plan to reduce reserve contributions and community expenses. Of those reducing these expenses, 40% will do so by deferring maintenance.
The Risks of Deferring Maintenance
While some maintenance can be safely deferred, bringing in a reserve study firm is highly recommended. Choosing to defer maintenance should be carefully considered with guidance from a professional who can determine whether delaying specific projects will pose a safety or structural integrity risk to the property.
Your reserve study consultant can provide guidance as to projects that can safely be deferred or if an expert is required to conduct further investigation to determine the merits of project deferral. In other words, if a component requires an invasive analysis, a community should defer repairs only if the analysis results warrant them.
Understanding Real Cost Increases
At the disposal of reserve study firms are numerous project cost databases, including the RSMeans construction database, which is updated quarterly to reflect current project costs in a specific market.
At Reserve Advisors, our engineers collect 100-150 actual historical costs per month, which supplement the database to consistently improve standardized information. This monthly collection also enables us to incorporate real-time cost changes into our reports. Your association and market are unique, so we never rely solely on standardized information.
The standard inflation rate of 3.5% implies that prices should have increased by about 21% from 2020 to 2026. As shown by the Producer Price Index (PPI) data, this has not been the case. While the majority of costs peaked in 2022, all remain significantly higher than expected, with many still rising at abnormal rates.
The Danger of Being Underprepared
One of the most stressful situations an association can find itself in right now is being underprepared. While this rate of inflation is nearly impossible to plan for, if an association has not historically built up adequate reserves to fund projects that are or will be necessary in the near term, cost hikes will likely be more significantly impactful.
Similarly, it’s not uncommon for associations to operate in “wait until it breaks” mode, especially if underfunded, by stalling on maintenance until it becomes absolutely critical. These associations are at the mercy of the market at that time, so with insufficient reserve funds and the inability to bid with intention, higher market prices can pose serious financial burdens with limited mitigation options.
In general, waiting until the last minute to complete projects will make them more expensive. Not just because of an unpredictable market, but because you run the risk of further deterioration that will require more intensive (and expensive) maintenance.
How Can Reserve Studies Help?
Reserve studies are an incredibly effective capital planning tool for proactively avoiding worst-case scenarios and, if the worst has arrived, finding a solution. Conducting an in-depth analysis of an association’s current physical and financial health, our team will lay out reserve funding and capital repair and replacement plans spanning 30 years, with emphasis on the next 5 years. Boards and managers will work with their reserve study specialist to review various options and scenarios, along with their implications, to determine optimal near- and long-term solutions.
If necessary, a reserve study lays out a catch-up plan for reserve funding, which may include special assessments, safely delaying certain capital projects, or a combination of tactics. You’ll have a plan for when projects need to be completed to maintain building safety and understand how to best fund them.
The Importance of Keeping Your Reserve Study Current
Conducting a reserve study update will remain important in the coming years. In fact, it will be more important than ever for some associations, given higher costs and lower purchasing power. To mitigate this and maintain financial stability, a reserve study update allows you to adjust project costs based on current market conditions and course-correct funding needs if necessary.
Changes in inflation and interest are one of many reasons that influence the frequency of updates. Your reserve study specialist can work with you to determine the optimal time to update
You Don’t Have to Navigate This Alone
If your community has found itself in a sticky situation due to inflation, you’re not alone – not by a long shot. The good news is you don’t need to navigate these challenges on your own. A reserve study takes on the role that will lead your community out of the dark and into a brighter, safer future. At Reserve Advisors, we will never send you a one-and-done reserve study report. Your engineer will work with you to understand the capital plan, make adjustments, and address any questions or concerns you have. We know your association is unique, and with extensive experience handling situations like yours, we’re ready to find solutions that work for YOU as your long-term partner.