The Department of Housing and Urban Development (HUD) on December 11 announced the 2025 Operating Cost Adjustment Factors (OCAFs) with a national average of 4.8% for 2025, half a percent below the current year’s 5.3% average.

The new OCAFs incorporate feedback on property insurance issues  LeadingAge presented in advocacy  to the agency.  For instance, HUD adjusted the calculation methods for property insurance expenditures, leading to a higher adjustment to offset rising insurance costs.

OCAFs are factors used to adjust project-based Section 8 contract rents annually, including rents in Section 202/8s, based on nine market-driven cost components. HUD-assisted properties adjust their contract rents by applying the OCAF for the state or territory in which the project is located to property operating expenses, exclusive of debt service.

Each year, HUD calculates OCAFs by state and territory. For many years, the national average hovered between 2-3 percent, followed by doubled increases during the high inflation years of the pandemic, and slowly reducing since then.

The OCAFs provided in HUD’s notice are applicable to eligible projects having a contract anniversary date on or after February 11, 2025.

OCAFs are calculated as the sum of weighted component cost changes for electricity, employee benefits/employee wages, fuel oil, goods/supplies/equipment, insurance, natural gas, property taxes, and water/sewer/trash using publicly available indices. LeadingAge has supported methodologies that better reflect steeply rising insurance and labor costs.

For the 2024 factors, HUD made a key change supported by LeadingAge: To calculate the inflation factor for the insurance component, HUD proposed to switch from using consumer data, like the Consumer Price Index, to relying on industry data, like the Producer Price Index and other data, to better reflect the cost of property insurance. However, the approach of using the PPI failed to capture significant geographic variations in the cost of insurance, as it is a national index.

Beginning with the 2025 OCAFs, HUD instead will use the year-to-year change in actual cost data from audited financial statements, as it better captures the significant rise in property insurance costs that multifamily properties have faced in recent years. HUD is accepting comments on the OCAFs until January 10, 2025.

With operations costs trending high, the OCAFs are critically important for housing providers to keep up with costs and maintain quality affordable housing. Certain HUD-assisted housing providers are locked into the OCAF increases without many other options for increasing their property budgets, except for Rent Comparability Studies (RCS), a market-driven adjustment specific to each property, available once every five years. Properties that have converted through the Rental Assistance Demonstration (RAD) have even fewer options to adjust budgets within their 20-year contract term.

Most state increases fall close to the national average of 4.8% for 2025. Some outliers include the following areas:

LeadingAge will continue to advocate with HUD for sufficient funding for quality affordable housing for older adults with low incomes.