Rising Multifamily Property Insurance Costs Impact Affordable Housing and Tenants

First came supply-chain-fueled higher construction costs. Then came inflation and interest-rate hikes imposed by the Federal Reserve. Now, multifamily property operators are seeing their property insurance premiums rise at a time when the cost to build and finance a commercial real estate project remains elevated, even though most material prices have stabilized since pandemic peaks.

Ripple Effect in the Multifamily Industry

In my time in the insurance industry, I've seen many changes and trends. The recent spike in insurance costs that have risen 26% on average among respondents during the past year will have a significant ripple effect within the multifamily industry, ultimately leading to higher rates being passed on to tenants. But more limited options to offset those higher costs are available for income-restricted housing or rent-controlled apartment markets.

The National Multifamily Housing Council's survey found that:

• 61% of respondents had to increase their deductibles during the past three years to maintain affordability
• 57% reported new policy limitations by their insurance carriers to reduce their exposure
• 34% of respondents said their insurance carriers limited or reduced coverage amounts

Reasons for Higher Costs

The cost of insurance isn't a new issue for multifamily operators, but conditions have worsened in recent years, with internal insurance dynamics, industry consolidation, carriers departing some markets, and climate change all contributing to the higher costs. The higher premiums now seen since the start of 2023 come on the heels of Hurricane Ian, a Category 5 hurricane that battered Florida in September, causing an estimated $60 billion in insured property damage.

On top of that, insurance carriers have increased their rates and have become more selective about where they insure property, pulling out of some markets altogether. Bloomington, Illinois-based State Farm Insurance, for example, recently became the latest insurer to exit California, with a decision in late May to stop accepting homeowner, business property, and casualty insurance applications.

For companies like The NRP Group LLC, which manages 15,334 affordable units nationally, rising insurance costs are taking a toll on existing portfolios and new construction. Debra Guerrero, senior vice president of strategic partnerships and government affairs at NRP, said the company has seen its insurance rates increase 18% to 20% annually. Companies like NRP are now looking at costs within their control, including utilities, staffing, marketing, and potentially some amount of deferred maintenance at their properties.

Consequences for Affordable Housing

Affordable-housing owners across the sector are likely to produce fewer affordable units, owing to elevated costs across the board. While NRP properties haven't had to be canceled outright owing to higher insurance costs, the overall higher-cost environment may cause delay or businesses to walk away from development deals. At NRP, some prospective deals have been abandoned owing to insurance costs.

Risk Management and Loss Control

The real estate industry must now be in the risk-management and loss-control business, whether they like it or not. Real estate owners need to be proactive in providing building replacement costs and high-quality data, while insurers are more stringent on their underwriting requirements. Everyone is now required to directly report adequate insurable rebuilding costs for all buildings, which is driving up the total insurable value of assets and creating a compound effect on premiums.

The NMHC is talking to policymakers about the impact insurance costs are having on housing affordability, and the group is advocating for a reauthorization and reformation of the national flood insurance program. The NMHC also is advocating for ways to boost and incentivize greater participation by carriers in the multifamily insurance market and devising ways to bring more capacity to the domestic reinsurance market.

Conclusion

In conclusion, multifamily property operators are facing higher premiums for property insurance, at a time when building and finance costs remain elevated. Not only will this lead to higher rates being passed on to tenants, but it could also affect property valuations and disrupt transactions. Companies that work in the affordable-housing sector, like The NRP Group LLC, are trying to figure out ways to offset higher insurance premiums. For affordable-housing owners, there’s a real danger that existing affordable housing will not be sustainable in the long run. It is important for real estate owners to be proactive in providing building replacement costs and high-quality data, and for policymakers to take action to mitigate insurance costs within low-income housing.

State Farm Insurance's Impact on Bay Area Community

Limited Buyer Pools and Mortgage Buyers

State Farm's decision to cease accepting new applications is likely to lead to limited buyer pools in heavily-wooded areas. This will affect buyers getting a mortgage, as lenders need to ensure buyers have adequate insurance coverage.

Private Fire Insurance for Luxury Properties

Private fire insurance, an alternative for buyers of luxury properties, may also be drying up. The lack of insurers willing to cover fire damages may make it more difficult for homebuyers with mortgages to find affordable cover, putting them in a precarious situation.

Impact on Small Business Owners

Entrepreneurs in the Bay Area, such as small business owners, may be negatively affected by State Farm's move. With fewer companies in the mix, insurance rates could increase, hampering the potential of the sector.

Factors Driving State Farm's Decision

According to Department of Insurance Press Secretary Gabriel Sanchez, factors driving State Farm's decision are beyond the state's control. These include climate change, reinsurance costs affecting the entire insurance industry, and global inflation.

Need for Innovative Solutions and Consumer Interest

Insurance providers need to find innovative solutions to provide affordable and holistic coverage to their insureds. It is essential for the insurance industry to prioritize consumer's long-term interest above short-term financial goals.

Long-Lasting Effects and Sustainable Coverage

State Farm's decision could have long-lasting effects on the Bay Area's economy. Homebuyers and small business owners are likely to experience the brunt of the shift, with the latter potentially seeing a significant rise in their insurance rates. Insurers should review stricter community guidelines to ensure adequate coverage for those living in high-risk areas. Providing sustainable insurance coverage that is affordable should be the industry's primary focus.