Rising Insurance Costs Threaten LA Affordable Housing

The recent surge in insurance premiums across California, driven largely by devastating wildfires, is putting pressure on LA multifamily developers, according to CoStar.

Case in Point

To put things in perspective, SDS Capital Group, which has nine affordable housing developments in the city, saw its insurance rates jump 40% over the last 18 months. 

Deborah La Franchi, CEO of SDS, warned that another round of rate hikes could make many of these projects financially unfeasible.

“If it goes up another 40%, this is going to decimate so many multifamily developments that will just not pencil anymore,” La Franchi told CoStar News. This threat is particularly alarming given the region’s ongoing affordable housing shortage.

Competitive Solutions Needed

The accessibility and cost of insurance are critical to Los Angeles property development, especially for multifamily housing. Developers typically need insurance to secure financing and permits. As rates rise, the financial feasibility of new projects becomes more uncertain.

In response to the wildfire crisis, California regulators introduced a “sustainable insurance strategy,” which requires insurers to increase coverage in high-risk areas. While the intent is to manage wildfire risk, the move allowed insurance companies to pass the cost of reinsurance to policyholders. This caused premiums to rise sharply, especially in areas prone to wildfires, including LA.

La Franchi pointed out that rising premiums, compounded by other development challenges, could make affordable housing projects even less viable. The number of multifamily units under construction in LA has already fallen 12% over the past year, unlike cities like Boston and Miami, which saw construction activity rise.

The State of The Market

Insurance costs aren’t the only hurdle. The city’s affordable housing development is also being hampered by the devaluing effects of Measure ULA, a “mansion tax” that places a levy on property sales over $5.15M. Due to the added expense, many developers are finding it harder to turn a profit. 

Moreover, construction costs have risen by 45% since before the pandemic, while financing remains costly despite sliding interest rates.

Meanwhile, LA urgently needs to build over 50K new homes annually through 2029, including 20K affordable homes. The city’s current housing crisis demands that new developments proceed, yet the combined costs of insurance, construction, and taxes are driving many developers away.

Insurers Push Back

Insurance companies are seeking broader solutions to lessen the impact of wildfires on property premiums. The American Property Casualty Insurance Association is lobbying for federal legislation to reduce wildfire risks, such as the Fix Our Forests Act, which proposes enhanced forest management and inter-agency cooperation to address fire-related damages.

However, California’s recent steps to allow insurers to incorporate reinsurance costs into premiums are expected to strain the development landscape even more, with some insurers considering pulling out of the market altogether. 

California’s state-backed insurance program, the FAIR Plan, has seen a dramatic rise in coverage, particularly in high-risk areas like Pacific Palisades. In 2024, the FAIR Plan covered $242M in commercial properties there—up a staggering 2,770% from just four years ago.

Addressing The Housing Crisis

Affordable housing developers are not only battling high insurance rates but also facing the broader economic realities of the construction industry.

According to Kevin Kawaoka, executive vice president at NAI Capital, rising insurance costs, construction expenses, and ongoing financing hurdles create a “perfect storm” that could stagnate LA housing development.

Even as California enforces stricter requirements on insurers, including mandates to increase coverage in high-risk areas, the immediate effect on developers may be counterproductive. Without a solution to address escalating costs and lack of coverage, many projects may remain unviable, leaving low-income residents to bear the brunt of the state housing crisis.

Rebuilding With Confidence

To address these challenges, experts suggest Los Angeles should invest in better building standards and infrastructure to reduce future fires. 

Jonathan Rose, president of New York-based affordable housing developer Jonathan Rose Cos., believes rebuilding with stronger, more fire-resistant standards could make LA properties more attractive to insurers.

“Anything that we rebuild, if it’s rebuilt to these better standards, it’ll be more appealing to insurance,” said Rose. He also pointed to Florida’s post-hurricane regulatory changes as a model for reducing future damages, which could help lower premiums.

For developers like La Franchi, competition among insurance providers is key. “We need as much insurance competition as possible, not as little,” she said. More competition could cut premiums down to size and make affordable housing projects more financially viable.