Insurers Retreat from Multifamily and Industrial Markets Following Record Losses

The U.S. multifamily and industrial real estate markets are facing challenges as property insurers scale back.

Jordan B. & Han-Gwon Lung
September 09, 2024

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Good morning. The U.S. multifamily and industrial real estate markets are facing challenges as property insurers scale back due to 2023's record losses, making renewals more difficult and expensive.

Today’s issue is brought to you by Agora—your all-in-one real estate investment management platform.

🎙️ No Cap Episode 8: Co-hosts Alex and Jack discuss Dallas' rise as a finance hub, major developments from Goldman Sachs and Wells Fargo, and Trimont's acquisition of Wells Fargo's $475B CRE loan portfolio.

Market Snapshot

S&P 500

GSPC

5,408.42

Pct Chg:
-1.73%

FTSE NAREIT

FNER

820.74

Pct Chg:
-0.01%

10Y Treasury

TNX

3.757%

Pct Chg:
+0.047

SOFR

1-month

5.34%

Pct Chg:
0.0%

*Data as of 9/06/2024 market close.

PROPERTY REPORT

Insurers Retreat from Multifamily and Industrial Markets Following Record Losses

The U.S. multifamily and industrial real estate sectors are seeing stricter insurance terms after record losses in 2023.

Increasing costs: In 2023, U.S. housing construction hit a 36-year high with 440,000 new apartments completed. Of those, 81% (356,400 units) were wood-framed, a material long considered higher risk by insurers due to its susceptibility to fire. With $10.8 billion in fire damages last year, insurers are increasingly reluctant to cover multifamily properties, driving liability insurance rate hikes of 10% to 20% for portfolio operators.

Zoom in: Rising insurance premiums hit the South-Central region hardest, with property values down 7.8%, led by Houston’s 11.1% drop. Florida saw a 6.8% decline, with Jacksonville down 9.6%. Oklahoma City (-3.8%) and West Palm Beach (-5.0%) saw smaller dips.

Source: CBRE / Effect on values from change in insurance expenses since Q4 2019 by region

Liability premiums: In addition to rising premiums, insurers are offering reduced coverage, with larger multifamily programs moving toward a $2 million occurrence/$4 million aggregate structure. Key exclusions, including acts of violence, dog bites, and abuse-related claims, are becoming more common as insurers react to heightened risk exposure.

Not just multifamily: The industrial market has also grown significantly, with 1.8 billion square feet of industrial space built since 2020—more than was built in the entire prior decade. Insurers are paying closer attention to tenant diversity and fire protection measures, particularly adherence to National Fire Protection Association standards. Older industrial properties face even tighter underwriting standards due to occupancy risks.

➥ THE TAKEAWAY

Big picture: While insurance accounts for only 8% of total expenses, it has contributed 17% to overall cost growth since 2019, becoming the second-largest driver of multifamily expense increases. However, with renter demand strengthening and new supply slowing, rent growth and stabilized cap rates are poised to offset these insurance-driven pressures, setting the stage for a rebound in property values.

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✍️ Editor’s Picks

Shifting curve: The yield curve is returning to normal, but experts remain divided on whether it signals an upcoming recession or a potential soft landing.
Construction loan: Related and Integra secured $527M for Miami’s St. Regis condo project, with 60% of units pre-sold.
Falling short: Despite lower mortgage payments, home sales remain sluggish as buyers await further rate cuts.
City struggles: Cities facing budget shortfalls due to declining property values are scrambling for solutions, with some raising taxes while others delay decisions, exacerbating the crisis.

🏘️ MULTIFAMILY

Fresh out of school: Recent college grads seeking affordable solo rentals should look to cities like Houston, Austin, and Detroit.
Solar financing: Freddie Mac's new guidelines tackle risks in financing multifamily properties with solar panels, focusing on ownership and third-party agreements.
Housing crisis: D.C. housing providers face financial collapse as rising costs and unpaid rent push many affordable housing properties toward foreclosure.
Taking the L: DWS Group took an $11M loss on the sale of the Marela Apartments in Pembroke Pines, selling the property for $110M after purchasing it for $121M in 2021.

🏭 Industrial

Pending: California's SB 98, regulating warehouse construction near sensitive areas, now awaits Governor Newsom's decision.
DFW entry: Harbor Capital entered the Dallas-Fort Worth market by acquiring the fully occupied 607K SF Corbin Industrial Park in Denton, Texas, with plans for future individual and bulk sales.
Logistics asset: Stonepeak purchased 1.1M SF of logistics space in Fort Worth's Alliance submarket, securing the rail-served properties with a $57M loan from PGIM Real Estate.

🏬 RETAIL

Retail boom: Wealth migration to Florida, especially to West Palm Beach and Miami, is driving a surge in retail demand, fueled by high-net-worth individuals and younger professionals.
REIT surge: Wheeler Real Estate Investment Trust's stock jumped nearly 200% after a U.S. appeals court dismissed a class-action lawsuit tied to its Cedar Realty acquisition.

🏢 OFFICE

Rising cap rates: Double-digit cap rates for Class B and C office buildings are becoming more common as market fundamentals stabilize despite slow sales and growing investor caution.
Denver deal: Koelbel and Real Capital Solutions acquired two Denver Tech Center office buildings for $22M, a 73% discount from their 2006 sale price.

📈 CHART OF THE DAY

Four of the six major property types saw significant increases in distress for CMBS/SBLL loans as of August 31st, according to CRED iQ® data: multifamily distress rose from 8.4% to 11.0%, industrial from 0.8% to 4.6%, office from 12.2% to 13.0%, and hotel from 7.8% to 8.4%.