Why Multifamily Insurance Prices Are Surging in the U.S.

Property insurance rates have increased by 26% on average since last year.

Jordan B. & Han-Gwon Lung
January 28, 2024

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RISING RATES

Why Multifamily Insurance Prices Are Surging Across The US

In today’s edition of CRE Daily, we’re honored to have Romain Sinclair, Director at Greysteel, as a special guest contributor. Romain is an expert in Multifamily investment sales in the Greater New York area. He will be sharing his expertise on the increasing insurance costs in the multifamily sector.

What happened: According to a research report by NMHC, which surveyed 160 apartment investment firms representing 1.6M apartment units, owners have seen their property insurance rates go up by 26% on average since last year.

There are four core reasons why.

1. Climate risks: A primary driver of the insurance cost surge is the increased frequency and severity of extreme weather events. Key examples include the Texas freeze in February 2021, Hurricane Ida in August 2021, and Hurricane Ian in September 2022. This escalation in weather-related destruction has nearly doubled the damage costs in 2021 compared to those in 2015, underscoring a trend of growing climate risks.

Note: This chart shows that the cost of weather events in 2021 was near double that of costs of damage in 2015. Source: Multifamily Dive.

2. The cost of inflation: Inflation has raised the costs of construction materials, labor, and natural gas/fuel. The cost to pay your team, to order the materials, and to have the materials shipped is up. That means, if or when that natural disaster strikes, a building owner should expect to get a pay-out that is above the book value of the initial purchase price. This is good… except if you are an insurer.

Note: The costs for property insurance and cyber insurance have, on average, grown more than other categories since last year. Source: Bloomberg City Lab

3. Passing the buck: Insurers have responded to these financial pressures by…

Reducing coverage amounts for over a third of policyholders.
Increasing deductibles for 61% of policyholders.
Limiting policy payouts for 57% of policyholders.

Case in point: According to Matthew Rieger CEO of Coconut Grove, a large affordable developer in Florida, “when wildfires hit California, […] premiums in Florida went up.”

4. Supply shocks: Major insurance carriers like All State and State Farm are withdrawing from high-risk markets like California due to escalating wildfire dangers. This retreat, coupled with the heightened risk of property damage, empowers remaining insurers to charge higher fees.

➥ THE TAKEAWAY

Looking ahead: U.S. states will have to contend with the rising cost of insurance and the spottier coverage nationally as severe weather patterns and litigation persist. How will states overhaul their insurance programs for owners of multifamily? Homeowners? The same carriers that pay out court-ordered fines in CA have presences in NY, and those big financial holes need to be plugged in by raising premiums – if not here, then there. This is an important challenge that investors buying today must pay attention to – especially when considering properties that have limited rent growth.

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⏪ Weekend Wrap-Up

Real Estate Rebound: Blackstone, the world’s largest commercial property owner, predicts real estate values are hitting a bottom due to slowing inflation and expected rate cuts by the Federal Reserve.
Opportunity Amidst Distress: Hedge fund LibreMax Capital, led by Greg Lippmann, is betting on distressed commercial mortgage bonds, seeing an opportunity in the sector.
Hot and bothered: The top 10 U.S. rental markets will cost renters at least $4.8K and up. In Collier County, FL, the average 3BR rents for $8K a month.
Fraud frenzy: Over 70% of major apartment landlords in the U.S. saw a 40% rise in fraudulent rent applications in the past year,, according to the National Multifamily Housing Council.
Rent on credit: Bilt, a credit card rewards rent payment platform, doubles its valuation to $3.1B with a $200M investment led by General Catalyst.
Less luxury: Blackstone (BX) sells Phoenix’s Arizona Biltmore hotel for $705M to London’s Henderson Park during a trend of luxury resort sell-offs.
Investor retreat: Investor purchases of single-family homes declined 29% in 2023 due to higher interest rates and record home prices.
Building bridges: Coral Gables-based KDM Financial is launching a $350M fund for bridge loans on multifamily projects and distressed property acquisitions.
Office to rental boom: A record 55.3K office-to-apartment conversions in major U.S. cities are schedule for 2024, up from just 12.1K in 2021.
Uncovering opportunities: In 2024, the U.S. apartment market may be impacted by a significant increase in supply, particularly in Midwest markets such as Chicago and Cincinnati.
Unmasked: Don Tepman, aka StripMallGuy, reveals his identity and shares valuable real estate advice, gaining widespread industry recognition.
Housing hotspot: Blackstone’s (BX) $3.5B deal to buy Tricon Residential Inc. (TCN) signals its continued interest in the single-family rental industry.
Tech titan territory: Tech billionaires back a controversial $400M down-payment assistance fund for a Solano County project, aiming to construct a new city for 400K residents.
Affordability crisis: Renting remains more affordable than owning in the majority of U.S. counties, according to ATTOM’s 2024 Rental Affordability Report.

CHART OF THE DAY

According to John Burns, average U.S. home ownership rates have actually gone up since the post-GFC low point in 2015–2016. In 2023, 39% of Americans under 35 owned a home, as did 63% of the 35–44 cohort, 71% of the 45–54 cohort, 76% of the 55–64 cohort, and 79% of the 65+ cohort.