MULTIFAMILY INSURANCE RATES ON RISE NATIONALLY

Increased financing prices are not the only financial burden on CRE in general and multifamily in particular. Operating costs have increased significantly, and are unlikely to go down when inflation tides recede. Prices are forecasted to remain high.

The hikes reduce net operating income, which puts pressure on the debt payment coverage ratio, signaling bad news for many operators. That unnerves lenders and may prevent attempts at refinancing.

Trepp has been examining the areas where multifamily has been most impacted, such as the metros where property taxes have increased the most. Another report on property insurance is currently available.

“Trepp finds that the cost of property insurance increased roughly 13.6% on average across the 50 largest MSAs from 2021 to 2022, with a few key southern multifamily markets seeing particularly pronounced insurance expense growth,” the firm stated. Looking at the top 15 multifamily markets, Charlotte-Concord-Gastonia, NC-SC had the lowest rate of growth in 2022 at 15.1%, while Miami-Fort Lauderdale-West Palm Beach, FL, had the highest growth rate at 28.0%.

It doesn’t take much prodding to figure out what might be fueling costs at a far slower rate than the rises. The frequency and severity of natural disasters, such as hurricanes, floods, and wildfires, broke records in 2021, noted Trepp. As a result, property owners now run a higher chance of suffering climate-related property damage. Insurance prices for properties have changed as a result of insurers having to adjust their pricing strategies and policies in response to these rising risks. In our previous study on real estate taxes, we emphasized how the multifamily sector was rising in some developing MSAs. Additionally, this trend can push up insurance costs for multifamily complexes.

It might even get worse. In a statement released at the end of May, State Farm stated that it would cease accepting new applications, including all business and personal lines property and casualty insurance… due to historic increases in construction costs outpacing inflation, rapidly expanding catastrophe exposure, and a challenging reinsurance market.

Allstate stated in November 2022 that it was giving up on the commercial insurance market in five states.
Trepp examined Florida and Texas in further detail.

Florida is a natural target for tropical storms and hurricanes due to its position, “with the Miami, Jacksonville, and Tampa MSAs experiencing an average rise of 24.9% in insurance expenses from 2021 to 2022.” In contrast to the average of 14, there were 21 named storms in 2018. Costs for building supplies increased by more than 31% between 2020 and 2022. Yet individuals continue to move there. Despite the fact that Miami has the worst flood risk rating in the country, Trepp noted that 147 multifamily structures with a combined 36,414 units were slated for completion in 2021. This construction volume represented 11.3% of the available inventory in the Miami market, and during that time the vacancy rate fell to under 5%.

The unique feature of Texas’ weather, according to Trepp, lies in its extremes, with both searing hot conditions and uncommon freezing temperatures impacting the region. Insurance companies began to leave the state, whether it was because of the devastating winter storm that left broad sections of the state without electricity and caused a $9.3 billion settlement, the April “Gorilla” hailstorm in the state’s north, or Hurricane Nicholas in September 2021.

In the short run, this rise can be at least partially attributed to inflation, concluded Trepp. And an oncoming surge of private capital might lead corporations to focus on more profitable sectors and forsake higher-risk ones. “However, it is essential to recognize that extreme weather has played a crucial role in reshaping the insurance premium landscape in the past several years.”