Why Multifamily Insurance Prices Are Surging in the U.S.
Property insurance rates have increased by 26% on average since last year.
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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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.
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