Multifamily Insurance Rates Are Up as Much as 28%

As GlobeSt.com has previously reported, higher financing costs are not the only fiscal strain on CRE in general and multifamily specifically. Operating expenses have risen sharply and are unlikely to recede with a receding inflation tide. Prices will stay up.

That’s bad news for many operators because the increases pare away at net operating income, which puts pressure on debt service coverage ratio. That makes lenders uncomfortable and can derail attempts to refinance.

Trepp has been looking at where the biggest impacts on multifamily have been, like the metros facing the biggest property tax increases. And now they have another report on property insurance.

“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 company said. Look at the top 15 multifamily and the bottom rate growth in 2022 was 15.1% in Charlotte-Concord-Gastonia, NC-SC, while the top in the nation, Miami-Fort Lauderdale-West Palm Beach, FL, saw 28.0%.

It takes little prodding to see what might be driving expenses far behind the rapid increases. “The year 2021 witnessed record-breaking frequency and severity of natural disasters, such as hurricanes, floods, and wildfires,” Trepp wrote. “Consequently, property owners have faced heightened risks of climate-related property damage. In response to these escalating risks, insurers have found themselves compelled to reevaluate their policies and pricing models, leading to fluctuations in insurance premiums for properties. Our previous report on real estate taxes highlighted the booming nature of the multifamily market in certain growing MSAs. This trend may also further contribute to even higher insurance premiums for multifamily properties.”

It could also be worse. State Farm in late May said 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 growing catastrophe exposure, and a challenging reinsurance market.”

Allstate in November 2022 had announced that it was exiting commercial insurance in five states.

Trepp took a closer look at Florida and Texas.

Florida’s location makes it a natural target of tropical storms and hurricanes, “with the Miami, Jacksonville, and Tampa MSAs experiencing an average rise of 24.9% in insurance expenses from 2021 to 2022.” There were 21 named storms, outpacing the norm of 14. Building materials costs have escalated more than 31% between 2020 and 2022. And yet, people keep moving there. “Miami has the highest flood-risk score in the U.S., but there were 147 multifamily buildings totaling 36,414 units under construction in 2021,” Trepp wrote. “This construction volume represented 11.3% of the inventory in the Miami market, with the vacancy rate dropping to sub-5% in that period.”

“The distinctive aspect of Texas’ weather lies in its extremes, with both scorching hot conditions and rare freezing temperatures impacting the region,” Trepp wrote. Whether the severe winter storm that devastated large swaths and took down power capability, with $9.3 billion payout, the April “Gorilla” hailstorm in the northern part of the state, or Hurricane Nicholas in September 2021, insurance companies started to bail out of the state.

“In the short term, this rise can be attributed to inflation, at least in part,” wrote Trepp. “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.” And an incoming wave of private capital might direct companies to focus on more profitable areas and leave higher risk ones.