Rising Insurance Is Killing More and More Deals

Insurance challenges have become a major cause of concern among real estate investors, according to the Spring 2024 Investor Sentiment Survey from RCN Capital.

In some cases, firms are forced to abandon deals and miss out on opportunities.

Brennen Degner, Managing Partner and co-founder of DB Capital Management, which owns approximately 3,000 units in Texas, Colorado, Utah, and Nevada, tells GlobeSt.com that on both new and existing deals, he’s seen a major material impact from insurance rate volatility.

For example, on an asset DB Capital owns in Denver, as the company analyzed its exit strategy, it had to take into consideration the recent tripling of insurance costs.

“So, as we explored our options, we found that what was once a profitable proposition through either disposition or refinance, we are now looking at only breaking even,” Degner said.

More than 68% of the investors surveyed by RCN Capital noted that rising insurance costs or the unavailability of insurance coverage was a factor in their decisions to buy and sell real estate.

Nearly 57% noted that these insurance issues had caused them to miss out on an investment opportunity. Over 90% of fix-and-flip investors in Florida and 83% in California said they have lost out on investment chances.

Eric Brody, Managing Partner at ANAX Real Estate Partners, tells GlobeSt.com that simply obtaining coverage is one of the main challenges his firm faces today.

“In states with extreme weather events, such as Florida and California, it has become difficult for investors to identify opportunities that pencil given these significant insurance challenges,” Brody said.

“This creates broader implications for real estate strategies across the board as other market premiums rise to cover losses in these states.”

Sean Kent, Senior Vice President, FS Insurance Brokers, tells GlobeSt.com that with multifamily investors, the underwriting of a deal might make sense until more details emerge regarding insurance rates, or the insurance policies renew before closing, and increased expenses make the deal less palatable, he said.

Kent finds this is particularly relevant in Florida, Georgia, South Carolina, Texas, Missouri, Kansas, Colorado, and California.

Hurricanes, wind & hailstorms, and wildfires tend to be the primary cause of the ever-hardening insurance market in those states, he said.

“Developers are facing similar issues,” according to Kent. “Many are being forced to increase the sale price of homes, condos, and townhomes to cover the cost of insurance until they are sold. In other cases, they may be required to increase the HOA fees to cover the higher insurance expenses. Either way, it may impact the probability or timing of deals, ultimately affecting both the seller and buyer.”

Michael L. Webb, Counsel, Real Estate at Farrell Fritz in New York, tells GlobeSt.com, “On the development and ownership side, we are seeing our clients experience continued difficulty trying to manage the imbalance that significantly increased insurance costs are injecting into project proformas.

“Especially in the multi-family rental space, insurance premiums and costs are rising at rates that cannot be passed through to end-users as increases to rent or additional rent.”

Webb said that rising insurance costs are exacerbating adverse market conditions and giving developers and investors another reason to pause if they cannot figure out how to make projects “pencil” and generate a reasonable return on their investment.

Alan R. Hammer, Esq., Brach Eichler, tells GlobeSt.com that insurance costs are up but not dramatically.

“Outside of Florida and other coastal areas, the increases have not impacted deal flow, which is already decimated by the increased interest rates, increased DSC ratios and correspondingly lower lending amounts,” he said.

“Investors are already facing many challenges in today’s housing market – rising prices, limited inventory, and higher financing costs,” RCN Capital CEO Jeffrey Tesch said in a prepared statement.

“Soaring insurance costs and instances where hazard insurance is simply not available is another significant hurdle for these investors to overcome.”

Fewer investors thought conditions today were better than last year compared to respondents in the Winter 2023 survey (37% vs. 40%), but only 27% felt conditions were worse, which was the lowest number recorded in the survey series.

Investors were more optimistic about future market conditions in the Spring (42%) than in winter (39%), and only 18% expected conditions to worsen over the next six months.

Rick Sharga, CJ Patrick Company CEO, said that if California and Florida can be considered bellwether states in the real estate market, findings in this quarter’s survey may be predicting more widespread problems.

“Investors in both states are already facing strong headwinds due to insurance issues, which may be contributing to some of the problems they’re having securing loans,” Sharga said. “We might start to see similar issues in other states prone to extreme weather events, such as Texas, Colorado, and Louisiana.”

Nick Balzano, General Manager of New Western’s Tampa office, tells GlobeSt.com that for investors, flood insurance is the biggest problem to deal with.

“The FEMA 50 rule applies, where an investor can only spend on renovations of 50% of the appraised value of the building only,” he said.

“Otherwise, the house must sit as is, be renovated underneath that number (unlikely to happen), or the house must be knocked down and built to FEMA standards.

“This is the largest issue we run into with properties in a flood zone, and therefore turning buyers away. For property insurance itself, we haven’t heard feedback of that being an issue for our investors acquiring our distressed inventory.”