Multifamily insurance costs are creating significant challenges for investors. Insurance costs have soared a staggering 129% since 2018, leaving many owners unable to absorb the higher expenses. The multi-year spike has put lender requirements at risk for insurance limits and deductibles, as well as necessary repairs and maintenance. In many instances, the costs have also dragged down property values.
Experts at NewPoint Real Estate Capital have seen the increase in insurance costs firsthand, with premiums increasing 33% in the firm’s portfolio from 2022 to 2023 alone. While multifamily owners cannot avoid the higher insurance costs, capital markets brokers can provide solutions to mitigate the impact.
A No-Win Scenario
Higher insurance premiums have a cascading effect on multifamily investment and operations, notes Robert Wright, Director of Insurance Risk Management at NewPoint. As he explains, owners who cannot afford the increased insurance premiums or cannot secure compliant insurance at all, which has happened in regions prone to natural disasters, will fail to meet the lender’s insurance criteria for limits and deductibles.
John Lloyd, Executive Managing Director, Head of Servicing and Asset Management at NewPoint, says the opposite scenario is no better. Instead, owners who absorb the higher costs face operational challenges.
“In this market, we have flat or declining rents leveraged against significant inflationary pressure on operating expenses. Our clients are forced to prioritize where to spend funds, which creates really tough choices,” says Lloyd. “They begin to cut corners and then it has a direct impact on the condition of the property.”
The higher costs also have an impact on property value. According to the Harvard JCHS, multifamily operating expenses have risen 7.1%, largely due to insurance premium increases of 27.7% year-over-year as of January 2024. “When cash flow goes down, then cap rates are up, and value goes down,” says Chuck Ryba, Senior Managing Director, Head of Asset Management at NewPoint. “It’s kind of that simple, unfortunately.”
Start Early to Find a Solution
Higher insurance costs are not a new problem— just an ongoing one. As Wright notes, “Q2 2024 was the 27th consecutive quarter where property and casualty insurance costs increased overall. This is not a new phenomenon. It’s just gotten worse and worse, and now we have catastrophic events compounding the problem.”
On the upside, Wright and his team have an established plan to respond and work with borrowers to find solutions. Wright recommends borrowers connect with their lender 90 to 120 days before an insurance policy renewal. “It would be great for owners to connect 30 days before they get new policy quotes,” he says. “That gives us time before the renewal to understand the issues that they are experiencing.”
In cases where the owner simply cannot meet the limits or deductible, lenders can put together a selection of options and alternatives. A 30-day lead makes all of the difference. As Wright explains, “If we are brought in before the renewal, we can provide the client with meaningful assistance.”
For more insights and thought leadership from NewPoint Real Estate Capital, click here.
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