Properties under the 50th percentile showed an average change of about 50 basis points. The worst 1% of properties that Moody’s tracks have seen insurance costs rise from 7% of total property revenue in 2018 to 13%. Out of that 1%, the worst 5% saw the share rise from 4% to 8%.

While the worst cases were a small percentage, it means buyers, lenders, and investors need to consider insurance and physical risks as a much higher priority in due diligence checks. Asset managers can find the changes to affect budgeting, exit strategies, and sometimes drive owners to look for waivers of minimum coverage requirements from their lenders.

Overall, a property needed an additional 1.3% annual rent growth to maintain steady net operating income and value. Properties in the worst category would see about a 12% decline in NOI and value. Lenders could see an implied loan-to-value rise of nine full percentage points, with the debt service coverage ratio falling by 0.25x. Refinanced loans at much higher interest rates would see even higher falls in DSCR from a higher cost of debt capital.

Various factors are at work in the rising insurance costs. Geography creates a “slight skew” given the weather impacts on the Gulf Coast area, with Texas and Florida being the only two states with multiple entries in the top 20 for the most properties in the worst categories of insurance rate growth. But problems aren’t restricted to that region, with top-scoring metros also in the East, Midwest, and South.

Multifamily (from 7% in 2018 to 14.3% in 2023) and retail (8% to 12.8%) saw the worst impact. Hotel and office (both from 5.0% to 10.4%) came close behind and industrial (about 5.0% to 7.0%), which had the lowest impact.

Size wasn’t a consistent reason for higher insurance costs as a share of revenue. Rent growth helps ameliorate the insurance growth.

Also, the median insurance growth rate for properties in the top 100 metros “substantially outpaces average revenue growth rate over the past six years.”