Extraordinary disruption has hit the property insurance market with multifamily premiums increasing significantly, policies being canceled more often, and even insurance companies exiting entire states. Apartment owners seeing coverage price hikes of 50% to 200% need to face the facts and have a plan.
From drought and wildfires in the West to flooding in Kentucky and Missouri and hurricanes in the Southeast, natural disasters are more powerful and costly. As a result, insurance rates in Florida are expected to increase by 45% to 50%, and “a doubling of premiums won’t be out of the question,” according to Yardi Matrix.
When an insurer raises premiums, they’re indicating that apartment buildings are going to cost more to operate and/or replace, but hikes of $30,000 to $40,000 annually are a whole other budgetary beast. In an industry where everything—from reducing costs to maximizing returns—is calculated to the last dollar, a huge financial shock wave looms for multifamily owners and investors.
Cost and Effect
It comes as little surprise that insurance rates have increased because of the growing impact of natural disasters, but there’s another, more economic reason. Premiums are going up because replacement costs for buildings, including apartments, are increasing. If replacing a property costs twice what it used to per square foot, then it only makes since that policies should follow suit and double in price.
Rising insurance rates mean apartment buyers will pay more, that is if they can even get across the sales threshold. If unable to buy insurance, they won’t be able to get a loan. Affordability has already shrunk dramatically due to inflation and rising interest rates; now there’s increased doubt about multifamily deals getting done due to soaring premiums.
And investors are right to ask: If insurance companies are leaving my state, why am I buying in? Florida homeowners are paying 42% more for their annual insurance premiums compared with last year, which is three times the national average, a spokesperson for the Insurance Information Institute told USA Today after Farmers Insurance became the fourth major residential insurer to leave the state.
The big picture is this insurance trend affects everyone in the sector. Whether buying or not, whether in California or Florida or not, owners have to prepare for the major challenge.
How to Limit Exposure
Thankfully, there are things multifamily investors can do mitigate the effects of the skyrocketing insurance market. Multifamily owners should not delay shopping for insurance, whether for an acquisition or if it’s time to renew coverage. Be urgent in your selection of an insurance carrier, knowing in advance to expect more scrutiny and expense.
Investors must adjust their pricing parameters, similar to what happened in 2022 when interest rates steadily climbed. Buyers should not be surprised with the premium hikes; instead they should factor those into their valuation models and adjust their acquisition price accordingly. The simple solution is buying quality properties that allow a buyer to get good insurance premiums. (If your asset is located in a fire-prone area, there might not be a solution at all.)
In some cases, apartment owners may have to improve parts of their properties just to get them insured. They should reduce property risk by addressing all repair needs. Fix those issues now, especially if you have an older building. Aged or even substandard electrical, plumbing, roof, and other property systems are the things that cause policies to go up.
It’s never been more important to get your house in order. If you’re finding deferred maintenance habits hard to break, concentrate on the cold, hard numbers that directly affect job No. 1—your investment returns. If a spike in insurance premiums carves off $50,000 from annual net operating income, they’re really taking away $1 million in value. That net income figure is most important for getting a loan and a value when it comes time to sell.
Underwriting Wrinkles
While proptech has revolutionized the real estate industry with its automation, big data, virtual reality, artificial intelligence, and other advantages, there may be a downside. Tech obviously makes buildings easier to monitor and measure, which allows insurance companies to be more particular when drawing up coverage for a multifamily asset. With an army of actuaries running spreadsheets and other data analysts, insurers will know a building’s baseline operations and projected performance five years out. The industry wasn’t as complex to deal with in the past. Owners need to be prepared to play small ball now.
Add background checks to tech in expanding insurers’ bills. Did you know that part of the risk assessment process when a company is insuring an apartment property is running a credit check on all the residents in a given building? That means the Social Security number and FICO score for every resident in a multifamily community. Because of this, an apartment owner could have two nearly identical properties with vastly different insurance premiums and not know why.
For all its economic and demographic advantages and impressive track record, the apartment sector faces more adversity in the form of dramatically increasing insurance rates. On the heels of the inflationary and interest rate challenges of the past two years, multifamily investment is not getting any easier with owners affected by everything from global weather events down to the smallest tools and tricks of the insurance trade. Apartment owners can weather the latest storm with a good plan and partner.
