Insurance Looms Large for Multifamily Owners

Property owners and operators in coastal regions and other high-risk markets—such as Florida, Texas, and California—are facing skyrocketing insurance costs that could more than double this year.

 Fast-dwindling insurance capacities and historical changes in the reinsurance market are sparking urgent calls for proactive solutions across the multifamily industry.

The upshot? For multifamily owners to weather the impact of this storm will require strategic collective measures from owners, insurers, lenders, and agency partners.

Current Insurance Landscape

 In some worst cases, owners and developers in Florida are bracing for potential insurance increases of more than 200 percent. It’s worth noting that Florida remains a high-need housing market, where affordable options for low- to moderate-income tenants have been steadily declining for years.

Owners and operators in many of these markets “are now in the risk-management and risk-control business,” one insurance industry panelist noted during an early June National Multifamily Housing Council (NMHC) webinar. The sense of urgency during that event was palpable.

For sponsors with capital and liquidity concerns, it’s high time for new insurance solutions that protect owners and operators from paying so much in insurance that ownership no longer pencils out. This need is rapidly increasing, as leading insurers pull back from some of the most vulnerable housing markets.

 Many throughout the multifamily sector now say that less stringent coverage options—such as collective loss-sharing and more customized agency insurance programs—are desperately needed to help cover essential costs for owners without putting a strain on their tenants. This rings especially true for entrepreneurial mid-market sponsors, who mostly rely on their own capital for operations, upgrades, and property management and who may opt to pass those costs along to tenants.

However, rapidly rising insurance costs could also exacerbate the country’s housing crisis and lead to more distressed multifamily assets if sponsors are unable to cover their debt service and insurance costs. These cost increases are expected to last for years to come, according to a 2023 NMHC study in which 61% of respondents indicated they have been forced to increase their deductibles in the past three years to maintain affordability.

  A Perfect Storm of Financial Strains

While commercial and residential property insurance rates are almost always rising over the long term, climate will remain a considerable factor.

Frequent storms, high winds, flooding, and the rise in sea level—especially in coastal areas—send a stark reminder: Severe climate conditions are a growing problem in North America and other parts of the world. After devastating Florida’s Gulf Coast last September and taking more than 140 lives, Hurricane Ian became one of the costliest storms in U.S. history, with insured losses pegged between $50 billion and $65 billion.

 All in all, the U.S. suffered 18 climate-related disasters last year—including storms, wildfires, and coastal flooding—on the heels of 20 climate-related disasters in 2021. 

It’s worth noting that it isn’t only climate driving up insurance rates and replacement costs in 2023.

High property values, combined with rising construction costs, inflation, and labor and supply chain issues have compounded a problem that has become a perfect storm of financial strains—including limited refinancing options.

At the same time, the commercial real estate industry is facing a $1.5 trillion debt wall, which could have massive impacts on the U.S economy. While the largest debt concerns at this time have mostly centered on troubled office and retail properties, rising multifamily defaults brought on by skyrocketing insurance costs would only make matters worse for federal, state, and local government and the GSEs.

While multifamily assets are widely considered to be safer investments than retail and office properties, mounting debt maturities and recent instances of loan delinquencies and defaults in the multifamily sector should give all stakeholders pause in this environment.

As insurance costs reach unsustainable levels, multifamily owners and operators are calling on their insurers and agency lenders for new cost-sharing solutions and other collective measures that serve a greater good.

 Taking Proactive Measures to Stay Ahead

In addition to rising coverage costs, insurers are imposing deductible increases, payout limits, and new exclusions for certain damages, including mold and flood endorsements.

Many private insurers are also curtailing their wind coverage, forcing property owners to pile separate windstorm insurance on top of their other policies to reach replacement cost values required by lenders.

Multifamily sponsors concerned about exorbitant insurance renewals on the horizon should take immediate stock of their biggest risks and most pressing costs with every property they own and operate.

 Secure roofing will remain a focal point for multifamily owners and borrowers who want to take proactive measures—whether or not they are in high-risk markets. One of the first things insurers, agencies, and some lenders are going to assess is how secure and weather-proof a property’s roof is, according to property insurers and other industry experts. This is one of the first things every property owner should do before they talk to an insurer about their coverage options.

Another vital measure at this moment is for all multifamily borrowers and lenders to bolster their data resources and overall data quality, per NHMC. Those who want to take advantage of all possible options should take a close look at their internal numbers pertaining to a property’s insurance coverage, climate resilience, and overall financial stability, since this can have a direct impact on insurance premiums.

Having comparable data on a specific region and market can offer additional safety nets for multifamily sponsors. Property owners can contact a Lument representative to tap into further insights.

Every Small Step Counts as Sponsors Weather the Storms

For the time being, multifamily owners and their lenders and insurers may need to come up with case-by-case assessments and temporary coverage solutions until public and private sector leaders are able to devise sustainable long-term coverage options.

An important flag in this environment: For securitized loans with countless bondholders, specific financial assessments and strategic negotiations with multifamily borrowers will run deep. Unmanaged losses with CMBS investors and other bondholders can often lead to drawn-out legal cases with little common ground between various parties.

Against that backdrop, all multifamily owners need to call their equity partners and most trusted lenders while taking strategic steps to find the right insurance brokers who have their interests in mind. It may also be time for institutional owners with LPs and other equity partners to start negotiating new terms with their insurers and lenders while looking into more flexible capital structures to cover rising costs.

Lument and other lenders are taking a close look at big-picture factors, while engaging in constructive talks with insurers and agency partners. This includes a more nuanced look at the global reinsurance market, which is projected to exceed $1.3 trillion by 2031.

 If industry stakeholders work together strategically to find practical and sustainable solutions, the U.S. multifamily sector and countless tenants could come out stronger. 

 Marc Suarez is a managing director at Lument, based in Miami.