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Homeowners’ lawsuits against insurance companies did not cause record losses and rapidly escalating insurance premiums in Florida, according to a new study.

But frivolous litigation has made a bad situation worse, with a disproportionate amount of lawsuits filed in Miami-Dade, Broward and Palm Beach counties. That confirms what the insurance industry has said for years — to a certain extent — the Miami Herald reports.

The Florida Legislature tasked the state’s Office of Insurance Regulation with completing the report. Last year, lawmakers passed legislation making it harder and more expensive for consumers to sue their insurers, in response to the repeated claim that superficial lawsuits were driving the rising cost of premiums.

The report found that litigated claims in the tri-county region in 2022 were six times more expensive than claims that did not result in a lawsuit. The more than 58,000 claims that were litigated in 2022 made up less than 8 percent of claims closed that year, and less than 1 percent of the policies in effect at the time. Insurance companies spent about $580 million on the litigated claims out of nearly $16 billion that Floridians paid in premiums, according to the Herald. That also amounts to less than 1 percent.

State Rep. Erin Grall, a Republican, said that the insurance industry “fabricated their arguments and data over the past few years to manufacture a crisis and push for various legislative reforms,” according to the Herald.

Policyholders were more likely to sue the longer it took for their insurer to close a claim, suggesting that some lawsuits were filed because of insurers’ modi operandi.

Insurance regulators collected the data from insurers under a 2021 bill that Gov. Ron DeSantis approved. Many insurers missed their deadlines or produced insufficient or incorrect information, Florida Insurance Commissioner Mike Yaworsky told the Herald.

Insurance premiums have doubled, tripled or quadrupled for some owners of commercial and residential real estate in recent years, hampering sales and forcing some to sell their properties at a discount or risk forgoing coverage if they’re able. Some insurers have stopped writing new business, scaled back or gone out of business across Florida.


Source:  The Real Deal

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Little things can add up.

For CRE, that is a range of costs including insurance, utilities, taxes, and other operating expenses. That can burden a property just as easily as higher interest rates.

According to a Moody’s Investor Service report cited by Barron’s, overall expenses for CRE properties are up by more than a third between 2017 and 2022. Insurance is up 73% over the last five years, utilities are 40% more expensive, and property taxes and other operating expenses rose 27% and 29% respectively.

And the lion’s share of these cost burdens, insurance, show little sign of retreating.

Commercial property insurance premiums hit a record rise of 20.4% in the first quarter of 2023. It’s the first time since 2001 that rates jumped more than 20%. Premiums have been rising by double digits in many markets. Some policy renewals offered half the coverage for that same price. The lack of affordable options is putting needed levels of coverage out of the reach of owners.

Yardi reported that states with increasing climate-related risk, such as Florida and Texas, see their costs rising upwards of 50% and starting to threaten new development and property sales.

Insurance prices are hitting deep into the financial viability of CRE projects, Brett Forman, managing partner at Forman Capital, tells

“I got an email yesterday from a fund I’m personally invested in. They didn’t have claims. Their insurance costs have risen by 70%. That changes the cash flow dynamics. It’s a big line item.”

The problem is that insurance companies are being hit hard by climate change-driven natural disasters. Massive coverage obligations even in a few geographic areas can drive the overall finances of carriers, which then will increase rates across the board.

“People talk about rental growth, but they’re not quick to mention expense growth,” Forman says. “In my mind, you don’t get dollar for dollar credit for the rent growth if expenses have gone up.”

John Vavas, a commercial real estate finance attorney at law firm Polsinelli, points to insurance as well as other carrying costs like taxes. Add increased debt service and it can mean having to find additional equity.

“When you think of a borrower having to bring new equity into a deal, that dilutes them substantially in the valuation,” Vavas adds. “It’s going to affect returns from a cash-on-cash perspective.”

The increase in costs can then affect the ability to get refinanced. Lenders who are watching risk worry that suddenly NOI at a property could drop, making it more difficulty to ensure payments.

“It’s already happening because of interest rates,” Vavas adds. “But you add into some of these other geographic specific issues like [insurance in] California or Florida, and it makes it harder to pencil a deal.”


Source:  GlobeSt.

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First came supply-chain-fueled higher construction costs. Then came inflation and interest-rate hikes imposed by the Federal Reserve.

Multifamily property operators are seeing their property insurance premiums rise at a time when the cost to build and finance a commercial real estate project remains elevated, even though most material prices have stabilized.

The recent spike in insurance costs arguably could have the most significant ripple effects within the multifamily industry, as higher rates will likely prompt multifamily landlords to pass those additional costs to tenants. But for income-restricted housing or rent-controlled apartment markets, according to those in the industry, the options to offset those higher costs are more limited.

A recent survey by the National Multifamily Housing Council, a trade group representing rental-housing owners and developers, found property insurance costs have risen 26% on average among respondents during the past year. Hurricane Ian had a tremendous impact on rising premiums, but internal insurance dynamics, industry consolidation, carriers departing some markets and climate change are also to blame for the higher costs.

Beyond the cost of operating an apartment property or portfolio, higher insurance premiums are starting to affect property valuations and disrupt transactions.

Michael Power, a chartered property casualty underwriter at New York-based FHS Risk Management, said during an NMHC webinar that in years past, adequate insurable replacement values weren’t necessarily enforced by the insurance industry. There’s been a monumental change on that front this year, he said, with everyone now required to directly report adequate insurable rebuilding costs for all buildings.

“That is having a huge impact on premiums because it’s driving up the total insurable value of your assets. … It creates a compound effect on premiums,” Power said.


Source:  The Business Journals

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Multifamily properties are still going strong in the commercial real estate (CRE) sector. But it’s not business as usual. Coming off record growth in 2021, the industry is recalibrating, which creates dynamic investment, valuation and risk environments for multifamily property investors.

Heading into 2023, inflation and rising interest rates prompted forecasts for a slight slowing of growth in the multifamily property sector. Through the first quarter, overall occupancy rates held steady, with a modest increase in vacancy rates to 6.7%, up from 5% one year ago. Rent income is still growing, but month-over-month increases are returning to pre-pandemic norms. Nationwide, demand for multifamily units remains strong, with plenty of inventory in the construction pipeline.

Looking ahead, multifamily properties continue to offer appealing and profitable opportunities for commercial real estate investors. However, today’s evolving market can’t be predicted based on past performance. For investors, keeping a pulse on key demographic, economic and risk-related trends is more important than ever.


1. Demographics and Demand

Demographic trends are favorable for increasing demand. Forty-five million Gen Z-ers, born between 1997 and 2013, will be in their peak years as renters by 2025. At the opposite end of the generational spectrum, an increasing number of Boomers are expected to opt for multifamily properties as they retire and downsize their homes.

Beyond the population numbers, other factors come into play. Inflation and rising interest rates may prompt Gen Z to live at home longer and Boomers to push back their timelines for downsizing from their single-family homes. At the same time, many Millennials are renting longer, having been priced out of the housing market due to a smaller inventory of starter homes and higher levels of personal debt compared to previous generations.


2. Inflation and Valuation

Inflation and higher interest rates have created a challenging near-term capital market environment for the multifamily sector. Capital is available but at a higher cost. With narrowing margins, lenders are taking a more cautious approach and loan-to-value ratios are down. With higher cap rates, the value of a stable multifamily property is lower. Similarly, value depreciation accelerates with slower rent growth and increased operating costs.

Inflation creates uncertainty about how much a property is worth, how much rental income will — or will not — grow and how much operating costs may increase. Digging into the details within a property’s valuation is critical in the current evolving market. An independent third-party valuation analyzes the historical performance of the property, comparable rental rates in the local market and expected operational expenses. The valuation projects the net operating income (NOI) and provides a benchmark of the property’s value over time.


3. Risk and Insurance

Insurance costs for multifamily properties are also on the rise. Over the past three years, property owners have seen double-digit increases in premium costs. Extreme weather events, such as wildfires, hurricanes and flooding, are a primary reason, with losses exceeding the premium collected. As a result, insurers are reducing their risk exposure in high-risk areas, which means property owners must often seek partial coverage from multiple carriers.

Inflation is also driving increased insurance costs. The cost of construction materials and labor has risen sharply since the start of the pandemic, with multifamily construction costs up 8% in 2023. An up-to-date valuation, which is required by many insurers at renewal, helps property owners to ensure their insurance covers the cost of rebuilding at current prices.

Liability insurance premiums have also increased in recent years, as several carriers exited the excess liability insurance business. Primary liability insurers are mitigating rising costs by increasing premium rates, deductibles and self-insurance limits. Many insurers are managing costs by implementing policy exclusions that may save property owners money in the short term but increase financial risk in the long term.

Insurance advisors can help property owners take a proactive approach to monitoring policy changes, conducting regular property assessments and calculating maximum probable losses in the event of a catastrophic event.

The dedicated commercial real estate team at CBIZ can help you optimize the valuation, insurance and tax strategies for your multifamily investment. Explore more resources and connect with a member of our team today.


This article includes input from John Rimar, Managing Director of CBIZ Valuation Group’s Real Estate Practice, and Greg Cryan, President of Southeast CBIZ Insurance Services, Inc. Their teams provide the initial and ongoing services needed to accurately assess and insure your real estate investments. 


Source:  CBiz