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As Insurance Costs’ Bite Gets Bigger, Owners Search For Creative Solutions

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Multifamily developer and investor Advenir is paying 76% more for property insurance in 2023 than it did last year. Over the last decade, the company’s rates are up 400%.

“How does that affect us? It affects cash flow, it affects valuations,” Advenir Managing Director Stephen Vecchitto said Wednesday at the Urban Land Institute’s Miami Symposium. “I’ve had the pleasure to learn more about insurance than I’ve ever wanted to know.”

Vecchitto isn’t alone.

The high cost of property insurance has reached a fever pitch in South Florida, forcing investors and developers to closely examine their coverage and search for creative solutions.

Commercial property rates in South Florida have risen this year by 25% to 50% on average compared to a 10.6% increase nationally, according to an analysis of second-quarter data from the Insurance Information Institute.

For Tim Peterson, the chief investment officer at the luxury property developer The Altman Cos., those increases have started to bite. Fort Lauderdale-based Altman was paying around $75 per unit for insurance in 2003, rising to around $750 per unit in 2019. Today, Altman is paying over $3K per unit for insurance.

“It went from less than 1% of revenue and something you didn’t really talk about to something that everybody’s talking about,” Peterson said at the event, held at the Mandarin Oriental Miami on Brickell Key.  

The cost of insurance is now a key factor in the decision-making process across the entire chain of ownership, from the development of a project, to its maintenance and ultimately even the sale. The costs have become such a concern that they’re also coming up in conversations with lenders.

“On the equity side, we used to quickly get to the question of what’s your [preferred] rate and now it’s ‘What insurance do you bring to the table?’” Peterson said. “If an equity investor’s program is better than mine, maybe I pay them for it. The things that we didn’t talk about, we now talk about with investors.” 

Altman has also begun to work directly with insurers to convince them to offer lower rates by touting their strong building standards, proactive maintenance and other efforts that would ultimately reduce the cost of any claim, Peterson said. If premiums are still too high, self-insurance is increasingly becoming a popular alternative.

“I haven’t recommended so much self-insurance in my broker career except in 2023,” said Pam Poland, managing director at the property insurance brokerage Marsh, a subsidiary of Marsh McLennan with headquarters in New York. 

Vecchitto said while Aventura-based Advenir was also working directly with insurers to understand risk assessments and look for ways to reduce rates, educating providers alone isn’t always enough to bridge the cost gap. In one instance, his firm chose self-insurance after it discovered that it was paying $9.2M for the first $10M worth of insurance in a multilayered policy.

In other cases, the high cost is leading Advenir to walk away from assets.

“Part of our approach is to get more education and how do we do risk transfer to lower that risk,” Vecchitto said. “The second thing we’ve done is we’ve looked at our portfolio, and we’ve said, ‘We’ve got some properties that are costing us more, because they’re older or they’re on the coast,’ and we’re asking how do we trim those back and reinvest.” 

 

Source:  Bisnow

 

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CRE Property Insurance Spikes Again In Q2

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Multiple severe thunderstorms threw a vicious punch at the commercial real estate industry in the first half of 2023, leaving it with the highest spike in premiums at 18.3%.

The storms accounted for insured losses of around $34 billion in the US alone, which is nearly 70% of global insured natural catastrophe losses in that time and the highest ever insured losses in a six-month period.

Perhaps not surprisingly then, CRE received the highest increase in insurance premiums among any insurance business lines in the second quarter, according to The Council of Insurance Agents & Brokers’ Commercial Property/Casualty Market Report.

In the report, respondents again pointed to rising property values (as a result of inflation) and natural catastrophe losses as the major contributors to the difficulties with this line.

Furthermore, a report by Swiss Re showed this number reached in just six months, is almost twice as high as the annual average natural catastrophe losses for the past 10 years, $18.4 billion.

CIAB suggested that these losses likely further contributed to carriers pulling back on underwriting commercial property—especially coastal property.

One respondent from a large Southeastern firm said today it is “very difficult to insure in the standard markets.”

Others commented that “property deductibles continued a steady upward march” and that carriers were still “pushing increases in property values,” calling it a lingering effect of inflation.

Reinsurance was another troubling aspect.

“Due to lack of reinsurance support, commercial property capacity has been reduced,” explained one respondent from a large Northeastern firm.

In fact, 80% of respondents reported a decrease in commercial property capacity, and nearly half of them described that decrease as significant.

Another respondent from a large Midwestern firm said that the reinsurance market was so difficult for some companies they had to non-renew property because of capacity issues.

 

Source:  GlobeSt.

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Multifamily Industry Grappling With Surging Insurance Costs

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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 Land Grab Expected To Slow As Interest Rates Rise

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Rising interest and insurance rates are projected to slow down South Florida multifamily investments following a year of frenzied buying, according to a recent report from Franklin Street.

Dan Dratch, director of multifamily investment sales at Franklin Street’s Fort Lauderdale office, says real estate investors and developers could hesitate even as apartment rental rates continue to soar and vacancies shrink.

“We have been in such a low interest rate environment, which has been fueling sales in the last couple of years,” Dratch said. “There’s a little bit of uncertainty… [Investors] want to know if it costs more to borrow the money and put more money down, or pay less.”

Adding to the uncertainty is rising property insurance rates in the wake of extreme weather events. This hurricane season is expected to be a particularly busy one.

“I know owners who are seeing a 20% to 30% increase on insurance, sometimes higher,” he said. “We have not been hit with a major hurricane [in five years]. If that happens now, it will affect things even further.”

South Florida saw significant rent growth in the first quarter of 2022, according to a Franklin Street report on the multifamily market, with year-over-year rents increasing 16% in Miami-Dade, 20% in Broward, and 23% in Palm Beach County.

At the same time, multifamily buildings were trading at premium rates.

In Miami-Dade County, each apartment unit averaged at $412,612 for new top-of-the-line Class A buildings, $327,394 for Class B buildings, and $207,592 for Class C.

In Broward County, units averaged $419,137 per unit for a Class A, $313,599 for a Class B, and $205,736 for Class C apartment buildings.

In Palm Beach County, apartments averaged at $413,253 per unit for a Class A, $320,410 for a Class B, and $206,812 for a Class C apartments buildings.

There weren’t many available apartment units on the market during the first quarter either.

Palm Beach County had a vacancy rate of just under 1%. Miami-Dade’s dropped to 3.3%. Broward’s vacancy rate increased slightly from the previous quarter to 4.1%, yet the county “also saw more deliveries than the other two counties in the market,” the report stated.

When it came to construction deliveries, Broward County led the tri-county area with 719 apartments added in the first quarter of 2022. In Miami-Dade, 497 new apartment units were added. In Palm Beach, 171 units were completed.

All three counties had fewer apartments finished in the first quarter of 2022 than in each of the quarters of the previous year, the report noted.

In spite of rising interest rates, labor shortages, and supply chain issues, construction of new apartment units are still “above historical averages,” the Franklin Street report noted. In the first quarter, development has commenced on 1,402 multifamily units in Broward, 869 in Miami-Dade, and 976 in Palm Beach County.

The confluence of apartment building transactions, low vacancies, and migration of well-paid remote workers propelled rents in South Florida during the pandemic. Multifamily investors were quick to seize the opportunity and bought up properties at a record pace.

“Most of the owners we were talking to were surprised that they got into a situation where tenants are creating a bidding war for the unit,” Dratch said.

Often, when longtime local renters were given rent increases, they would renew, unable to find cheaper options.

“They are finding it might be worse elsewhere,” Dratch.

While rents are going up everywhere in the United States, the average rents in South Florida are higher than the national average.

According to the National Association of Realtors, the average effective rent — meaning the average rent a landlord receives after deducting expenses such as leasing commissions and tenant improvements — throughout the U.S. was $1,578 a month in the first quarter of 2022, a 12.2% increase over the year before.

 

Source:  SFBJ

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