Susan Gittelman
There’s a new threat to affordability that is jolting the rental apartment real estate industry, especially those in market-rate and affordable multifamily housing: insurance premiums.
One industry specialist predicted that insurance costs for next year will be hiked 20 percent on average in the multifamily category and as much as 200 percent in high-hazard zones. Sudden, whopping new premiums over the last five years are driving rents even higher – and even derailing development of much-needed new housing.
A Boston-area owner-operator of subsidized housing just got a bill with an 80 percent increase for 2024, adding hundreds of thousands of dollars to annual operating costs, and that’s not an isolated case.
“Last year our insurance increased 18 percent,” said an executive there. “This year it has nearly doubled.”
Rising Claims a Factor
The National Multifamily Housing Council and National Apartment Association last month wrote to the U.S. House of Representatives’ Subcommittee on Housing and Insurance, expressing concern for the approximately 39 million Americans who live in apartments.
“The ability of multifamily firms to attract investments required to meet the nation’s housing needs and help address its housing affordability crisis is put at risk by out-of-control insurance costs,” the letter said, “… which will undoubtedly have a long-term effect on housing supply and affordability for years to come.”
Industry specialists say that there are three major causes that have contributed heavily to the premium increases.
The first is catastrophic losses caused by weather events like hurricanes, floods and fires over the last few years. Broadly, some of the losses are attributed to climate change. Increases have been especially high for older properties, for those built with wood rather than masonry, and for those located in states prone to violent weather, including California, Florida and Texas.
A second cause is what one liability consultant called “nuclear settlements.” In cases of discrimination or abuse, or slips and falls, court settlements or jury verdicts have awarded larger dollar amounts.
The third is the soaring cost to replace these buildings. Replacement costs of damaged or destroyed structures have outpaced the coverage that owners had been paying for, and insurance companies have taken notice and hiked premiums to cover actual replacement costs.
Beyond these new trends, though, there are factors that are narrower, can be targeted at individual properties, and likewise can have serious negative effects on operating budgets. These include exclusions – situations insurers won’t cover or that they charge a lot more for because of the perceived risk. Unlike factors whose cost impact is spread evenly, these exceptions can have a more disparate impact on affordable multifamily housing based on the neighborhoods these properties are located in, who lives there, and how they operate.
Bad Calls Hit Affordable Buildings Hard
Some affordable multifamily properties sustain increases despite not having made claims, because they are located in geographic areas that have suffered higher levels of criminal activity. This is reminiscent of the racial bias that characterized the underwriting that created the insurance maps associated with redlining practices of the 1970s. Areas considered high-risk have led lenders to paint with a broad brush, denying even worthy potential customers the coverage to buy.
And then there are demographics. Some insurance companies have turned down affordable housing developments because they claim the buildings’ low-income tenants are a crime risk, Bloomberg’s CityLab reported, citing David Gasson, a lobbyist and executive director of a national advocacy organization, the Housing Advisory Group.
The risk profile is sometimes not based on actual facts, as in the case of a Boston property whose insurance was reevaluated once it was recognized that some units were occupied by formerly homeless families whose rents were guaranteed through government subsidies.
In terms of operations, naturally insurers are wary of buildings without sprinkler systems. But they are now focusing on even more specific areas of operation, resisting insurance on buildings that have emergency pull cords in units on the logic that the response might be inadequate, and disallowing the charging of electric scooters in their apartments for fear of fire.
Affordable multifamily owners trying to cope with these increasing costs have reported they are increasing deductibles, reducing coverage if possible – and increasing rents. This puts an added burden on affordable housing properties, where rents are tied to residents’ incomes, not rising operating costs, and are highly constrained.
With no solution in sight, and as the pipeline of new affordable housing production requires adequate coverage at reasonable prices, the time is now for bold solutions. For example, like the programs established for addressing emergency flood insurance risk, Congress could provide the assistance the housing delivery system in its time of crisis. The time to act is now.
Susan Gittelman is executive director of B’nai B’rith Housing, a nonprofit affordable housing developer working in Boston, MetroWest and the North Shore.
