The rising costs of floating rate expenses, property taxes, and insurance have created significant challenges for property owners, particularly in the real estate market. Insurance costs, in particular, have escalated dramatically in some states, with increases of over 100% in certain cases. This surge in insurance pricing has sparked concerns among property owners and real estate professionals, causing some to consider drastic measures such as closing their businesses or selling their properties.

While this is an adjustment we are seeing in the greater economy, REV has taken substantial measures to prepare for these calculations. Instead of basing our assumptions on the pro forma provided by sponsors, we physically underwrite multifamily deals based on the nitty gritty excel sheets provided to us. Often, our underwriting is so intricate, we are having conversations with local insurance companies to keep our finger on the pulse of this metric.

Danielle Lombardo, the chair of the Global Real Estate Practice at Lockton, an insurance brokerage firm in Kansas City, Missouri, has observed the distressing impact of these rising costs on property owners. Many of her clients have expressed their struggle to sustain their businesses due to the escalating insurance prices along with the burden of variable rate debt and property taxes. This confluence of factors has made it difficult for property owners to make profitable deals and service their debts effectively. When acquiring these assets, knowing this rising insurance costs are on the horizon, our team has been able to prepare for these numbers before hand.

The compounding issues are pushing some property owners to the brink, potentially resulting in them relinquishing their properties to the bank. Alternatively, many property owners may be left with no choice but to sell their properties, although this solution is not without its challenges. The  insurance costs also have repercussions for real estate transactions and new development projects, making the underwriting process more complicated. Due to the increased pressure for new development projects, REV has made sure to pivot from these assets and stay true to value-add investment opportunities.

An example shared by a real estate professional involved a Class C property owner in Houston. This owner witnessed a significant increase in annual insurance rates for their units, going from $800 per unit to $2,200 per unit. Such a threefold increase in insurance costs cannot be easily offset by raising rents, leading to financial instability and even insolvency for some property owners.

In real estate deals, the financial calculations are delicate, and even small changes in expenses like insurance costs can lead to deals falling through. For instance, even when property owners anticipated insurance expenses of $500 to $700 per unit, the actual costs came in much higher at $1,600 per unit, leading to the cancellation of potential deals.

Overall, the surge in insurance costs, combined with other rising expenses, has created a challenging environment for property owners, potentially leading to closures, property sales, and financial instability within the real estate market. Many investors who have been sitting on the sidelines are preparing for increased opportunities coming their way!

and This information was provided by Multifamily Dive: Rising insurance costs could force apartment sales, threaten new development