WTI - What The Insurance?
As inflation continues to rise, so do operating costs for rental housing providers. One of the biggest increases is insurance. As of June 2023, insurance costs per unit have jumped 33% year-over-year according to a report from Marcus & Millichap. Swapnil Agarwal, the CEO and founder of Houston-based apartment owner Nitya Capital, has seen rising premiums kill deals because buyers have difficulty getting coverage. “The insurance premiums will break a lot of deals because the buyer will probably underwrite a deal with a normal insurance price,” he said. “People are underwriting $500, $600 or $700 [per door] in insurance, and the costs come back at $1,600 and the deal didn’t happen.”
How will increased insurance costs affect potential plans for development in Mecklenburg County and will potential developers leave entirely? While it’s tough to predict when insurance costs will decrease, it’s important to identify what causes them. A 2022 National Multifamily Housing Council survey sited water damage was the number one type of claim filed. Water damage can be caused by frozen pipes, high pressure, corrosion, or broken seals. While it’s important for maintenance teams to be proactive and prepare for inclement weather, there are also many factors that are out of their control. Other causes include crime, higher deductibles and reduced coverage.
Sadly, the affordable housing community is taking a strong hit. Insurance carriers are increasingly declining to underwrite general liability policies for subsidized apartment projects or raising their premiums to prohibitive levels. In some instances, insurers are even declining to write coverage for affordable developments altogether. “Ultimately, affordable housing providers may be forced to consider whether to opt out from participation in the affordable housing market if insurance and other operating costs continue to outpace allowable rent,” said Michelle Norris, Executive Vice President for National Church Residences.
Will increasing insurance costs drive away affordable housing providers in Mecklenburg County? With 113 people moving to Charlotte every day, the need for affordable housing will continue to exist. Will management companies continue to operate and expand their portfolios with high insurance premiums? Time will tell.