August 2023
CRE Research
Breaking Down Multifamily Property Operating Expenses Across
the U.S. | Part 3 – Property Insurance
In a recent report, the Trepp team discussed the trends in year-over-year (YoY) net operating income growth (NOI) for
multifamily properties across various geographies. In this series, Trepp examines YoY trends for specific operating expense
line items that contribute to the overall NOI of multifamily properties.
In a continuation of our series on multifamily property
expenses, we shift our focus to property insurance.
Property insurance, a fundamental component of operating
expenses for commercial real estate properties, plays a
crucial role in safeguarding properties against unforeseen
risks. According to Trepp’s property line-item financials
extracted from the TreppInsights tool, insurance expenses
have trended upwards for multifamily properties across
major metropolitan statistical areas (MSAs) in the U.S. in
recent years. In this report, Trepp finds that the cost of
property insurance increased roughly 13.6% on average
across the 50 largest MSAs from 2021 to 2022, with a
few key southern multifamily markets seeing particularly
pronounced insurance expense growth.
Property insurance costs are dependent on two primary
factors: property value and associated risk. Insurance
companies meticulously analyze property location,
construction materials, security measures, historical
claims, and other factors to assess the property value and
the level of risk involved with the property. Based on these
factors, insurance companies will set a policy premium
that strikes a balance between affordability for the insured
and sustainability for the insurance provider.
The year 2021 witnessed record-breaking frequency and
severity of natural disasters, such as hurricanes, floods,
and wildfires. Consequently, property owners have faced
heightened risks of climate-related property damage.
In response to these escalating risks, insurers have
found themselves compelled to reevaluate their policies
and pricing models, leading to fluctuations in insurance
premiums for properties. Our previous report on real estate
taxes highlighted the booming nature of the multifamily
market in certain growing MSAs. This trend may also
further contribute to even higher insurance premiums for
multifamily properties.
COMPARING YOY CHANGES IN PROPERTY INSURANCE
ACROSS MULTIFAMILY MARKETS
In this part of the series, the Trepp team ranks the multifamily
markets based on the largest average YoY increase in insurance
expenses from 2021 to 2022, utilizing the multifamily property
FIGURE 1: TOP 15 MULTIFAMILY MARKETS FOR LARGEST YOY
INCREASE IN INSURANCE EXPENSES (2021-2022)
RANK
MSA
AVG YOY
INSURANCE
EXPENSES PER
UNIT CHANGE
1
Miami-Fort Lauderdale-West Palm Beach, FL
28.0%
2
New Orleans-Metairie, LA
27.9%
3
Jacksonville, FL
27.4%
4
Salt Lake City, UT
21.3%
5
Houston-The Woodlands-Sugar Land, TX
21.1%
6
Tampa-St. Petersburg-Clearwater, FL
19.3%
7
San Antonio-New Braunfels, TX
19.2%
8
Raleigh, NC
17.9%
9
Dallas-Fort Worth-Arlington, TX
16.9%
10
Riverside-San Bernardino-Ontario, CA
16.7%
11
Denver-Aurora-Lakewood, CO
16.1%
12
Atlanta-Sandy Springs-Roswell, GA
15.8%
13
Louisville/Jefferson County, KY-IN
15.5%
14
Cleveland-Elyria, OH
15.4%
15
Charlotte-Concord-Gastonia, NC-SC
15.1%
Sources: Trepp Inc.
www.trepp.com
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CRE Research
data set laid out in the Data Set Description section in Part 1
of the series. A majority of the MSAs featured in the ranking
have encountered at least one of the 22 separate billiondollar weather and climate disasters in 2021.
A DEEPER DIVE INTO SPECIFIC MARKETS
Florida
Florida’s geographic location makes the state susceptible to
weather and climate disasters, specifically tropical storms
and hurricanes. Three MSAs in the state have surfaced
in our rankings, with the Miami, Jacksonville, and Tampa
MSAs experiencing an average rise of 24.9% in insurance
expenses from 2021 to 2022. In 2021, Florida faced an
unusually busy hurricane season, witnessing 21 named
storms and surpassing the norm of 14 named storms.
These weather events caused significant damage, leading
to a surge in insurance claims and necessitating insurers
to reassess risk and implement higher premiums for the
subsequent renewal periods.
The cost of building materials for home building and
rebuilding has gone up over 31% from 2020 to 2022.
Moreover, Florida leads the country in insurance lawsuits,
which can also raise insurers’ operation costs. These
additional costs will inevitably be passed on to policyholders
through higher premiums. For instance, the average cost
insurers pay to cover a wind damage claim in the Miami
metro area has roughly quadrupled since 2010.
Despite disaster risk, however, Florida continues to draw a
continuous influx of new residents. In 2022, over 318,000
individuals relocated to Florida, which was the highest
influx among all states. This demand surge has driven
developers to construct multifamily homes in areas riddled
with high flood and hurricane risks, thus concentrating the
state’s insurance risk and subsequently leading to higher
premiums. Taking Miami as an example, Miami has the
highest flood-risk score in the U.S., but there were 147 multifamily buildings totaling 36,414 units under construction
in 2021. This construction volume represented 11.3% of
the inventory in the Miami market, with the vacancy rate
dropping to sub-5% in that period.
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From the insurance company’s standpoint, the challenge
lies in the inadequacy of even increased premiums to cover
their rising costs. The impact of Category 4 Hurricane Ian
in 2022 devastated Florida, resulting in staggering costs
exceeding $117 billion, pushing several insurers perilously
close to insolvency. Frequent extreme-weather events
have already forced some national insurers, including
Farmers and AAA, to cease renewals of some home and
auto policies in Florida. As a result, the remaining insurers
are left facing a more concentrated risk in the state, which
will probably lead to even higher insurance expenses for
multifamily properties in the future.
Texas
Texas stands out as another state where property
insurance expenses witnessed a surge across the majority
of its main MSAs. Three MSAs, Houston, San Antonio, and
Dallas, landed in the top ten of the ranking, reporting an
average rise of approximately 19.0% in insurance costs for
multifamily properties.
The distinctive aspect of Texas’ weather lies in its extremes,
with both scorching hot conditions and rare freezing
temperatures impacting the region. In 2021, Texas faced an
unprecedented winter storm and severe cold weather in
February, leaving a trail of destruction in its wake. Insurers
reported paying out $9.3 billion in claims for commercial
and residential properties, with a record-setting 478,735
insurance claims filed throughout the state. Just two
months later, Texas experienced another calamity, as the
“Gorilla” hailstorm pummeled the northern part of the state
in April. The San Antonio and Dallas metros bore the brunt
of this damaging hailstorm, shattering windows and even
penetrating homes’ roofs.
In the hotter month of September, Hurricane Nicholas
soaked Houston and left at least 503,000 properties without
power in Texas, mostly in Houston. The concentration
of natural disasters in Texas during 2021 led to several
insurance companies going out of business, while others
had to readjust their risk ratings and raise premiums to
cope with the escalating costs.
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CRE Research
In 2022 and 2023, hailstorms and hurricanes continued
to pose a significant threat to regions in Texas, resulting
in billion-dollar losses and driving up insurance expenses
in the affected areas. Similar to the situations seen in
Florida, some private insurance companies in hurricaneprone regions of Texas have faced financial challenges,
leading to insolvency or discontinuation of policy renewals.
Consequently, many residents have turned to the region’s
state-chartered insurance programs. However, the current
reserves of these programs may not be sufficient to cover
claims if another devastating hurricane strikes. There is a
pressing need to address the insurance infrastructure in
Texas in order to ensure adequate coverage and financial
stability for both insurers and policyholders.
WHAT’S AHEAD FOR PROPERTY INSURANCE
Trepp data shows that property insurance for multifamily
properties has seen double-digit rate increases for major
MSAs. In the short term, this rise can be attributed to
inflation, at least in part. However, it is essential to recognize
that extreme weather has played a crucial role in reshaping
the insurance premium landscape in the past several years.
The reduced availability of insurance providers can ultimately
result in higher concentration risk, or conversely, lower risk
diversification. In these cases, the insurance burden will
often fall onto state-backed insurance programs, who are
typically lenders of last resort.
Moreover, the influx of private capital into insurance
companies may prompt a shift towards prioritizing more
profitable policies, which can also impact the affordability
and availability of insurance for multifamily properties. In
response to these challenges, regulatory efforts such as
FEMA’s “Risk Rating 2.0” system have been launched to
establish a new premium equilibrium.
However, the Trepp team anticipates ongoing fluctuations
in the short-term future as the insurance industry adapts
to these changes. Trepp remains steadfast in monitoring
changes in insurance expenses for multifamily properties
and staying abreast of all relevant trends and news. Stay
tuned for further updates.
The increased frequency and severity of weather-related
disasters have made it challenging for insurers to remain
profitable in disaster-prone states. As a result, some insurance
companies have been compelled to readjust their climaterelated risk models and reevaluate their market strategies,
leading some insurers to withdraw from certain regions.
For more information about Trepp’s commercial real estate data, contact info@trepp.com.
For inquiries about the data analysis conducted in this research, contact press@trepp.com or 212-754-1010.
About Trepp
Trepp, founded in 1979, is the leading provider of data, insights, and technology solutions to the structured finance, commercial real estate, and banking
markets. Trepp provides primary and secondary market participants with the solutions and analytics they need to increase operational efficiencies,
information transparency, and investment performance. From its offices in New York, Dallas, and London, Trepp serves its clients with products and
services to support trading, research, risk management, surveillance, and portfolio management. Trepp subsidiary, Commercial Real Estate Direct, is a
daily news source covering the commercial real estate capital markets. Trepp is wholly owned by Daily Mail and General Trust (DMGT).
The information provided is based on information generally available to the public from sources believed to be reliable.
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