In the last decade, the US has incurred nearly $1 trillion in damages caused by weather-related natural disasters. The frequency of large climate events where damages exceed $1 billion is growing rapidly, with 24 such events in 2024 alone. Climate disasters affect commercial real estate in myriad ways, from increasing investment risk to the simple cost of repairing damages. However, the most widespread and immediate impact is oninsurance costs. The prevalence of natural disasters has significantly increased property insurance costs and in some regions where natural disasters are the most frequent, there is no insurance available at all.
Property insurance is poised to become a standout challenge for multifamily owners in 2025 and beyond. Here is a closer look at rising insurance costs and what developers can do to navigate this new market.
The High Cost of Property Insurance
Multifamily property insurance costs increased a staggering 27.7% in 2023, and in 2024, they have continued to climb. This year, experts expect insurance premiums to increase another 10% to 20% for primary liability plans and 10% to 15% for umbrella insurance. Higher insurance premiums are causing significant problems for multifamily developers and owners across the entire lifecycle of a multifamily property.
Rising insurance costs are the primary cause of increased operational expenses for owners. Some owners have reported challenges holding onto assets as a result. “I have clients calling me saying they have to close up shop if insurance pricing continues on this road,” Danielle Lombardo, chair of the Global Real Estate Practice at Lockton, told Multifamily Dive in an interview, illustrating the challenges multifamily owners are facing. “They can’t do business like this. They can’t make deals pencil out and they can’t pay debt service between insurance costs, variable rate debt, and property taxes.” Moreover, and more specifically for developers, high insurance costs have significantly hampered property values. Research from CBRE found that properties values have fallen 3.6% as a result of rising insurance costs.
This year, insurance premiums have started to moderate. Multifamily REIT Camden Property Trust, for example, predicted an 18% increase in insurance costs at the beginning of the year. Now, the REIT is reporting expectations of a 3% decrease in insurance costs. Still, insurance prices remain significantly higher than pre-pandemic, up 50% for the REIT in the last three years. Even if insurance costs stabilize, many multifamily properties are still struggling to meet the current rate, particularly in markets like Florida and Texas, where natural disasters have become an annual event.
Why Property Insurance Isn’t Just a Line Item in the Operations Budget
Higher insurance costs have a widespread impact on property performance. Of course, the operations budget is the first place owners will see the impact. This year, operations costs have increased more than 7%, and insurance is the leading driver of the increase. Of course, higher operations budget negatively affects NOI and, as a result, the cap rate. However, insurance has an effect on the investment well beyond the operations. Insurance is not an option; it is a requirement. If a property owner is unable to secure the right insurance coverage, it could affect financing compliance. Property owners would be unable to maintain current debt, forcing a default, or secure debt on a new property.
In some cases, high insurance costs are forcing property sales, too. For developers, rapidly rising insurance costs has also made underwriting the asset and generating an accurate proforma very difficult. Affordable housing properties are the most impacted by this trend, because rents cannot be increased to offset the higher premium rates. The New York Times reported several owners in California, Texas, and Florida selling off affordable and subsidized housing portfolios earlier this year due to higher insurance costs. Frank Woodruff, the executive director of the Community Opportunity Alliance, a trade group representing nonprofit housing developers, told the Times that high insurance costs could “threaten to end affordable housing development as we know it.” This could lead to increased homelessness and damage the banking sector, which has billions of dollars invested in federal tax credits, according to the report.
But, market rate housing is also negatively impacted by the higher costs. Nationally, rent growth has slowed to .9% this year. That is a far stretch from the nearly 30% increase in insurance costs. Multifamily developers with new projects—already working on thin margins—will have trouble making those numbers work.
How To Navigate the New Normal in Property Insurance
Thankfully, insurance premium increases have slowed this year, and multifamily owners and developers are expecting prices to stabilize. unfortunately, high premiums are now the new normal, and property owners are still struggling to absorb the higher costs into existing business plans. First, developers and owners should lean on capital markets professionals to help them find options. Capital markets professionals are navigating through the high insurance market and working closely with capital providers to either adjust guidelines to reflect the new market or finding alternative capital solutions. Capital professionals recommend starting early, at least 90 days before an insurance renewal, to work through potential options.
Developers and owners can also optimize processes by leveraging automation and smart technologies. Modern real estate development software like Northspyre can help manage budgets – including accounting for high insurance premiums. Northspyre’s Anticipated Cost Report functionality allows you to stop relying on siloed, backwards-looking data and instead get a 360-degree view of your project financials in real time. You can also forecast what could happen with forward-looking, actionable insights, allowing you to take informed action to prevent unplanned future costs.
Northspyre’s Insurance Data Index can also play a key role in helping you overcome challenges with certificate of insurance (COI) management, further lowering insurance-related risk. This tool makes it easier for your team to track active insurance and identify upcoming expirations or missing coverage. Users can set requirements for each policy type which the COI Co-Pilot feature then uses to proactively notify vendors when COIs are missing or expired.
Read our ebook on Lowering Insurance-Related Risk on Real Estate Projects to learn more strategies for streamlining COI management and keeping development projects on track and on budget.