Developers of apartment buildings across the US are raising alarms as property insurance rates continue to rise, a trend that threatens to seal off the pipeline for much-needed housing construction — especially new apartments with affordable units.
Premiums and deductibles for policies required by mortgage lenders have shot up two- to three-fold over the last five years, frustrated developers say. Increasingly frequent and severe natural disasters are fueling these changes across the industry. Multifamily housing developers in California, Florida, Louisiana and Texas in particular — but not exclusively — are seeing triple-digit increases in costs as insurance providers adjust to extreme weather connected to global climate change, according to industry leaders.
But some of the increases appear to have little or no connection to risks related to wildfires, floodwaters or storm winds. Shifts in the way that insurers rate the risk of crime have hit projects with subsidized units with steep hikes for liability policies and deductibles, affordable housing developers say. In some cases, insurers are even declining to write coverage for affordable developments altogether.
“Mortgages have requirements that nowadays can’t be met with primary insurance providers,” says Barry Kahn, president and CEO of Houston-based developer Hettig/Kahn Companies. “It’s going to result in a lot of affordable housing getting lost if something isn’t done.”
The insurance rate hikes come amid a surge of multifamily construction: Record levels of new apartments have come online over the last two years as the US has emerged from the pandemic-era fears of an eviction emergency, a building boom that’s kindled hope for cities suffering from a critical shortage of affordable units. But developers warn that the housing crisis will worsen if lawmakers don’t intervene quickly.
Disparate Impact
Apartment builders now face several new challenges. Higher interest rates have led to financing gaps for projects in the works. These gaps are particularly hard on affordable housing developers, who have a limited ability to pass along higher costs to renters. After all, rent hikes run contrary to their affordable housing mission, and in any case rents for subsidized projects are restricted by statute. With pandemic-era relief surpluses dwindling, it’s harder for affordable developers to bridge these financing gaps, leading deals to idle or even fall apart.
A rapidly shifting landscape for property insurance is making matters that much worse: Rising premiums, higher deductibles and reduced coverage are pushing costs higher while also raising conflicts with lenders and investors.
Michelle Norris, executive vice president for the nonprofit National Church Residences, testified before Congress on Sept. 7 about how rising rates have hurt the faith-based housing provider. Over the last six years, premiums for National Church properties, which house some 20,000 low-income seniors across 23 states, have risen from $2.5 million to more than $13 million — an increase of over 400%, far outpacing the growth of the nonprofit’s portfolio.
“In recent years there has been little room left for negotiation,” Norris told the Senate Committee on Banking, Housing and Urban Affairs. “Carriers have increased premiums and raised deductibles but adopted a ‘take it or leave it’ approach.”
Affordable housing developers aren’t alone in facing rising rates. Multifamily operators face the same pressures that have walloped single-family homeowners in states prone to natural disasters. Dozens of insurance carriers in Florida and Louisiana have gone insolvent, for example, raising costs for Gulf Coast builders and increasing the strain on carriers left standing — to say nothing of the worries for residents.
But affordable housing providers face a problem others don’t: Insurance carriers are increasingly declining to underwrite general liability policies for subsidized apartment projects or raising their premiums to prohibitive levels. Not only do these insurance practices put stress on affordable housing builders, they can have a disparate impact on low-income communities.
“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,” Norris said.
In her testimony, Norris pointed to third-party “crime score” methodologies that insurance providers rely on to rate the risk of underwriting multifamily properties. A surge in certain kinds of violent crime during the pandemic could be linked to higher costs for apartment owners with assault and battery coverage, for example. But industry surveys of large multifamily operators show that insurance costs are higher in every category, not just coverage associated with crime.
Sharon Wilson Géno, the president of the nonprofit National Multifamily Housing Council, says that eviction moratorium orders changed the way that landlords and judges treat criminal activity in rental housing. While even the strictest eviction orders allowed landlords to evict tenants for violence or criminal activity, the moratoriums may have affected insurance industry perceptions of crime risk.
“Jurisdiction by jurisdiction, property by property, there’s a sense among affordable housing developers that judges have become more lenient than they have in the past. They want to keep people in their homes,” Géno says.
Crime is a factor cited by affordable housing providers across the country for insurance struggles, according to David Gasson, a lobbyist and executive director of the Housing Advisory Group, a national advocacy organization. But he questions how insurance carriers could be rating crime risk fairly, given the messiness of national crime data and the broad pitfalls of bias surrounding affordable housing. And indeed, Gasson says that some insurance companies refuse to insure affordable housing developments because of the residents they serve. Gothamist reported that dozens of carriers in New York explicitly refuse to underwrite buildings with low-income tenants.
Insurers don’t share their formulas for how they evaluate risk, but Gasson points out that least some of their decisions appear to be built on arcane logic.
“We found instances where an affordable housing development was going up in Arlington,” he says, referring to the Virginia city outside of Washington, DC, “and because there might have been an incident across the Anacostia River in Maryland, that would affect the development and Arlington’s ability to get or afford liability insurance. Simply because something happened at or around a similar type of development 20 miles away.”
Deal Breaker
While the causes of the trend are murky, the impacts are concrete. Developers might get a quote from an insurance company during the financing stage that will increase by an order of magnitude by the time contractors are ready to break ground. “For new construction projects, you may have pro forma’d that at $300 or $400 per unit. It may come back as $1,300 or $1,400 per unit,” says Géno. “Our members are seeing that and really struggling with how to do those deals.”
The situation is so dire that in June, the National Association of Home Builders adopted an emergency resolution urging policymakers at all levels of government to take action. The resolution states that private insurance providers are “increasingly and dramatically raising insurance rates and deductibles for affordable housing.” It further states that “rent-restricted rental housing … is increasingly not feasible in many areas of the US due to these high insurance costs.”
To address the issue, Norris said in her testimony that the US Department of Housing and Urban Development may need to rethink insurance requirements for developers who use subsidies. The Internal Revenue Service could provide guidance to allow insurance premiums and other costs to be capitalized rather than expensed. Over the long term, Congress may need to set up another backstop for insurers, just as lawmakers did with the National Flood Insurance Program and the Terrorism Risk Insurance Act.
But with lawmakers divided over the root of the insurance problem — in the Senate hearing, Republicans blamed burdensome state regulations driving out carriers; Democrats pointed to a lack of action to arrest climate change — federal efforts to address it may not be on the immediate horizon.
“This can’t wait,” Gasson says. “It’s a direct and immediate threat to the economic well-being of the country.”