Commercial real estate professionals are acutely aware of the sharp increase in insurance costs and they have plans to navigate around it.
A recent survey conducted by the Federal Reserve Bank of Minneapolis provides concrete data on this trend. The study, which included 35 property owners managing nearly 45,000 housing units across Minnesota, Montana, North Dakota, and South Dakota, revealed an average annual premium increase of 45% between 2023 and 2024.
“‘Something is not right,’ commented a respondent with zero claims and a 200 percent increase in their premiums,” the bank study noted.
It was a so-called convenience sample based on who they could reach easily, not a statistically representative selection. Still, it’s no surprise that insurance has become a big driver of the difficulty in maintaining net operating income and a strong debt-service coverage ratio for the multifamily industry.
The question quickly becomes what owners can do about it. As the bank noted, property owners are trying “all available options to mitigate increased costs.” Within the survey group, one almost universal step was seeking bids from multiple carriers.
Given the complexities of insurance, this might be more difficult than it seems. A cheaper quote could depend on less complete coverage. One company might have a reputation for being particularly difficult about settling claims. Saving money doesn’t help if there is little cooperation in addressing a situation.
A respondent to the survey highlighted reducing coverage, which always involves some degree of trade-off. An alternative is to raise deductibles, which leaves overall coverage but increases the out-of-pocket burden.
Half of the survey respondents undertook resiliency measures intended to make their properties more resistant to damage from wind, flooding, or changing construction materials. These measures included updating roofs and improving maintenance.
However, there was an unsuspecting surprise. Some of the owners said that despite efforts in greater readiness, there was no change in their premiums.
One of the biggest impacts was on affordable housing providers. They are typically restricted from raising rents past a predetermined amount. One noted being “astonished” at how some carriers avoid covering affordable housing. Such factors might over time “jeopardize price stability and housing affordability for low- and moderate-income communities," according to the survey.