How do Insurance Increases Affect Owners of Multifamily Properties

Written By Cliff Hockley

Property insurance costs for multifamily properties in Oregon and Washington have risen sharply in recent years reflecting national trends.

Property insurance premiums have increased  up to 26% per year over the last five years, reaching an approximate cost of $697.00 per unit per year and marking the seventh year of  double-digit increases.

In Oregon a survey by the Oregon Housing Community services found that from 2019 to 2022 about 49% of the people who responded, reported insurance premium increases of 51% or more and 26% reported increases of 100% or more.  This is a reflection of insurance for  low-income housing in particular. According to HFORE a  Portland commercial apartment brokerage company insurance costs for older buildings have risen sharply with premiums reaching up to $4000 per unit per year

Factors that drive insurance increases

Oregon's multifamily properties face elevated risks from fires, floods, earthquakes and severe storms that have driven up insurance costs and coverage requirements.  This is similar to increases  for insurance costs across the country for multifamily properties that also face hurricanes, tornadoes and tropical storms. It's also a reflection of very dry forests and a climate driven increase in heat which affects weather patterns throughout the USA.

Examples of major damages can be seen in the  number of homes and properties that were damaged in Southern Oregon in 2021 as well as the recent California fires ( Pacific Palisades and Powerlines fires to name two).  Unfortunately, most properties are not built using  materials that are resistant to fires.  Due to the many losses many insurance companies are leaving markets they deem too risky,  which means the players who are left have a little bit of room to increase their pricing to assume the increased risk. 

Both Oregon and Washington insurance rates are also affected by increased costs of construction particularly  with increased material costs. Changes in insurance and reinsurance markets  have also contributed to higher premiums.   

Additionally, the surge in pricing is also tied to increased or stricter underwriting.  The impact of these changes  means less coverage. Housing providers are being faced with increased deductibles, reduced coverage or exclusions in order to  have some level of  insurance in place as required by existing financing  i.e. lenders

Legal and regulatory changes  as well as claims history and building age have also forced increased insurance premiums. 

Older Properties are struggling to find insurance coverage

Many insurance companies have been leaving multifamily insurance due to the age of properties. Properties that are sixty or seventy years old,  that have not replaced plumbing and electrical systems and  have not installed fire suppression systems or fire monitoring systems are seen as higher risk and are driving an increase in insurance costs as well.

Lenders of course are also concerned about coverage because they have properties spread all over that are at risk. Properties that are built using the most recent International Building Code (IBC) are more resistant to fire and damage than buildings that were built 70 years ago. In other words, wood frame buildings built in the fifties,  sixties, seventies or eighties are more susceptible to fire and have a higher risk factor.

The International Building Code  has been in place for some time in Oregon and keeps getting updated every three years.  This newer code protects more and more multi- family properties and of course reduces the risk for insurance companies. Financial institutions are most likely reviewing their risks.  We can see this in their  increases to premiums and  refusal to insure many from older buildings.  Some insurance companies are requiring major property upgrades if property owners want to obtain insurance.

Rent Control 

You might think building owners could pass on these increases in their rents, but there is rent control in Oregon and Washington ( as well as in many other states) with significant increase limitations.  Even though Insurance is a relatively small component of building operating expenses ( about 8% in 2023 according to the National Apartment Association)  the constant pattern of significant annual increases  makes operating a multifamily property even more difficult as their expenses are rising aggressively as well and it is difficult to pass on these costs to tenants.

 In Oregon increases are limited to 7% per year plus CPI  for a maximum of 10%.  Washington’s rent control is limited to 10% as well.  Owners of buildings built in the last 10 years in Oregon  and Washington are not quite as affected as owners of older buildings because they have some flexibility and can increase rents using the 15-year developer exclusion in Oregon and a 12-year developer exclusion in Washington. Oregon's rent control is permanent unless repealed. Washington's law ends July 1, 2040, when it will probably be renewed by the legislature.

Conclusion

Unfortunately, we can expect a constant pattern of increases in property insurance as  Insurance companies continue to lose money. In 2023, insurers lost money on homeowners’ coverage in 18 states, more than a third of the country, according to a New York Times analysis of newly available financial data.   They also lost money on Multifamily properties for similar reasons.

The impact of these increases and in some cases, means that Owners need to plan ahead and forecast potential property damages and protect against them.  For example, in an area with flooding risk, move HVAC units to a higher level, or build using fiber cement siding such as Hardiplank rather than wood or vinyl siding to reduce fire damage risk or install  heavy duty roofing materials that can resist high wind power storms.

Additionally, many Multifamily owners are trying to manage the stiff increases by self-insuring for risk by not reporting smaller claims, say under $25,000, and paying for the repairs through their cash flow, plus increasing their insurance deductibles significantly to reduce the premium costs.  

Bottom line is that Multifamily owners need to consider the ability to insure a property, potential property renovations and upgrades and the cost of annual increases as well, as they make decisions to buy their next multifamily investment.


Sources 

Clifford A. Hockley, CPM, CCIM, MBA

Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services in 1986 and successfully grew the company from 10 to almost 100 employees, with over Two Billion dollars of real estate under management. He then merged with Criteria Properties in 2021 to establish Bluestone Real Estate Services, where he still serves as an associate broker.

In 2023, Cliff formed a real estate consulting practice, Cliff Hockley Consulting, LLC. designed to help real estate business owners, managers and investors improve their bottom line.

Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate related topics.

Cliff is the author of two books 21 Fables and Successful Real Estate Investing: Invest Wisely Avoid Costly Mistakes and Make Money, books that help investors navigate the rough shoals of real estate ownership. He can be reached at 503-267-1909, Cliffhockley@Outlook.com.


Cliff Hockley
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