The U.S. multifamily and industrial real estate sectors are facing tightened insurance terms following unprecedented losses in 2023.

Rising Costs

U.S. housing construction reached its highest level in 36 years in 2023, with 440,000 new apartment units completed. Of these, 81% (356,400 units) were built using wood framing, which insurers have long viewed as a higher-risk material due to its fire vulnerability. With fire-related damages totaling $10.8 billion last year, insurers are becoming more cautious about covering multifamily properties, leading to liability insurance rate increases of 10% to 20% for property operators.

Regional Impact

The South-Central U.S. has been hit hardest by rising insurance costs, with property values declining by 7.8%, including an 11.1% drop in Houston. Florida saw a 6.8% decrease, led by a 9.6% decline in Jacksonville. Other cities like Oklahoma City (-3.8%) and West Palm Beach (-5.0%) experienced smaller decreases.

Insurance Premiums

Along with rising premiums, insurers are also reducing coverage limits. Larger multifamily portfolios are seeing policies shift toward a $2 million per occurrence/$4 million aggregate structure. Common exclusions, such as acts of violence, dog bites, and claims related to abuse, are becoming more prevalent as insurers respond to increased risk.

Industrial Market Impact

The industrial sector has also seen substantial growth, with 1.8 billion square feet of new space built since 2020, surpassing the total industrial space constructed in the previous decade. Insurers are paying closer attention to tenant diversity and fire safety measures, particularly compliance with National Fire Protection Association standards. Older industrial properties are subject to even more stringent underwriting due to occupancy risks.

Key Takeaway

Although insurance expenses only represent 8% of total costs, they have contributed to 17% of overall expense growth since 2019, becoming the second-largest driver of multifamily cost increases. However, strong renter demand and a slowdown in new supply are expected to balance out the pressure from rising insurance costs, which could support a recovery in property values.