What do Rising Insurance Premiums and Rents Have in Common?

My favorite bagel shop closed last week. It was a small independent business that had the best bagel sandwiches around. They were so good that I would drive 30 minutes from my home just to get one. The owner said inflation killed his business and he just couldn’t survive with the cost of everything going up - insurance, food, utilities, taxes, etc. That made me angry. 

In last month’s edition of The Ledge, I talked about the impact of federal interest rate increases and inflation on housing supply. And, to that end, how the looming recession has paused many apartment development plans. In this edition, I’d like to discuss how all these factors affect insurance rates for the multifamily industry and help shed some light on the uncertainty in the market as insurance carriers tighten the reins which increases the rates an owner or investor has to pay.

Housing providers, whether big companies or small independent owners are impacted by inflation as well. One of the biggest cost increases have come by way of insurance premiums. The cost of doing business has become extraordinarily expensive and we, as the consumers, feel it. For example, at everyone's favorite discount dollar store, the price of everything has gone up from $1 to $1.25+. That’s the way businesses operate; the costs end up in the pricing.

The multifamily industry has seen insurance premiums double over the last three years. And apartment owners are also faced with increased deductibles and self-insurance limits.  A rental housing provider’s insurance policy typically includes general liability, property, and even loss of rent coverage.

Insurance is an operational expense and is categorized as a non-variable cost. These are costs that one has limited or no control over such as property taxes, insurance, and utilities.  Variable costs are those that change over the course of the year and can be easily influenced by the decisions a business makes. Those would be your repair and maintenance, landscaping, renovations, marketing, advertising and so forth.

You may ask, what’s driving these insurance premium increases? The COVID pandemic was one factor, but uncertainties in the market caused by inflation and supply chain challenges that have dramatically increased the cost of building materials is another. These costs shift to the insurer in the case of a claim. Hence, increased costs result in increased rates.

With all the attention on rising rents, I thought it would be valuable to share one of the primary reasons rents increase. This month’s reason: rising insurance premiums.