Rising insurance costs have significantly impacted multifamily property values across the U.S., with Sun Belt markets feeling the brunt. Since Q4 2019, multifamily property values have dropped by 3.6% nationwide due to increasing insurance premiums. However, the South-Central region and Florida have experienced even sharper declines, with values falling by 7.8% and 6.8%, respectively.
The Hardest-Hit Markets
Among the most affected cities, Houston and Jacksonville led the downturn with property value drops of 11.1% and 9.6%. In contrast, Oklahoma City (-3.8%) and West Palm Beach (-5.0%) were the least impacted within their regions.
While South Florida has seen some of the steepest rises in insurance premiums, the value impact has been less severe than anticipated. Resilient renter demand and extraordinary rent growth in 2021 and 2022 helped mitigate the effects of rising insurance costs on net operating income (NOI). Similarly, California’s high insurance costs, driven by wildfires and environmental risks, have had a limited impact due to strong rent increases.
Signs of Stabilization
Q2 2024 marked a turning point, as nationwide insurance cost growth began to moderate for the first time since mid-2022. Even in Florida, where premiums have doubled over the last two years, the pace of growth slowed.
Despite representing only 8% of total multifamily expenses, insurance has contributed 17% to total expense growth since 2019. While insurance costs have been a significant driver of overall expense growth, other factors like higher cap rates, rising vacancy rates, and lower rent growth have had an even greater impact on property values.
The Road Ahead
The multifamily market may finally be on the cusp of recovery. Improved renter demand led to absorption outpacing new supply in Q2 2024, and a shrinking development pipeline is expected to drive rent growth above historical averages. Stabilized cap rates, combined with anticipated Federal Reserve interest rate cuts, are likely to boost investor demand.
For the first time in over two years, many markets are seeing their multifamily property values rise. While elevated expenses will remain a challenge, market conditions point to potential value recovery in certain markets as early as mid-2027.
Looking Forward
Sun Belt markets like Houston and Jacksonville may have been hit hardest by rising insurance costs, but improving fundamentals suggest a brighter future for multifamily values. As these markets regain momentum, opportunities for investors and operators will likely emerge, highlighting the resilience of multifamily real estate in dynamic economic conditions.
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