The Rogue Wave: Rising Insurance Premiums and the Impact on Multifamily Valuations

The Rogue Wave: Rising Insurance Premiums and the Impact on Multifamily Valuations

Insurance has always played a role in the real estate industry to protect assets from potential risks. Recently, due to the increasing frequency and severity of natural disasters, there has been a significant impact on insurance premiums. In 2022, the U.S. experienced 18 separate weather-related disasters, costing over $1.0 billion each and totaling approximately $165 billion in damages. These recent events have prompted a need for new practices, policies and underwriting processes for insurance companies. Based on recent data from AON, the fourth quarter of 2022 was the 20th consecutive quarter of increasing rates, unprecedented in recent history.

Hub predicts insurance premiums for the Multifamily sector will increase 20% on average in 2023 and as much as 200% in high-hazard zones. According to a report from USI Insurance Services, properties with less optimal risk profiles will see rate increases of 25% up to 150% in the first half of 2023. Properties that fit a “less optimal risk profile” are catastrophe exposed or non-catastrophe exposed with a poor loss history or poor risk quality. Catastrophe-exposed property with minimal loss history and good risk quality will experience rate increases between 15% to 50%. In addition to catastrophes, a second factor contributing to the premium increases is the impact of a substantial replacement cost increase because of the inflationary environment for labor and building materials.

An increase in insurance premiums reduces the NOI of a property, negatively impacting valuations and therefore returns. Alliance Global Advisors (Alliance) believes it is essential for Managers to stay informed about the role of insurance in their portfolio of assets to be prepared to navigate this evolving landscape. In this blog, Alliance interviewed several Managers active in the Multifamily sector to understand the challenges rising insurance costs are creating for their portfolios and the evaluation of new investments. 

We thank Ravi Ragnauth, Chief Financial Officer at Berkshire Residential InvestmentsDamian Gancman, Chief Operating Officer and Chief Financial Officer at CityviewErin Ankin, Managing Partner and General Counsel at Waterton and Stephen Spook, Senior Investment Officer at SBA Florida for contributing to this article.

Q: What are the differences in pricing or coverage across the different Multifamily sub-types?

Damian Gancman, Cityview: At Cityview, we hold several types of insurance for our projects. Builder’s risk insurance helps protect our development projects from incidents that might occur during construction, such as water damage, arson or stolen materials. Our OCIP liability policy covers liability that could lead to water damage, such as a faulty roof that results in a leak. Our operations policy covers everything liability and property-related for existing buildings. The building’s construction type, age, geographic region and catastrophe (CAT) risk for events such as wildfires, earthquakes, drought and severe storms all impact pricing.

Q: In general, how much have you seen insurance costs increase (or decrease)? Is this dependent on any specific factors?

Damian Gancman, Cityview: While some insurance sectors are seeing market conditions soften, the property market is seeing some of the hardest conditions in decades. According to our insurance broker, Lockton, average prices have increased 25-50% without CAT coverage, and 50-100% or more with CAT coverage. At Cityview, we’ve seen an increase of 20-25% or more each year.

CAT disasters have increased not only in frequency but severity, with 18 events in 2022 that are expected to exceed $1.0 billion each in the U.S. Over the weekend of April 1 – April 2 alone, more than 800 severe weather events were reported nationwide. Fires, earthquakes and flooding are of particular concern in some West Coast markets, where several of our properties are located, which drives up premiums. High inflation, widespread supply chain issues, rising material costs and labor shortages are additional contributors to increasing costs.

Ravi Ragnauth, Berkshire Residential: The 2023 premium increase over 2022 varies from $115 to $360 per unit, around a 50% increase, depending on the location. Coastal markets have a higher year-over-year increase at approximately 60-100%.

Q: What factors make the most difference regarding increased insurance costs (asset location, vintage of asset, exposure to climate risk, etc.)? 

Ravi Ragnauth, Berkshire Residential:  The location was one of the most important factors that drove insurance cost changes. The type of construction was also a significant factor related to the increase in premiums. Assets with wood-frame construction saw a much more sizable increase from feedback from the broker.

Damian Gancman, Cityview:  All of these factors are significant contributors to increased insurance costs.

Q: Have you seen these changes impact transaction pricing (assets on the market for sale)? If so, by what magnitude?

Damian Gancman, Cityview: The increase in insurance costs has a direct impact on NOI and operating costs, which affects transaction pricing. The magnitude varies based on a wide variety of factors, including the specific market and product type, the investor’s risk appetite and geographic variables.

Ravi Ragnauth, Berkshire Residential: Insurance has been a contributor to the change in value, however, there are other factors that are driving changes in transaction pricing, including real estate taxes and interest rates.

Q: How can real estate managers understand if their insurance premiums are considered market rate?

Damian Gancman, Cityview: It’s important to shop different policies, work closely with a broker to understand your options and diversify your portfolio as much as possible to help reduce risk. The more focused a portfolio is geographically or otherwise, the higher the risk. At Cityview, we target Opportunistic and Value-Add projects throughout the Western U.S., Colorado, the Pacific Northwest, California, Arizona, Utah and Texas, which helps mitigate our risk.

Erin Ankin, Waterton: Carriers offer a wide range of services beyond just insuring against losses.  Many carriers offer risk management services to assist real estate managers in minimizing and addressing risk. For example, carriers often provide seminars or other learning opportunities regarding current risk issues and have experts available to assist with an insured’s risk questions.  Carriers also assist managers in maximizing risk transfer opportunities whenever possible such as, for example, through vendor contracting requirements. Real estate managers should therefore view the carriers as their partners in risk mitigation efforts and take advantage of the myriad services they offer.

Q: What are some common mistakes that real estate managers make when selecting insurance companies/brokers/etc.?

Ravi Ragnauth, Berkshire Residential: Not focusing on the depth of experience of the brokerage team with respect to their underwriting skills and dealing with a challenging market.

Damian Gancman, Cityview:  A broker’s knowledge and reach is critical. These policies can be very large, and there isn’t just one insurance company involved, so a good broker can help managers understand the intricacies of each policy, what’s happening in the market, how to mitigate risks and different policy options that might get you the same or better coverage more economically or with more controllable costs. The more volume and portfolio growth you have, the greater negotiating power you have when it comes to insurance. At Cityview we also hire a separate risk management consultant. Many brokers have claims departments that serve this function, but we’ve found value in having a separate consultant that can be an advocate when we do have claims. It’s an additional cost, but we have seen the financial benefits for our projects.

Q: What trends are you seeing across markets? Are any new insurance products emerging that you would recommend investors consider?

Ravi Ragnauth, Berkshire Residential: There is now a renewed focus on Captive Insurance Programs, given the limitations on capacity and the increases in premiums based on the recent renewals.

Q: Are you utilizing a consultant to optimize insurance costs across your portfolio? If so, who would you recommend?

Damian Gancman, Cityview: We have a longstanding, strong relationship with Lockton, but there are instances when we use other brokers as well. It’s helpful for us to compare the offerings and see what’s available. We think it is critical to understand the market and stay up to date on the latest developments and trends, and a good way to do that is to be continually talking to different industry professionals. 

Erin Ankin, Waterton: In addition to employing a broker, we do use an insurance consultant to assist us in ensuring that we are obtaining the right coverage at the right price. In the increasingly challenging insurance market, it is important to have an experienced team evaluating coverage from every angle and working with the carriers so that the bound insurance program sufficiently meets the organization’s insurance needs.

Q: Are there any new solutions being examined by your team in this space

Damian Gancman, Cityview: Our main focus is on investing in quality product, which helps drive value for investors while reducing risk and mitigating potential defects.

CONCLUSION
Rising insurance costs are taking center stage for Multifamily Investors as premiums continue to increase materially. The increase in premiums is primarily attributed to various factors, including catastrophic risks, location, type of construction, inflation, labor shortages and supply chain issues. In an already challenging investment environment, the uncertainty of future insurance costs in select markets along with higher debt costs and property taxes is another variable for Investors to contemplate in transaction pricing. Additionally, the increasing insurance costs raise more significant concern for Multifamily relative to other property types because the increases cannot be passed directly through to tenants without impacting the ongoing housing affordability issue.                

Managers should pursue a comprehensive approach to address insurance needs, including working in partnership with their carriers to mitigate risk, leveraging the resources of their insurance broker and considering working with a third-party insurance or risk consultant. An insurance broker can provide valuable guidance for understanding and designing an insurance strategy offering the optimal cost and risk mitigation combination. Managers must evaluate a broker’s experience and resources to access a breadth of policy options, particularly in challenging market environments. A third-party insurance or risk consultant can provide an independent assessment of whether the insurance coverage is appropriate and the right price and guidance on trends in the insurance industry.   

Read more: https://alliance-globaladvisors.com/blog/the-rogue-wave-rising-insurance-premiums-and-the-impact-on-multifamily-valuations

Sarah Hunt

Senior Associate, Business Development & Capital Relations

Ms. Hunt joined Cityview in 2021 and is a Senior Associate on the Business Development & Capital Relations team.  She is primarily responsible for relationship management, investor communications, and marketing collateral.  Additionally, she works closely with internal functional teams on due diligence efforts and supports investor reporting and special projects.  She is also a member of Cityview’s Sustainability Committee focused on communication of ESG initiatives to investors.

Ms. Hunt has over six years of real estate investment, capital formation, and investor relations experience.  Prior to joining Cityview, she was an Associate with Chicago-based Magnolia Capital.  During her tenure, she worked on equity capital raises for numerous real estate investment vehicles.  Prior to Magnolia, Ms. Hunt was a Financial Analyst with LaSalle Investment Management where she oversaw the financial performance of assets with over $1 billion in value.

Ms. Hunt received her Bachelor of Business Administration degree in Finance, Investment, and Banking from the University of Wisconsin-Madison.

Ramtin Esfandiari

Director, Acquisitions

Ramtin Esfandiari joined Cityview in 2018 and is responsible for managing acquisitions, including sourcing, underwriting and closing multifamily development deals. Prior to joining Cityview, Ramtin was on the Acquisitions team at The Bascom Group where he underwrote over $9 billion in multifamily acquisitions across the U.S. and supported all aspects of the acquisition process. Ramtin holds a Bachelor’s Degree in Business Economics from the University of California, Irvine, and is an active member of Urban Land Institute.

Jonathan Anderson

Controller

Jonathan Anderson is the Controller of Cityview and provides leadership and oversight over the finance, accounting, and shared services departments.  Prior to joining the Cityview team, Jonathan worked at CIM Group where he held several finance and accounting roles during his tenure, most recently as head of private fund reporting and prior to that as director of SEC reporting for one of CIM Group’s publicly traded REITs.  Jonathan began his career in Ernst & Young’s assurance practice where he served both public and private clients in the real estate and asset management industries.  Jonathan graduated from the University of Southern California with both a bachelor’s degree in accounting and a bachelor’s degree in business administration with an emphasis in real estate finance.

Tina O’ Brien

HR Manager

Tina O’Brien, HR Manager, is a national and state-certified HR Professional (SHRM-CP, PHRca), overseeing all aspects of Human Resources for both Cityview and Westhome employees. Her experience spans the spectrum of the HR field, including recruitment, employee relations, performance management, benefits, compliance and employee development. She joined Cityview in summer 2021 from a telecom technology firm in Van Nuys, and previously worked for a private real estate investment and property management company in Beverly Hills. Tina is an LA native and she’s committed to helping grow our vibrant, healthy corporate culture here at Cityview.

Noah Watts-Russell

Director Asset Management
Noah Watts-Russell is Director, Asset Management of Cityview. As Director of Asset Management, he oversees Cityview’s value-add portfolio and is responsible for establishing and driving the portfolio business plans to maximize performance and value. Prior to joining Cityview, Noah was an Associate in the Real Estate division at The Blackstone Group where he oversaw over $15bn in multifamily real estate (>70,000 units, covering market rate, affordable and rent-controlled) and worked on over $2bn in total sales and $1bn in refinancing. Prior to Blackstone, Noah managed the FP&A team at LivCor, Blackstone’s multifamily asset management company. Noah holds a Bachelor’s degree in Finance and Economics from Washington University in St. Louis.

Denise Katz

Director Asset Management

Denise Katz manages Cityview’s core and development assets across multiple investment vehicles and is responsible for maximizing the operational and financial performance of the assets.  Denise has over twelve years of experience in real estate. Prior to joining Cityview, Denise was Regional Vice President at CIM Group of a $2.4 billion portfolio in the Western US and Latin American markets. During her time at CIM, she managed end-to-end transitions of development projects, acquisitions, and dispositions of office, multifamily, retail, parking, condominium, and mixed-use projects. She holds a double major Bachelor of Arts degree in International Studies and Psychology from Wilkes University in Wilkes-Barre, PA.

Steve Roberts

Director, Development and Construction
Steve Roberts is responsible for the development of several of Cityview’s ground-up multi-family assets, including due diligence, design, entitlement, permitting, construction, and market delivery. Prior to joining Cityview, Steve managed several nationally award-winning projects as Vice President of Development for Community Dynamics, a Santa Monica based developer of residential and mixed-use communities. Steve has built his career on creating exceptional communities that deliver high-quality housing to residents, first-rate design for neighbors and municipalities, as well as strong financial returns to investors. Steve holds a BA in Urban Studies and Planning from UCSD and earned an MBA and Master of Real Estate Development from the University of Southern California.

Anh Le

Director, Development

After 8 years in the construction industry managed complex multi-use development projects, Anh Le joined Cityview in 2018 as Director of Development. Le manages ground-up developments in Northern and Southern California and leads consultant teams through entitlement, design, permitting, budgeting, contracting, construction management and project turnover. She works closely with designers, neighborhood groups and Cityview’s in-house Asset Management team to deliver best-in-class multifamily projects. Prior to Cityview, Le worked as a project engineer and project manager at Cobalt Construction. Le holds a Bachelor’s of Science in Civil Engineering from the University of California, Irvine.

Kyle Naye

Senior Director, Acquisitions

Kyle Naye is Senior Director, Acquisitions of Cityview.  As Senior Director of Acquisitions, he is responsible for managing acquisitions, including sourcing, underwriting, closing and developing comprehensive business plans for investors.  Naye primarily focuses on non-California markets across the Western U.S., including Seattle, Portland, Denver, Phoenix, Salt Lake City, Dallas, and Austin.  In his role, Naye works closely with the Cityview team to manage and expand strategic acquisitions across the firm’s vertically integrated platform.

Prior to joining Cityview, Naye was a vice president of originations at PGIM Real Estate, where he provided transactions and underwriting oversight for core-plus and high-yield debt vehicles. He also held a prior role at PGIM managing the underwriting, investment committee preparation and closing of $992 million in multifamily, retail and office assets across the Bay Area and Pacific Northwest. At earlier stages of his career, Naye was a senior associate of acquisitions at Clarion Partners, senior real estate analyst at Northmarq and an officer in the United States Navy.

Zory Grigoryan

Director, Development

As Director of Development, Zory Grigoryan is responsible for the full cycle development of several of Cityview’s projects, which includes managing the due diligence, underwriting, entitlement, design engineering, construction processes and turnover to asset management. Prior to joining Cityview, Grigoryan worked for Oakmont Capital as a Project Manager overseeing the development and construction of several multifamily projects. Prior to that, he worked at Cobalt Construction as a Project Manager on the construction of numerous mixed use and multifamily projects. During his career, Grigoryan has been responsible for the development, preconstruction and construction of over 1,500 units.

Grigoryan holds a Bachelor’s of Science Degree in Construction Management from the California State University of Northridge, where he was the top ranked graduate of his year. During his time at Cobalt Construction, Grigoryan was also selected as distinguished alumni by the CSUN department faculty and appointed as ambassador for alumni recruitment by CSUN construction management department’s board of governors committee.

Chris Brown

Director, Capital Relations

Chris Brown is responsible for capital raising and investor relations at Cityview. Chris has over seven years of real estate investment and capital raising experience. Prior to joining Cityview, he was a member of the Fund Advisory team at JLL working on equity capital raises for private real estate investment vehicles. Prior to JLL, Chris worked on the Portfolio Management team at Clarion Partners and the Asset Management team at LaSalle Investment Management. Chris graduated from Florida State University with a Bachelor’s Degrees in Finance and Real Estate. He is a general securities representative.

Dana Gomez-Gayne

Vice President and Associate General Counsel

Dana Gomez-Gayne manages the legal aspects of all project-related matters, including acquisition, development, management and disposition, and advises Cityview on corporate formation and maintenance, insurance, risk management and other legal matters. She was previously an Associate at O’Melveny & Myers LLP and Manatt, Phelps & Phillips, LLP where she represented a variety of clients in real estate, project development and finance transactions. Gomez-Gayne also has a background in fundraising development and worked at Teach For America raising philanthropic funds from regional and national corporations and foundations. She is a graduate of Pomona College and Pepperdine University School of Law.

Chase Ballard

Vice President, Construction Management
Chase Ballard is Vice President of Construction Management at Cityview. He is responsible for overseeing the Construction Management team and their daily operations. Chase and his team are involved in every stage of our value add renovation opportunities, from pre-acquisition through project completion, executing projects that include interior renovations, common area improvements and deferred maintenance. Prior to joining Cityview, Chase was a Director of Capital Projects with Greystar Real Estate Partners.​

Rob Lester

Managing Director, Business Development & Capital Relations
Rob Lester is responsible for business development and capital formation efforts for the Firm’s investment platforms, developing strategic growth initiatives, and creating long-term relationships with investors and partners. He has nearly 25 years of investment banking and private capital formation experience. Prior to joining Cityview, he was Managing Director with Macquarie Capital, and a Managing Principal with Blackstone. ​

Con Howe

Managing Director

Con Howe leads Cityview’s partnerships to finance, assemble and entitle land for development in the greater Los Angeles area. With over 40 years of experience in planning, entitlements and development, he assists all Cityview funds with acquisitions and development strategies. Prior to coming to Cityview he was the Director of Planning for the City of Los Angeles responsible for the Adaptive Reuse Ordinance and zoning to encourage infill housing. Previously he was the Executive Director of the New York City Planning Department.

Shane Robinson

Vice President, Property Management
Shane Robinson is Vice President of Property Management responsible for overseeing Westhome Property Management and their daily operations. Shane has over 20 years of experience overseeing multifamily properties. Previously, Shane was the Regional Vice President for Sunrise Management responsible for the expansion and management for its Los Angeles portfolio. Prior to that he was Regional Portfolio Manager for GHP Management. ​

Melissa B. Delgado

VP, Asset Management
Melissa Delgado is responsible for overseeing Cityview’s asset management and portfolio operations. Prior to joining Cityview, Melissa was a Senior Director at TruAmerica Multifamily LLC where she was responsible for achieving the investment objectives of an $800 million portfolio. Earlier in her career, Melissa was an asset manager for Kennedy Wilson’s Southern California portfolio. Prior to that, she was a Vice President and Head of Marketing at Kepler Capital Markets, an investment bank in New York. ​

Devang Shah

Managing Director, Acquisitions

Devang Shah is co-head of Cityview’s acquisitions activities on the West Coast. He has 25 years of experience in real estate investment, development, design, construction and asset management. Previously, Devang was the principal of Marketcents Inc., an independent project management firm, serving as an owner’s representative to investment firms, builders and developers. Prior to that, he worked was Vice-President at RCLCo, LLC, a national independent real estate consulting firm. ​

Adam Perry

Senior Vice President, Development and Construction
Adam Perry oversees all aspects of the commercial real estate development process from acquisition due diligence and entitlement processing through design budgeting, contracting, construction management, closeout and turnover. Prior to joining Cityview, Adam worked at CIM group as an Associate Vice President of Development overseeing ground up retail, office and mixed-use developments. ​ Adam holds a BA Degree in Political Science and History from UCLA and an MBA from the UCLA Anderson School of Management.

Matthew Falley

General Counsel & Chief Compliance Officer
Matt Falley oversees and directs the company’s legal affairs and is the firm’s Chief Compliance Officer. Matt was previously a partner at Greenberg Glusker Fields Claman & Machtinger LLP, where he represented numerous clients in the real estate industry, including Cityview. Matt holds a B.A. from the University of California, Santa Barbara and a JD from the University of California, Berkeley School of Law (Boalt Hall), where he was a member of “California Law Review” and Order of the Coif.​

Tony Cardoza

Managing Director, Acquisitions
Tony Cardoza is responsible for Cityview’s acquisition activities throughout the West Coast. He has 21 years of experience in real estate investment and management. Previously, Tony ran the investment group for Real Estate Capital Partners in the Western U.S., which developed and acquired over 5,000 multifamily units. Prior to that, he worked for Prometheus Real Estate Group in a land and multifamily acquisitions role on the West Coast. Tony holds a B.A. in Economics from Middlebury College and an MBA from the Haas School of Business at UC Berkeley.​

Jennifer Halvas

Managing Director, Investor Relations and Associate General Counsel
Jennifer Halvas leads the firm’s investor relations team, where she is responsible for maintaining relationships with the investor community, bolstering infrastructure for new and existing investors and helping to develop investment strategies and initiatives. She has been instrumental in securing capital needs for several Cityview funds across a broad base of institutional investors, insurance companies, foundations and endowments, family offices and high-net-worth investors. A 12-year veteran of Cityview, she uses her deep institutional knowledge to create value for investors and the communities in which Cityview works.
 
She was previously at O’Melveny & Myers LLP, where she represented a variety of clients in real estate, project development and finance transactions. Jennifer holds a B.A. with honors from the University of Southern California and a JD from Vanderbilt Law School.

Damian Gancman

Chief Operating Officer and Chief Financial Officer

Damian Gancman oversees the operations of Cityview and its investments while supporting the strategic growth of its finance, acquisition, asset management and property management functions. An 18-year veteran of the firm, Damian is also a partner at Cityview and a member of its investment committee. As CFO, he helped build out Cityview’s best-in-class finance department, including the implementation of strategic process, accounting, reporting and technology improvements that enhance the investor experience.

In addition to his role at Cityview, Damian is a guest lecturer for the University of Southern California’s Master of Real Estate Development program and is a key contributor to the Cityview Leadership Academy. Damian earned a master’s degree in real estate development from the University of Southern California and a dual bachelor’s degree in business administration and psychology from the University of California, Berkeley.

Sean Burton

Chief Executive Officer
Sean Burton has been with Cityview since 2003. Prior to joining Cityview, Sean was vice president of corporate business development and strategy at Warner Bros. Before that, he was an attorney in the real estate and corporate groups at O’Melveny & Myers, LLP and also served in the White House during the Clinton Administration. From 2013 to 2021, Sean served as President of the Board of Airport Commissioners which oversees the LAX and Van Nuys airports. Sean holds a B.A. from the University of California, Irvine and a JD from New York University School of Law.