Are rising insurance rates threatening affordable housing developers?
Developers of apartment buildings in the United States are facing a daunting challenge as home insurance rates continue to soar.
It is putting the construction of much-needed affordable housing units in jeopardy.
Over the last five years, premiums and deductibles for policies required by mortgage lenders have surged two- to three-fold. This trend is largely driven by increasingly frequent and severe natural disasters.
Particularly, multifamily housing developers in states like California, Florida, Louisiana, and Texas have witnessed triple-digit increases in insurance costs as providers grapple with extreme weather events linked to global climate change.
However, some insurance hikes appear to be unrelated to natural disaster risks. Shifts in crime risk assessments are also causing substantial increases in liability policies and deductibles.
The consequences are dire, as these rising insurance rates threaten the future of affordable housing construction, potentially exacerbating the housing crisis.
How are rising insurance rates affecting affordable housing developers?
The surge in home insurance costs is creating significant challenges for apartment builders, particularly those focused on affordable housing.
Higher interest rates have resulted in financing gaps for projects in progress, hitting affordable housing developers the hardest as they struggle to pass these increased costs onto renters, which goes against their mission of providing affordable housing.
With pandemic relief funds diminishing, bridging these financing gaps has become increasingly difficult.
Additionally, insurance companies are becoming more reluctant to underwrite general liability policies for subsidized apartment projects, either by refusing coverage altogether or raising premiums to unaffordable levels.
This situation poses a substantial threat not only to developers but also to low-income communities that rely on affordable housing options.
What can be done to address the insurance crisis?
The Senate Committee on Banking, Housing and Urban Affairs convened a hearing at the start of September to discuss the growing insurance crisis and explore potential solutions.
To mitigate the impact of rising insurance rates on affordable housing, several measures are being considered.
The US Department of Housing and Urban Development may need to reconsider insurance requirements for developers utilizing subsidies, while the Internal Revenue Service could provide guidance on capitalizing insurance premiums and other expenses rather than expensing them.
In the long term, Congress might need to establish a backstop for insurers, like the National Flood Insurance Program and the Terrorism Risk Insurance Act.
However, addressing this issue at the federal level is complicated, as lawmakers are divided over the root causes of the insurance problem.
While some attribute it to burdensome state regulations, others point to climate change as the driving force.
Regardless of the debate, affordable housing developers and communities are grappling with an immediate threat to their economic well-being, necessitating swift action to ensure the continued availability of affordable housing options across the country.