The cost of insurance for property owners is steadily increasing, as reported by the Deloitte Center for Financial Services. They predict that by 2030, the average monthly cost of insurance for a commercial building in the US could reach $4,890 from its current rate of $2,726 – an 8.7% compound annual growth rate.
This rise in insurance costs not only affects CRE ownership’s bottom line but also has a significant impact on overall property values. In fact, multifamily properties have seen a decline in value since Q4 2019 due to rising insurance expenses. The South-Central region and Florida have experienced some of the most severe declines at -7.8% and -6.8%, respectively.
However, there are some positive developments amidst these rising costs. Despite paying higher premiums in South Florida, multifamily owners have been able to mitigate some impact due to strong renter demand and continued rent growth.
Moreover,
insurance costs are starting to stabilize across all regions since mid-2022 with Q2 2024 marking the first quarter with lower growth rates.
Another factor contributing towards improving market conditions is higher absorption rates compared to new supply levels during Q2 2024.
As per experts’ predictions,
this trend will lead towards above-average rent growths across most markets as well as stabilization of cap rates when interest-rate cuts occur through Federal Reserve policies.
Despite high expenses currently faced by multifamily property owners,
it is expected that values will surpass their previous peaks around mid-2027 thanks
to shrinking supply pipelines driving up rental prices once again.
