Hawaii Wildfire Tragedy Highlights the Shifting Risk Landscape for Housing Providers

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As extreme weather events become more common, multifamily firms face more challenges in preparing for and mitigating the risks.

As the wildfires in Maui have been contained, the scale of the tragedy is starting to be realized. The nation mourns the loss of more than 100 lives and the devastating effects on property, including the more than 2,000 homes and business that burned. The devastation is a solemn reminder of the far-reaching impact that wildfires can have on geographical areas that historically have not faced this threat.

It also underscores the challenges facing rental housing providers as extreme weather events like wildfires continue to massively disrupt the insurance market. Higher costs and limited coverage options are increasingly become the norm, stressing the investment in and operation of rental housing.

Housing providers are evaluating their portfolios with a keener eye toward the increased risk of potentially catastrophic events. However, the great uncertainty permeating the insurance market underscores the need for policy interventions to ensure rental housing providers continue to have access to cost-efficient insurance products. Without those risk-management tools, the health of the rental housing market remains in jeopardy at a time when the need for more affordable housing grows.

Extreme Weather Events Fuel Insurance Crisis

The multifamily industry has faced a volatile and costly insurance market for nearly a decade. Apartment firms of all stripes (market-rate, workforce, affordable) have been affected, as the costs of all lines of insurance (property, liability, cyber) have risen.

Property coverage, in particular, has become more expensive, less comprehensive, and sometimes unavailable. Inflation on construction and labor costs, depleted insurance market capacity, greater frequency and severity of catastrophic events, and historical changes to the reinsurance market have all contributed to the volatility.

Extreme weather events such as wildfires and storms have become a significant factor in the insurance equation. Results from the National Multifamily Housing Council’s 2023 State of Multifamily Risk Report, which included survey data from 160 multifamily firms representing ownership of 1.6 million apartment homes, demonstrated some of the financial impact extreme weather events have had on multifamily firms recently.

The survey asked respondents what their largest losses were in the last three years. Nearly one-quarter of responding firms (24.6%) said their biggest losses were related to the Texas and Southern U.S. freeze of 2021. Another 23.8% of respondents said fires drove their biggest losses, while 16.2% pointed to water damage/flooding and 7.7% identified windstorms/tornadoes/lightning as driving major losses.

Not only do losses like this strain balance sheets, but they also tax property operations, often leading rental housing providers to make the tough choice of deferring maintenance or cutting coverage. These dynamics are impacting valuations, disrupting transactions, deterring investors, and leading to growing areas of uninsured risk.

Housing Providers Take More Precautions

Sadly, devastating fires like the one in Maui are becoming more common. The Western region—and California in particular—has also been caught in a challenging cycle of drought and wildfire. And the forecast doesn’t seem to be improving.

The changing climate has increasingly shifted wildfire season from a few months of prevention and response to a year-round crisis threatening denser areas of the West. The threat of wildfires is here to stay, and preparedness is critical for rental housing providers and residents.

Wildfire resilience planning requires a focus on preparedness, long-term strategy, and relationships with external partners and community leaders. Both the Federal Emergency Management Agency and Ready.gov have tips and tools to help rental housing providers plan for wildfires and other extreme weather events, as well as mitigate risk for their residents and assets.

As more areas of the country find themselves at great risk, some apartment firms are also looking at resiliency strategies when designing, building, or renovating communities. Everything from community infrastructure planning to specific construction techniques can reduce building ignition risk and protect from wildfire damage.

Insurance Challenges Necessitate New Policy Interventions

With the threat of wildfire and other extreme weather events growing in lockstep with the challenges and costs in the insurance market, rental housing providers are finding themselves in a tough position.

Many are forced to scale back coverage or opt for higher deductibles to control for higher costs, increasing risk exposure and affecting operations and services. This situation is having particularly acute effects in the lower- and middle-income housing space, where it can be more difficult to offset higher costs. More pressure on these types of housing providers only further exacerbates the nation’s housing affordability crisis.

The outlook for improvement in the insurance market looks rather bleak as more insurance providers exit tranches of the market and specific geographic areas. This problem is evolving into a full-blown insurance crisis in places like California and Florida, which have been hit hard in recent years by extreme weather events.

Policymakers are increasingly aware of the direness of the problem. They are looking at new programs and tools that can provide more transparency around risk and costs and improve access to cost-effective insurance products. Finding solutions that balance the needs of insurance providers, rental housing providers, and residents is a challenging necessity. An uninsurable housing market is an unsustainable one given the ever-growing demand for housing.

Source: Multifamily Executive