Key Takeaways
- From 2020 to 2022, expenses for rated multifamily affordable housing properties in the U.S. increased by a higher percentage year over year than revenues; however, on average property owners saw net income per unit increases.
- Rent increases from 2020 to 2022 varied from 37% to 1%.
- Property insurance premiums are an increasing percentage of total expenses, a trend that will likely continue to accelerate.
- Several insurers have announced plans to significantly increase premiums in California in 2023 and 2024 or limit their exposure in states with elevated environmental risks.
Four Types Of Expenses In Our Review
S&P Global Ratings analyzed 2020-2022 expense trends on 60 loans on U.S. affordable housing properties receiving low-income housing tax credits; these properties contain over 6,500 units. The loans were securitized under the Arizona Industrial Development Authority's municipal certificates series 2019-2 and the California Housing Finance Agency's municipal certificates series 2019-1 and 2019-2 loan securitizations. Most of those loans (44) are for properties in California, and the remainder are for 16 properties in Connecticut, Florida, Massachusetts, Minnesota, New York, and Washington. We analyzed the following expense categories: payroll and benefits, utilities, repairs/maintenance, and insurance (chart 1). Overall, we found that these expenses have increased annually, with insurance representing a larger share of the total each year.
Chart 1
Properties across the U.S. have been affected
The properties with the largest increases in insurance expenses are located in diverse markets throughout California, Connecticut, New York, Virginia, and Washington (chart 2).
Chart 2
Insurance premiums continue to rise precipitously
We expect property and casualty insurance premiums for commercial properties, including multifamily, will keep rising through 2023. This is in part due to the material increases in insurance claims resulting from both the greater frequency of weather-related damages and the inflation-affected cost of repairs. The U.S. property/casualty market has reported multiple years of elevated weather-related losses, highlighting the burgeoning threat of climate change and the growing importance of secondary perils like convective storms, wildfires, and flooding that exacerbate losses. (See "U.S. Property/Casualty Insurers Face Declining Investment Values And Personal Lines Loss Cost Inflation," published Jan. 25, 2023, on RatingsDirect). In 2022, the U.S. experienced 18 natural disasters with $1 billion or more in damages, according to the National Oceanic and Atmospheric Administration.
Most property insurers obtain reinsurance to offset the costs of major events such as named hurricanes. But reinsurance costs have also risen due to widespread weather-related events globally. S&P Global Ratings believes property and casualty insurers might reduce their use of reinsurance, which could pressure their premiums by exposing earnings over time to natural catastrophe loss.
Revenues outpace expenses
While overall expenses increased by 13% and rents rose at a slightly slower pace, 7.3% from 2020 to 2022, net income per unit increased year over year (see table).
| Net rental revenues increase slightly | |||
|---|---|---|---|
| Year | Weighted-average annual rent ($) | Weighted-average total expenses ($) | Net income per unit ($) |
| 2020 | 16,871.64 | 6,711.20 | 10,160.44 |
| 2021 | 17,577.24 | 7,169.90 | 10,407.34 |
| 2022 | 18,109.68 | 7,585.78 | 10,523.90 |
Location matters for rent growth
Although rents at some properties rose minimally from 2020 to 2022, in markets where median incomes rose significantly, properties were able to substantially raise rents, as those rents are based on a percentage of the area median income (chart 3). Rental revenues increased by an average of 7.3% from 2020-2022. Median family income in the U.S. rose to $88,590 in 2021 from $84,348 in 2020, a 5% increase, according to the St. Louis Federal Reserve Economic Data; data is not yet available from the Census Bureau for 2022.
Chart 3
Affordable housing ratings remain stable despite insurance expense trends
Although we have seen steady increases in expenses across rated low income housing tax credit properties, property owners have been able to raise rents to levels that have maintained strong debt service coverage. We will continue to monitor the insurance sector to identify any trends such as providers exiting markets or implementing severe increases in deductibles and premiums that could affect rating stability.
This report does not constitute a rating action.
| Primary Credit Analyst: | Raymond S Kim, New York + 1 (212) 438 2005; raymond.kim@spglobal.com |
| Secondary Contact: | Marian Zucker, New York + 1 (212) 438 2150; marian.zucker@spglobal.com |
| Research Assistant: | Alvi Jamil, New York |
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