🏘️ Multifamily risk is on the rise. Here's why.

👋 Hello, Best Ever Community! As of Thursday, the CME FedWatch Tool shows an 87% chance of an interest-rate cut to a range of 5% to 5.25% at next week’s Fed meeting. It’s all happening.

In this week’s newsletter, insurance companies tighten up, investors bet big on “onshoring,” and rent growth picks up.

Today’s edition is brought to you by HotelSHIFT Capital . Capitalize on the vastly undersupplied affordable housing market by transforming underutilized hotels into vibrant apartment ecosystems with HotelSHIFT.

Let’s roll!

🗞 NO-FLUFF NEWS: CRE HEADLINES

💥 Factory Boom : Global and domestic companies have committed nearly half a trillion dollars to build new factories for EVs, semiconductors, and other products in the U.S., and investors are betting big on microcities springing up around these “onshoring” projects.

🌊 Industrial Waves : Rising e-commerce and supply chain demand pushed warehouse rents up 3.06% in Q2, while flex space rents rose 2.91%. Warehouse cap rates also increased by 23 bps to 6.42%, while flex industrial properties rose by 17 bps to 6.93%.

🆘 Distress Signals : The Trepp CMBS multifamily special servicing rate rose 60 bps to 5.71% in August, the highest since December 2015. The overall Trepp servicing rate increased 16 basis points to 8.46%, while CMBS delinquencies also increased for apartments, rising 67 bps to 3.30%.

🏆 TOP STORY: INSURERS TIGHTEN UP ON MULTIFAMILY, INDUSTRIAL

As the U.S. property insurance market shows signs of softening, insurers are pulling back from multifamily and industrial properties on the heels of record losses in 2023, enacting increasingly strict underwriting standards to offset increased risk.

The multifamily sector is feeling the brunt of these tightening standards. 

• Insurers’ Biggest Fear: New housing construction reached a 36-year high in 2023, with builders completing 440,000 apartments. Of these units, roughly 356,400 (81%) were built with wood framing, which insurers have traditionally viewed as higher risk.

• And with good reason: Losses from residential fires in 2023 amounted to approximately $10.8 billion, according to the U.S. Fire Administration. The rise in remote work is a key factor, as nearly half of the 374,000 residential fires in 2023 were caused by cooking accidents.
• Other High-Risk Claims: Insurers are also increasingly cautious about liability risks such as violent acts, sexual abuse, and even dog bites. Many are implementing exclusions for incidents involving canines, assault, abuse, habitability issues, and firearms. Some underwriters demand up to 7-10 years of loss history, while crime scores have become increasingly scrutinized....