The most destructive wildfires in California history are expected to send insurance rates surging, adding another headwind for owners of multifamily properties in Los Angeles and potentially hindering affordable housing goals.
Anticipated insurance rate increases will add to already high operating expenses for apartment landlords in Los Angeles, potentially scaring away new development, according to Deborah La Franchi, CEO of Los Angeles-based SDS Capital Group. Her firm raises private capital to fund affordable housing developments across the country, with nine projects in Los Angeles and another 10 planned in the area.
"Our insurance rates have gone up 40% on our projects in just the past 18 months," La Franchi told CoStar News. "If it goes up another 40%, this is going to decimate so many multifamily developments that will just not pencil anymore."
The accessibility of insurance — often required for financing and permitting — is crucial to the city's rebuilding efforts, property professionals note. State regulators have been implementing what they call a "sustainable insurance strategy" based on lessons from past fires and negotiations with insurance providers. The most recent step, announced less than a month before the latest fires, requires insurers to increase coverage in high-risk areas in exchange for being able to incorporate the cost of "reinsurance" into rates and use predictive risk modeling to set rates. Before that move, California had been the only state that didn't allow the cost of reinsurance to be passed on to policyholders.
Multifamily development is already stymied by the devaluing effects of Measure ULA — the "mansion tax" — that puts a levy on property sales topping $5.15 million, according to Los Angeles brokers. Merchant developers can't turn a profit building because of the added expense. The number of multifamily units under construction has declined 12% in the past year in Los Angeles, even as it has climbed in similarly sized markets, with a 12% rise in Boston and an 8% increase in Miami, according to CoStar. And sales of properties in Los Angeles valued at more than $5.15 million have dropped 70% since the launch of the tax, according to a study by the Sol Price School of Public Policy at the University of Southern California.
For their part, insurance companies are asking the federal government to focus on reducing wildfires instead of adding more regulations. The American Property Casualty Insurance Association is pressing Congress to pass more laws to address wildfire risks like the Fix Our Forests Act that seeks to increase the pace and scale of forest management and establishes a program to better coordinate federal agencies to reduce wildfire damage to properties.
Worsening situation
Even before the fires, a shortage of affordable housing in Los Angeles created a pall on overall economic growth, those familiar with local housing development said. Renters in Los Angeles County need to earn $48.04 per hour — nearly triple the minimum wage — to afford the average monthly asking rent of about $2,500, according to the California Housing Partnership. That average is about 45% higher than national rents, based on CoStar data. To help alleviate the problem, California is requiring Los Angeles to build more than 50,000 homes each year on average through 2029, about 40% of which are to be affordable.
Encouraging more new development is the only way to boost affordability, according to Kevin Kawaoka, a multifamily specialist and executive vice president at Los Angeles-based NAI Capital. Insurance costs and operating expenses have escalated sharply, adding to construction costs that are up 45% since before the pandemic and financing that remains expensive despite declining interest rates, he said.
Property owners already expected insurance rates to climb significantly after the state issued the new directive allowing them pass along reinsurance costs. In the wake of the most recent fires, with insured losses pegged at roughly $20 billion so far, industry professionals expect some companies to leave the market entirely. California issued a year-long moratorium on insurance companies dropping coverage for policyholders in areas affected by the wildfires.
California's insurer of last resort, the FAIR Plan, covered $242 million in commercial properties in the Pacific Palisades neighborhood alone in 2024. That amount has ballooned by 2,770% over the past four years as traditional insurers refused to cover properties. More than 3,600 FAIR Plan policyholders in Altadena, Pacific Palisades and other parts of Greater Los Angeles had submitted claims by Friday, officials said.
Major private insurers including State Farm, Nationwide, Farmers Insurance, Allstate, USAA and the Hartford stopped writing new policies in high-risk areas or limited their coverage in recent years. "Hopefully the state gets rid of the insurance caps that have driven private insurers out of our states," La Franchi said. "We need as much insurance competition as possible, not as little," because as competition surges for limited construction resources, affordable housing developers are concerned their projects for low-income residents will be a lower priority than high-end luxury rebuilding.
For their part, insurers blame inflation and delayed maintenance: The cost of homeowners insurance has increased by 22.4% in the past five years, while costs for construction materials and labor have skyrocketed 37.4% over the same time, according to the American Property Casualty Insurance Association.
“Costs have also been increasing because most new homes are being built in areas with a higher risk of loss due to natural catastrophes,” association president and CEO David A. Sampson said in a statement. California alone has built more than 2 million residences in areas at high or extreme wildfire risk without fully implementing corresponding improvements needed to effectively mitigate wildfires, he added.
Winning back insurers
California risks falling into the same trap as other extreme weather-prone states including Florida, where some insurance firms have decided they can't operate profitably, even after state officials cut regulations, according to Dave Jones, director of the climate risk initiative at UC Berkeley's Center for Law Management & the Environment.
Across 18 states, insurers are hiking rates and cutting coverage after extreme weather-related events, Jones said.
Newly built structures could help show insurance companies that it's safe to cover Los Angeles properties again, said Jonathan Rose, CEO of New York City-based Jonathon Rose Cos., an affordable housing developer with eight properties across Los Angeles that haven't been affected by the fires.
"Anything that we rebuild, if it's rebuilt to these better standards, it'll be more appealing to insurance," Rose told CoStar News.
That means implementing housing regulations like those put forth in Florida that have reduced hurricane damage, Rose said. Los Angeles will also need to ramp up emergency and disaster planning, he added.
"To give confidence to the insurance system, we're going to need to invest in the firefighting infrastructure," Rose said.