Fresno's Northbrook Apartments image via The Mogharebi Group.

Rising insurance rates have affected home and car owners and the multifamily housing sector. As aged equipment reaches the end of its lifespan, owners need to find a way to replace it for the safety of their tenants.

Most problems may be found in older buildings and complexes. Every facility must do what it can to bring units up to code, which requires upgrading facilities at a high cost of materials. 

“The issue of insurance is that if there’s a fire, you bring those units up to code. The problem is the cost of materials and systems today are so much more expensive,” said Robin Kane, Fresno-based managing director of capital markets leader Northmarq. 

From making sure air conditioning units align with the new climate change initiatives to changing certain Zinsco and other electrical panels because it is difficult to get them insured, many insurance companies don’t want to insure complexes with these possible liabilities that can cause fires. 

These insurance companies demand that outdated equipment be replaced within a reasonable period. Other items include galvanized plumbing and roofing. 

The problem with galvanized plumbing is that it’s prone to leaks after 10-15 years. This causes water leaks and flooding, which can cause serious damage to the interiors of the units.

Insurance companies are using drone technology to fly over their portfolio of material properties. If they see that the condition of the roof is poor, then that reflects something they don’t want to insure. 

“So insurance companies are just a sort of the vanguard, the leading edge of a lot of these buildings that have tremendous amounts of deferred maintenance that have to be dealt with,” said Kane. 

It’s not a deal killer, but it could be a deal breaker, said Kane. Buyers may hesitate to spend their money when purchasing a property that requires numerous upgrades to avoid liabilities. 

An investor goes in with a thorough expectation of what it costs to operate and maintain the property. When prospective buyers are confronted with huge escalations in personnel and other utility costs, they are met with hesitation as operating costs increase.

Aside from the rising insurance rates as top companies stop offering specific coverage in states, the reality of the cost to maintain the property has risen. 

California has a large file of slip-and-fall claims—the class action suit claims. This has made it very difficult for insurance companies to justify their actions. Kane said that a downside of residential investment, or real estate investing, is that contrary to offices, industrial, or retail, you’re dealing with people’s homes and their habitability. 

“As a landlord, you have to be much more focused on making sure you’re providing a safe, habitable environment because if you don’t, there are laws that protect the tenant,” said Kane. “So you have to be on your A-game to ensure you’re taking care of the things.”