Harvey. Irma. Maria. Jose. We all remember the headline storms of 2017, the costliest year on record for natural disasters, which exacted $306 billion in damage, according to federal government estimates. Many multifamily properties were in the crosshairs of those storms, leaving owners, operators and residents scrambling to recover. In fact, some are still trying to recover from last year, even though the 2018 hurricane season officially began on June 1. If there is one lesson learned from the 2017 storm season, and the increasing frequency and intensity of extreme weather events, it’s that disaster preparedness has become central to our industry’s operations, from the property level to the C-suite.
Last year’s storms were almost unimaginably destructive and provided countless heart-wrenching images that dominated the news for weeks. Less publicized, though, was how multifamily operators put their residents first in the wake of these disasters. They helped residents relocate to safer conditions, turned off revenue management systems to freeze rent increase, and waived application and late fees. They also worked collaboratively with local officials, nonprofit groups and first responders to get residents back on their feet and back in their homes.
The lessons learned in 2017 can help apartment operators prepare for the 2018 hurricane season—one that, unfortunately, has the potential to bring 10 to 16 named storms in the Atlantic alone, according to the National Oceanic and Atmospheric Administration forecast.
Public vs. Private Plans
At the National Multifamily Housing Council’s spring board meeting, experts advised the C-suite attendees to recalibrate how they look at risk and made a direct correlation with the bottom line. One of the most important risks flagged by those speakers was risks and how to insure properties against them.
The issue is that, in many cases, private flood insurance makes more sense for apartment owners than the National Flood Insurance Program (NFIP), the federally provided alternative, yet not all operators can access private coverage. For those who can’t, NFIP becomes the insurer of last resort. Why does that matter? Because while the industry appreciates NFIP as a backstop to guarantee coverage in all markets and at all times, it has serious limits on both the coverage amount offered—$500,000 per property for structural damage, $100,000 per property for contents—and policy terms.
Also, NFIP doesn’t include business interruption coverage for commercial and multifamily policyholders, nor does it allow owners to insure all structures or properties in their portfolio through a single policy. These limitations, among others, make the program an important, but highly flawed, risk management strategy.
Even worse, just as this year’s hurricane season kicked into high gear, NFIP was set to expire on July 31. Without a reauthorization package clearing the president’s desk, real estate closings of all kind may come to a grinding halt. NMHC has been pressing Congress to act and adopt program reforms that will free up private market insurance solutions and better cover multifamily firms. Generally, we expect Congress to provide another short-term extension of the program, but apartment owners and operators should look to assess flood risk across their portfolios and consider whether private insurance solutions could help lessen their exposure.
Insurance is just one step of the process. Multifamily operators should also be looking at physical flood mitigation measures, which could lessen the risk of flooding and reduce insurance premiums on the front end. In recent years, the Federal Emergency Management Agency (FEMA) and Congress have begun acknowledging the unique challenges faced by multifamily properties by issuing guidance on alternative flood mitigation methods for properties that can’t be elevated. While not as comprehensive as we would have liked, these recommendations provide a wide range of solutions that are worthy of consideration.
As firms plan for hurricanes and other natural disasters, they should look across the enterprise and create a comprehensive emergency plan that will cover resident communication, evacuation procedures, business continuity plans and more. FEMA provides a wealth of resources for apartment operators as part of its Hurricane Ready Business Toolkit. Even those apartment properties that are not directly in the potential path of hurricanes would benefit from using the toolkit because no area is truly free of flood risk and the need for disaster recovery strategies goes beyond summer storms.
NMHC has a number of resources to help firms prepare for and respond to severe weather events. Risk management can be a tedious and often overlooked aspect of our business’ core responsibilities. Yet, with the many threats our industry faces on a daily basis, it has become a mission-critical process throughout the enterprise—especially at the C-Suite level.
Kevin Donnelly is vice president of government affairs for the NMHC in Washington, D.C. He can be reached at [email protected]
You’ll find more on this topic in the CPE-MHN Mid-Year Update 2018.