Optimizing Total Cost of Risk to Boost Returns on Multifamily Asset

Recent surveys reveal that TCOR is skyrocketing for multifamily firms, straining budgets and threatening profitability. Total Cost of Risk (TCOR) encompasses all costs associated with risk management, including insurance premiums, claims losses, risk mitigation expenses, tenant default and administrative costs.

The Causes-Numerous and Diverse

Several key factors are driving up TCOR for multifamily real estate owners and operators:

• Rising Insurance Costs—Average annual increases in insurance premiums frequently exceed 20% across most lines of coverage. Property and liability rates have soared, sometimes doubling or even tripling. Deductibles are also being raised to maintain coverage. This dramatic rise in insurance costs is a major contributor to multifamily's swelling TCOR.
• Persistent Claims Losses—Frequent claims, particularly those stemming from water damage, are significantly impacting multifamily portfolios. The increased frequency and severity of these claims have led to insurers raising rates, while self-insured losses are also on the rise. It is imperative to address this surge in claims to effectively manage and reduce TCOR.
• Tenant Default—Whether due to lease breaks, skips or applicant fraud, one recent survey found that 25% of bad debt comes from rental fraud, costing up to $4 million per year for ownership groups surveyed.  Additional data has indicated that post-pandemic delinquencies are 1.5 times higher than before 2020.
• Inadequate Risk Management—With limited resources, many firms struggle to quantify risks, implement loss prevention measures, or leverage risk transfer options. This lack of risk mitigation allows losses to persist unchecked, further elevating TCOR. More strategic risk management is essential.
• Administrative Inefficiencies—Managing TCOR requires significant personnel resources for risk, security deposits, insurance, claims, and vendor management. Outdated systems and manual processes lead to administrative inefficiencies that inflate expenses. Streamlining operations is key to optimizing TCOR.

The Impact is Significant

The financial impact of the increasing Total Cost of Risk (TCOR) is significant. Recent surveys show that multifamily firms are now spending an average of over $9 million annually on insurance premiums and retained losses alone. When considering the additional costs of risk management, administrative expenses, and the economic impact of uninsured losses due to tenant default, as well as outsourced services, the financial burden becomes even more significant.

Effective Risk Management is Key to Controlling TCOR

Investing in risk management tools and practices is crucial for controlling TCOR. Risk management helps identify and mitigate risks that lead to financial losses. Implementing risk management systems allows companies to monitor risks in near real time. Investing in risk management ensures sustained cost control in the long term as new risks emerge. A robust risk management infrastructure helps organizations anticipate threats, maintain optimal cost levels, and improve asset returns.

Powering Solutions with AI Analytics

To gain control over runaway TCOR, multifamily firms need solutions that provide actionable risk intelligence. This is where AI-powered analytics solutions - explicitly built for multifamily that leverage massive datasets, predictive modeling, machine learning algorithms, and automation are now emerging.

These solutions offer unparalleled abilities to assess risk exposure, predict economic consequences, pinpoint specific mitigation tactics, and measure the ROI on risk management initiatives.

Intelligent Risk Analytics Capabilities

Historical Insights—AI analytics generate granular risk scores at the unit, building and portfolio levels. Risks are quantified for resident cohorts and aggregated at the property level based on advanced statistical models and correlations uncovered for past and active leases. This enables accurate exposure measurement.

Performance Monitoring—AI analytics continuously monitor property and operations data for risk levels and mitigation outcomes. Results are measured against targets to enhance strategies over time. The capabilities of AI analytics suites align perfectly with the risk intelligence needs of multifamily firms. Applying these tools can provide the actionable insights essential to controlling escalating costs associated with tenant default.

Underwriting Analysis—Analyzing risk drivers and economic risk factors, simulating mitigation strategies and quantifying the potential financial return. This reveals the most effective solutions to implement.  Powerful financial models integrate risk metrics with asset data to project economic risk impacts on asset returns under various scenarios. Metrics like NOI, IRR, and residual value illustrate the financial risk profile.

AI-Powered Risk Management in Action

One example of an AI-powered risk transformation platform purpose-built for multifamily is the Assurified Risk Transformation Platform, which features powerful AI risk underwriting models and analytics. Assurified will roll out its platform and analytics in 2024.

The Path Forward

With TCOR expanding into an existential threat for many multifamily firms, leveraging AI-powered risk analytics provides a pathway to control costs and risk. Quantifying exposure, modeling economic impacts, optimizing mitigation strategies and tracking performance can transform risk management capabilities.

Purpose-built AI analytics solutions finally offer multifamily firms the sophisticated capabilities needed to understand risk drivers and project outcomes and maximize returns. Adopting these tools can drive better risk decisions and contain the TCOR beast before it devours profits. The time for advanced multifamily risk analytics has arrived.