Multifamily Underwriting Amid Sustained Cost Shocks: A DSCR Stress Test

Apartments - Wilson County Submarket

Rising Operating Costs Erode Multifamily Margins

Multifamily properties in the U.S. are facing an unprecedented surge in operating expenses that is testing the resilience of their debt service coverage ratios (DSCR). Landlords today grapple with sustained cost-shocks across multiple fronts – from sharp increases in insurance premiums and property taxes to escalating utilities, labor, and construction-related costs. These rising operational costs are pressuring owners to raise rents simply to maintain margins. Inflation-driven spikes in materials, labor, property taxes, insurance and utilities have all contributed to higher expenses. While landlords did enjoy robust rent growth in the post-pandemic boom (median U.S. apartment rents climbed ~35.8% from January 2020 to mid-2025), expense growth has begun to outpace revenue growth, squeezing net operating income. Profit margins, which averaged a healthy ~35% for the apartment rental industry in recent years, are now under pressure to shrink as operating costs climb and occupancy softens. The national rental vacancy rate has already risen from 5.6% in 2021 to about 7.1% by early 2025, reflecting both an influx of new supply and tenants’ affordability challenges. This uptick in vacancy further challenges landlords to balance rent increases with occupancy stability, as pushing rents too high can drive tenant churn. In short, multifamily owners are walking a tightrope: facing inflationary cost pressures that threaten to erode their DSCR cushions, even as they strive to sustain rental income growth.

Insurance Premium Repricing: A Hard Market Hits Apartments

Property insurance costs have emerged as a particularly acute pain point for multifamily underwriting. The property & casualty (P&C) insurance industry entered a hardening cycle in recent years, with insurers steadily raising premium rates to rebuild capital and improve profitability. “Rising insurance premiums make owning assets, running businesses and hiring employees more expensive,” notes one industry analysis. Multifamily owners have felt this directly. According to Loan Analytics data, the average property insurance expense for apartment buildings surged by over 75% between 2019 and 2024 – from roughly $39 per unit per month to $68 (inflation-adjusted). This jump reflects both higher coverage prices (rate hikes) and higher insured values as property prices climbed. Notably, insurance costs grew much faster than rents; by 2024 insurance represented nearly 5% of gross rent revenue for the average apartment property, up from about 3% five years prior. Crucially, landlords have been unable to fully pass these hikes on to tenants. Research shows that for every $1 increase in insurance expense, only about $0.28 was recouped through higher rents – the remaining $0.72 hit the owner’s net income. In practice, tenants only absorbed an estimated $7–$12 per month of additional rent (less than 1% of rent) due to insurance cost increases, meaning owners are shouldering the bulk of the burden. This dynamic is directly compressing DSCR, as higher insurance bills eat into the cushion previously available to service debt.

The situation is even more dire in disaster-prone regions. In coastal markets like Florida and the Gulf Coast, multifamily insurance premiums have skyrocketed amid recent hurricane and flood losses. Industry reports cite premium increases as high as 500% in Florida over the past year for some properties. One Florida apartment owner saw their annual insurance quote jump to $3.7 million (for a $40 million asset), versus ~$1 million if more data-driven risk models were allowed. That nearly four-fold difference in insurance cost can mean the difference between a cash-flowing property and a potential loan default. Lenders traditionally require full coverage on collateral, but such insurance costs, when taken to extremes, can consume an outsized share of a property’s NOI – in some cases rivaling the annual debt service itself. Even outside of coastal catastrophe zones, insurance rate hardening is a nationwide phenomenon. P&C insurers across the U.S. raised premiums by an average ~3.4% annually from 2020–2025 as they responded to higher claims, inflation in rebuilding costs, and a need to bolster reserves. They have largely succeeded: industry-wide profit margins reached about 14% of revenue in 2025, the highest in years. While that’s good news for insurer balance sheets, it translates into persistently higher insurance costs for property owners. Well-capitalized insurers are expanding into new markets with strengthened reserves, but relief in pricing has yet to materialize. In sum, multifamily underwriters must reckon with insurance premiums that have reset to a higher baseline, with particular volatility in regions exposed to hurricanes, wildfires, and other climate risks. DSCR calculations now need to bake in these elevated insurance expenses, and lenders are beginning to stress-test deals for further rate hardening or even non-renewal scenarios in challenged markets.

The Squeeze of Property Taxes, Utilities, and Labor

Insurance is only one piece of the cost puzzle. Property tax reassessments have been another steady source of expense inflation for multifamily assets. Rapid appreciation in property values since 2020 (national home prices up ~52% from 2019 to 2024) has translated into hefty tax bill increases. On a national scale, property tax payments rose about 27% from 2019 to 2024 on average. In states with the fastest price growth, the effect is more pronounced – for example, Florida’s median property tax payment jumped ~47% in that period. Even markets that tout low tax rates have seen taxes surge once booming valuations are factored in. For apartment investors, this means tax expenses that perhaps were underwritten at, say, 10% of gross income a few years ago might now be 12–13% (or higher in high-growth Sunbelt markets). Unlike some other operating costs, property taxes tend to ratchet upward and seldom decline, creating a structural drag on cash flows. These rising taxes, much like insurance, often cannot be fully passed through to tenants without hurting occupancy or running afoul of rent control in certain jurisdictions. They therefore directly erode net operating income and reduce DSCR headroom.

Utility costs have likewise climbed. Energy prices saw double-digit jumps in recent years, especially in 2021–2022, driving up the cost of heating, cooling, and electricity for common areas. In many apartment communities, owners cover utilities for common lighting, HVAC in lobbies/hallways, water heating, and so on – all of which have become more expensive. For context, in energy-intensive property types like cold storage warehouses, electricity now comprises around 8–11% of total operating costs and has risen significantly with commercial power rate hikes. While a typical apartment may not have such a high utility share (IBISWorld data indicates utilities were just about 1% of industry revenue on average), any increase in these costs still contributes to margin compression at the property level. Notably, owners of value-add multifamily assets who budget for capital improvements (e.g. installing better HVAC systems or smart thermostats) are increasingly eyeing energy efficiency upgrades – not only for sustainability, but also to control utility expenses and mitigate future cost inflation.

Labor and personnel expenses are another area of concern. Wages for property management, maintenance, and security staff have been on the rise, tracking the broader tight labor market. By some estimates, general maintenance wages and property management salaries have increased in the mid-teens percentage range over the past few years, and even more in high-cost metros. We can draw parallels from the logistics sector: in cold storage facilities, labor represents roughly 30–35% of operating costs and wage rates have jumped ~23–27% over the past four years. Multifamily operators similarly face higher payroll costs to attract and retain leasing agents, on-site managers, and skilled maintenance technicians, especially given competition from the commercial sector (e.g. warehouse operators, who also need similar skill sets). Rising labor costs directly inflate the “wages” line item in an apartment’s operating statement, which was about 11% of revenue for the industry in 2025. If that share increases to maintain service quality, it further chips away at NOI unless offset by rent growth. Additionally, the cost of contract services – from landscaping and janitorial to security – has gone up with labor and fuel inflation, often categorized under “Other expenses” in operating statements. Altogether, higher taxes, utilities, and labor costs are combining with insurance hikes to significantly raise the expense load for multifamily assets. This reduces free cash flow available for debt service, i.e. lowers the DSCR, if rents and occupancy don’t simultaneously outpace these costs.

Debt Service Coverage Under Strain: Testing Resilience

For lenders and investors, the DSCR is a critical gauge of a multifamily asset’s ability to withstand income fluctuations. A healthy DSCR (typically 1.20× or higher for many loans) provides cushion such that NOI can decline and still cover debt obligations. Under sustained cost inflation, that cushion is thinning. Operating expense ratios have begun rising, eating into what had been record-high profit margins for apartment owners during 2021–2022. Industry reports pegged the average profit margin at 34–35% of revenue through 2025, but that is a backward-looking figure buoyed by exceptional rent growth. Going forward, if expenses keep climbing faster than rents, margins will tighten. Even a few percentage points shift can materially impact DSCR. For example, consider a stabilized apartment property with a 1.30 DSCR and a 35% expense ratio. If its operating costs increase by an amount equal to 5% of revenue (e.g. through some combination of insurance, taxes, and utilities increases) without an equivalent rent hike, the expense ratio would rise to ~40%, cutting the NOI margin to 30%. That could easily drop the DSCR from 1.30 to around 1.10 – below typical loan covenants – purely from cost-side pressure. While this is a simplified illustration, it underscores how sensitive highly leveraged properties are to expense shocks.

Real-world data is now validating these concerns. The Federal Reserve’s analysis of apartment financials found that rising insurance costs have mostly been borne by owners (as noted above), resulting in direct NOI reduction. In parallel, higher property taxes are non-discretionary and hit cash flow immediately upon reassessment. Unlike some other commercial real estate sectors, apartment landlords often operate on relatively slim margins per unit and rely on economies of scale. There is limited ability to significantly trim other operating expenses to offset a big jump in one category – for instance, you can’t skimp on hazard insurance or property taxes without severe consequences. The Fed study notably found no evidence that landlords offset rising insurance costs by cutting other expenses. This means any cost increase tends to flow through and reduce net income dollar-for-dollar (aside from partial rent pass-throughs). DSCR resilience, therefore, hinges on whether the property had sufficient initial cushion and on the pace of rent growth. In 2021 and 2022, many multifamily deals benefitted from outsized rent spikes that outpaced expense growth, temporarily boosting DSCR. However, rent growth has moderated to more sustainable levels since 2023, and in some markets rents have flattened or even ticked down slightly as new supply hits. With top-line growth cooling and costs still climbing, borrowers may find their DSCRs trending down over time. This is especially true for value-add acquisitions underwritten with aggressive expense assumptions or new developments coming online into a high-cost environment.

Lenders are increasingly taking note. Some are re-underwriting loans with higher expense allowances, particularly for insurance. Whereas a few years ago a proforma might assume insurance at, say, $300/unit annually in a low-risk region, now it may underwrite $500 or more to be safe – or even higher in coastal markets. Property tax stress scenarios are also common in underwriting models: e.g., assuming the asset will be re-taxed at full market value upon sale, which can significantly raise the tax bill. Loan sizing is being adjusted downward in certain cases to account for these heavier expenses, because a given property’s NOI can only support a smaller loan amount if the DSCR must stay above the minimum threshold. For example, if insurance and taxes collectively add $100,000 in annual costs that weren’t initially modeled, that $100K reduction in NOI might force a cut of $1.25–$1.5 million in loan proceeds (assuming a typical 8% cap rate or debt yield). Borrowers who acquired properties with floating-rate debt or short-term bridge loans during the low-rate, low-expense environment are facing a tough refinance climate: not only have interest rates risen, but their NOIs are effectively lower than expected due to expense growth, meaning they qualify for smaller loans upon refinancing. This dynamic is prompting some owners to inject additional equity or accept higher DSCR covenants to secure refinancing. In extreme cases, if expenses spike unexpectedly (as with the Florida insurance crisis), properties can tip into technical default on DSCR covenants even if they are still making payments – simply because the coverage ratio falls below the required 1.20x or 1.25x. We are already seeing calls for flexibility: industry groups like NMHC have urged lenders to allow more insurance structure creativity (such as captive insurance or parametric cover) to help lower costs, and to negotiate wiggle room in loan terms for expense volatility. In summary, multifamily DSCRs are being stress-tested as never before by sustained cost inflation, and prudent underwriting now demands more conservative assumptions on operating expenses and robust escrows or reserves for taxes and insurance.

Shared Pressure Points with Logistics and Cold Storage Assets

It’s worth noting that multifamily is not alone – structurally similar real estate sectors like last-mile logistics warehouses, cold storage facilities, and other supply chain infrastructure are experiencing parallel cost pressures. These property types, like apartments, have significant operational expense components that are rising in the current environment. For instance, insurance and property taxes are weighing on industrial owners as well. Large distribution warehouses in high-risk regions also saw property insurance premiums double or more in recent years, especially if they house high-value inventories or face natural disaster exposure. Just as apartment insurers pulled back in places like Florida or California, industrial property insurers have tightened terms and raised rates in catastrophe-prone areas, leading warehouse landlords to budget much higher insurance costs or retain more risk. Property taxes on logistics facilities have jumped too, particularly in booming distribution hubs where land values soared (think Inland Empire in California or Dallas–Fort Worth), mirroring the impact of rising assessments on apartments. These increases in fixed charges affect triple-net leased logistics assets as well – tenants may bear some costs directly, but ultimately total occupancy cost rises, affecting demand and rent growth potential.

Perhaps the closest analog to multifamily’s situation is cold storage warehousing, a niche within industrial real estate that has seen dramatic cost inflation. Cold storage operators face labor and energy costs spikes that resemble what multifamily owners face with payroll and utilities – but magnified. Labor is roughly one-third of cold storage operating expenses, and recent wage inflation of 20%+ has hit their bottom lines. Energy (for refrigeration) can be ~10% of costs and has also risen in double digits. These facilities have had to hike their storage rates to try to offset costs, similar to how apartment landlords raise rents, yet the increases often lag the expense growth. A recent analysis noted that core cost drivers for cold storage – “facility rent, labor, commercial electricity, insurance, taxes, building supplies, maintenance and material handling” – are all increasing faster than general CPI inflation. The mention of insurance and taxes in that list is notable: even for refrigerated warehouses, insurance premiums (e.g. coverage for product spoilage or specialized machinery) have been rising, and property tax hikes follow higher warehouse valuations. This parallels the multifamily experience where insurance and tax line items are devouring a bigger piece of the income pie.

Last-mile delivery hubs and broader supply chain infrastructure are also feeling the crunch of higher utilities (fuel for fleet and electricity for EV charging), labor shortages, and construction costs. Modern distribution centers loaded with automation and technology have high upfront costs and maintenance needs – similar to multifamily developers investing in smart building systems and amenities that require ongoing capital outlay. Construction-linked expenses such as steel, concrete, and lumber have been elevated across the board; developers of both apartment buildings and warehouses have seen hard costs for new projects jump 20–30% or more since the pandemic. This means replacement costs (a key input for insurance coverage) are higher, and any building repairs or capital improvements also come at a steeper price. All these shared pressure points create a common theme: margin compression. Whether it’s a 200-unit apartment complex or a 200,000 sq. ft. fulfillment center, owners and lenders are realizing that the generous profit margins of a few years ago are being whittled down by operating expenses rising on multiple fronts.

The comparison also provides some strategic insight. These sectors are exploring mitigants that could inform multifamily strategies. For example, cold storage operators are considering on-site solar power and automation to offset energy and labor costs. Logistics companies are reworking supply contracts and investing in efficiency to blunt fuel and insurance increases. Multifamily owners, likewise, are increasingly implementing energy efficiency retrofits (LED lighting, better insulation, solar panels for common areas) and automation in property management (self-guided tours, AI maintenance scheduling) to control costs. Such investments can help at the margins, but they often require upfront capital and their ROI is uncertain, especially if cost inflation continues to outpace technology gains. In the end, all these real asset classes share a reality of higher operating leverage in 2025 – meaning a greater portion of gross income is eaten by expenses – leaving less slack to cover debt and equity returns.

Asset-Level and Market-Level Variances in Exposure

It is important to emphasize that cost-shock impacts are uneven across assets and markets. DSCR stress will be most acute for certain profiles of multifamily properties. At the asset level, older properties with deferred maintenance might see outsized repair and replacement costs (e.g. an aging boiler that fails amid rising utility prices, or needing a roof replacement when materials costs are high). Properties in disaster-prone areas (coastal Florida, Gulf Coast, wildfire zones in the West) face both higher insurance costs and greater volatility – one bad storm could make insurance even costlier or harder to obtain, and property taxes might jump if a rebuild increases assessed value. By contrast, properties in regions with milder climates and stable insurance markets (say, the Midwest) have seen more moderate cost increases. Local regulatory frameworks also matter: jurisdictions with strict property tax caps or slower reassessment cycles (such as California’s Proposition 13 for certain properties) can shield owners somewhat, whereas states that reassess frequently at market value (Texas, Florida) pass on valuation spikes quickly into tax bills. Utility costs can vary based on local energy markets – an apartment in an area with cheap hydroelectric power will fare better than one reliant on expensive natural gas-fired electricity, for instance. Labor cost pressures tend to be higher in high-cost metros with worker shortages, versus regions with a larger pool of affordable labor. All these factors result in a wide distribution of expense impact.

At the market level, new supply coming online can constrain landlords’ ability to push rents in response to rising costs. Markets that saw record construction (e.g. many Sunbelt cities in 2023–2024) now have higher vacancy and more competition, limiting rent growth just as expenses hit new highs. As cited earlier, the U.S. rental vacancy rate edged above 7% in 2025 – still relatively low historically, but a notable increase from the tight market of 2021. In markets where vacancy is rising, landlords have less pricing power to offset costs, meaning DSCR deterioration is more likely unless they entered with a very strong cushion. On the other hand, markets with persistent housing shortages (some coastal cities, for example) may afford landlords more ability to raise rents in line with expenses, albeit at the risk of affordability pushback. Another consideration is asset class segment: Class A luxury rentals often have higher operating costs (due to amenities, services, and typically higher insurance replacement values), but they also have higher rents that might absorb those costs better. Class B/C workforce housing might have lower absolute expenses but also slimmer margins and tenants who cannot absorb significant rent hikes, making those investments potentially more vulnerable to cost shocks affecting DSCR.

Investors and lenders are now dissecting portfolios property by property, market by market to identify these variances. Many are performing sensitivity analyses: for each asset, asking “What if insurance costs another 20% next year?” “What if property taxes go up 10% post-sale?” “What if occupancy falls 5% due to competition?” – and seeing how far DSCR would drop under those stresses. Properties in markets with high regional insurance volatility (e.g. Southeast hurricane zones) or with impending tax reassessments are being underwritten with extra caution. Some investors are even reconsidering geographic exposure, tilting away from certain high-cost or high-risk regions in favor of markets seen as more expense-stable. For example, an investor might favor a Nashville or Indianapolis deal (with relatively low insurance/tax costs) over a South Florida deal with similar demographics, purely for better cost predictability. This kind of risk-adjusted thinking is becoming integral to strategy, as the era of low and predictable operating costs has clearly ended.

Implications for Loan Sizing, Re-underwriting, and Investor Returns

The confluence of these cost pressures carries significant implications for how multifamily loans are sized and how investments are underwritten going forward. First and foremost, loan sizing metrics like debt yield and DSCR are being tightened. Lenders are demanding higher initial DSCRs to create more breathing room. It is not uncommon now to see lenders targeting 1.30× or 1.35× DSCR on stabilized deals (up from the minimum 1.20× of past years), knowing that rising expenses could erode that to 1.20× in a short span. Some lenders are also using lower leverage (LTV) as a blunt tool – for instance, capping loans at 65% of value instead of 75% – to ensure the loan amount isn’t too high relative to an NOI that could be volatile. Loan covenants may feature more explicit language on DSCR maintenance, expense escalations, or even requirements for borrowers to carry rate cap insurance or other mitigants if certain costs exceed thresholds.

We’re also seeing a push for more frequent re-underwriting or performance check-ins. Rather than assuming a static underwriting at origination will hold, asset managers and lenders are monitoring operating statements annually (or even quarterly) to see if expenses are trending above proforma. If a property’s DSCR is slipping, proactive steps might be taken: raising additional equity, adjusting interest reserve budgets, or in some cases refinancing to a smaller loan to right-size the debt. In extreme scenarios, if an expense shock causes a serious DSCR breach, lenders might require recapitalization or partial paydowns as a condition to waive defaults. This was not a common practice when values and NOIs were constantly rising, but it has entered the conversation in 2025’s more challenging environment.

For investors (equity side), risk-adjusted returns are under pressure from these trends. Higher operating costs mean lower net income, which, if not offset by higher rents, leads to lower cash yields. Many multifamily acquisitions made at low cap rates assumed a certain margin that may no longer be attainable, resulting in lower annual cash-on-cash returns than projected. Additionally, if debt financing is reduced due to DSCR constraints, investors might have to contribute more equity per deal, diluting returns (but potentially reducing risk). In markets where cap rates are starting to expand (partly in response to interest rates and now expense concerns), property values could adjust downward to reflect the new NOI reality – a form of repricing of assets. In other words, buyers will pay less for a given apartment property if they know insurance and taxes will eat a bigger chunk of revenue going forward, all else equal. This valuation impact is a crucial consideration: some investors are already baking in higher exit cap rates or demanding price discounts on acquisitions in high-cost-growth markets. Conversely, properties that have mitigated expense risk (through long-term insurance locks, tax abatements, or energy-efficient designs) might command a premium or at least face less downside.

From a broader perspective, these sustained cost shocks are prompting a more conservative and analytics-driven approach to multifamily underwriting. Lenders and investors are borrowing strategies from other real asset classes, performing scenario analysis akin to how infrastructure deals model long-term maintenance costs or how hotel investors model cyclical expenses. The comparisons to logistics and cold storage highlight that prudent underwriting today involves questioning optimistic assumptions and preparing for volatility in operating statements. Loan Analytics suggests incorporating buffer factors – for example, underwrite insurance at 110% of current quotes, assume property taxes at purchase price mill rate, and include contingency line items for unexpected repairs or regulatory costs.

Finally, in terms of risk-adjusted returns, investors will likely seek either higher unlevered yields to compensate for this increased operational risk or employ strategies like interest rate hedges and fixed-cost contracts to stabilize some expenses. Some may pursue portfolio diversification across regions to smooth out regional insurance/tax shocks. Others might engage in policy advocacy (as apartment industry groups are doing) for insurance reforms or property tax relief to address the systemic issues. In any case, the clear implication is that yesterday’s underwritten DSCR might not be good enough for tomorrow’s reality. Multifamily stakeholders must adapt by demanding more resiliency in cash flows – whether through higher initial DSCRs, robust expense management plans, or simply more cautious investment terms. The result will be a recalibration of both loan terms and return expectations. Lenders will protect themselves with more stringent coverage requirements and covenants, and investors will price in these cost risks, potentially tempering the aggressive growth assumptions that defined the last cycle.

In summary, U.S. multifamily real estate is navigating a period of sustained cost inflation that is testing the mettle of underwriting standards. By quantifying DSCR resilience under stress – and learning from parallel sectors facing the same headwinds – lenders and investors can better identify where the pressure points lie and adjust their strategies accordingly. The goal is to ensure that even under adverse expense scenarios, properties remain cash-flow positive and loans stay secure. In this new normal of higher insurance premiums, rising taxes, and pricier operations, conservative underwriting and proactive asset management are paramount to preserving value and achieving acceptable risk-adjusted returns. Each deal now must be approached with a sharper pencil and a keen appreciation for the margin of safety required to weather the next cost shock.

Sources: Loan Analytics industry research and Fed analysis, with comparative data from sector reports and public filings for logistics and cold storage properties.