Hurricanes vs. Hawaii Condos
What sellers and buyers need to know now
A Category 5 storm
A storm has been brewing in the real estate market the last few months, and it's intensified from a Category 1 to 5. Hurricane insurance - or lack thereof - has become a major pain point for Hawaii condo buyers and owners. New prospective buyers may not be able to find a lender for certain buildings, and current owners may see their maintenance costs increasing more than expected.
This December 2023 Hawaii Business magazine article details the origins of the problem: due to the increase in natural disasters around the world - including the Lahaina fire last August - rising claims have prompted insurance companies to increase their premiums, often by more than triple. Condo HOAs did not foresee (and arguably could not have), and their prepared budgets were short. Besides dramatically raising maintenance fees, they've had no other option but to reduce the amount of hurricane replacement coverage, which covers the costs to rebuild if a hurricane levels the building.
The major secondary mortgage lenders, Fannie Mae and Freddie Mac, as well as government-backed loans like VA, FHA, and USDA, won't accept loans on buildings that do not have 100% hurricane replacement coverage. As a result, these condos will not be available for new buyers and current owners to get a mortgage or Home Equity Line of Credit (HELOC). One of the largest local insurance brokers in Hawaii estimates about 375 Oahu condos have sub-limits for hurricane replacement coverage.
The Maui Fires affected the entire state
Because of the Lahaina and Kula fires last year, according to this New York Times article, Hawaii went from being a state with a low risk level with lower premiums, to the highest risk level with much higher premiums. As long as there are no other disasters here, our risk level may go back down, but it might take 2-3 years. Even single family home buyers and owners are facing higher homeowners insurance premiums as a result of Lahaina.
What's worse, there were already just a few condo building insurers doing business in Hawaii. One has now pulled out of Hawaii altogether, and the others are pausing renewals of existing policies. I have owners and a buyer for a building which currently has 100% hurricane coverage, but when their policy expires in March, the current insurer will not be renewing it. The building will probably need to go to the secondary insurance market which could cost 4-10x higher.
Other looming, costly issues
All this comes on top of other condo issues: aging pipes and spalling, and recent requirements to update fire safety after the Marco Polo fire in 2017. An overwhelming majority - over 90% - of Oahu condos were built before 1990. These aging buildings don't have fire sprinklers and also face plumbing retrofit projects - which is another pain point for insurers. Here's a comprehensive article about the fire safety requirements which have a 2035 deadline.
How can I check if my condo building has 100% hurricane replacement coverage?
If you own a condo, every year your HOA should send you an updated "Insurance Summary" that looks something like this:
Compare the two lines I've highlighted: "Building replacement insurance" and the line item for "Hurricane." If the numbers match, your building has 100% coverage. But many, many buildings have a much lower hurricane coverage amount such as in this example, where the insurance company will max out coverage per event at $10 million, vs a total building replacement cost of $23 million.
This is truly shaking up the real estate market right now. If you have any questions, I am happy to help you research the current insurance coverage in your building - please reply to this email or give me a call! And this year, you may want to attend those (boring) HOA meetings you've always avoided.