Insurance Drags Down Property Values By 17% In Climate-Sensitive Markets, Study Shows

The effects of climate change are starting to take a toll on real estate owners where it hurts them the most: their property values.

In markets with higher risks of natural disasters, such as hurricanes, wildfires and flash floods, market values for commercial real estate are 16.9% lower than in markets with lower climate risk, according to a report climate risk data firm First Street shared with Bisnow.

The gap is a result of an increasingly costly and volatile market for commercial real estate insurance, which is less regulated than homeowners insurance and thus more susceptible to sharp price increases.

It also shows how thinning margins are sowing doubt about the long-term health of properties in areas vulnerable to climate risk, according to the report.

Across the four major asset classes of multifamily, office, industrial and retail, insurance costs grew by 154% between 2017 and 2024, at a compound annual growth rate of 14.3%, according to First Street. In the first 17 years of the 21st century, the annual increase was 4.6% on average.

The problem is most acute for multifamily owners, which saw their insurance costs rise from an average of $285.83 per unit in 2017 to $878.91 per unit in 2024, a 207.5% increase, according to the report. 

Multifamily assets in high-risk markets have 69% higher premiums on average than those in low-risk areas, according to First Street. As a result, multifamily properties in high-risk markets trade at a 25% discount to those in low-risk areas.

Property values are directly tied to their operating income, and even if landlords can pass on the increase in insurance costs to their tenants, the increased rental rates can raise vacancy risk. Multifamily owners aren't able to pass on the costs directly, and in 2024, insurance ate up 6.6% of landlords' net operating income, according to First Street.

First Street analyzed 25 years of performance data from the National Council of Real Estate Investment Fiduciaries across 120 U.S. metro areas to produce the report, its first attempt at quantifying the impact of climate risk on commercial real estate performance.

Insurance consumed 4.1% of all properties' NOI in 2024, up from 1.9% in 2017.

“We’re really focused on what are the tangible economic and financial impacts of climate risk,” First Street Chief Economist Jeremy Porter said in an interview. 

Insurers are, too. Insurance rates are higher and take a bigger chunk out of properties' income in high-risk areas. The study compared properties based on baseline market value, expenditures and incomes from NCREIF data.

“Setting all these indicators constant and just measuring climate, there’s this consistent impact from this observed survey data of high-risk versus low-risk markets,” Porter said.

Insurance rates on industrial properties in high-risk areas have risen at three times the rate of those in low-risk markets, according to First Street. Insurance consumed 5.9% of industrial NOI in high-risk markets in 2024, compared to 2.4% for buildings in low-risk markets.

After a hurricane-free 2025, the property insurance market is expected to soften this year, with some insurers projecting rates to drop from last year's level by double digits.

“We are seeing the end of the hardening market,” Porter said. “Every time we go through a market-hardening period, we raise the level. It becomes the new baseline. It may dip a little bit, but it basically doesn’t go down.”

The rates for reinsurance, in which insurers pass some of their risk down in what is essentially insurance for insurers, have fallen, as those are the companies most directly affected by natural disasters. Property owners should be paying careful attention to the reinsurance market, as premium increases have been essentially in direct correlation with reinsurance rates since 2017 because of extreme weather losses and a lack of price regulation, according to the report.

The hard market began that year because it was the largest on record for natural disaster payouts, with more than $300B in damages. Reinsurance rates spiked again after Hurricane Ian in 2022 did $112B in damage, the costliest storm in Florida history.

“The reinsurance is almost in the background, but it’s really the gauge for what’s happening in the insurance companies,” Porter said.

While First Street's research shows property values are starting to be affected by climate risk by way of insurance costs, some of the highest-risk markets are still some of the most desirable for real estate investors. The highest-risk office markets are Miami and Fort Lauderdale, Florida, where insurance is eating up roughly 5% of investors' NOI, compared to 1.4% of Nashville office NOI.

Fort Lauderdale has felt the impacts. Office values there fell 17% between 2020 and 2024 as insurance costs doubled, according to First Street. 

But Miami has attracted more headquarters relocations this year as billionaires fleeing high taxes buy up the area's mansions, pushing rents and valuations up. Miami offices traded at an average of $360 per SF last year, nearly twice the national average of $190 per SF, according to Yardi Matrix, and 38.5% above their valuations in the first quarter of 2020.

Typical real estate investment cycles are seven years, 14 at the longest, Porter said, and the returns investors have gotten on properties in Miami, Houston and Los Angeles in recent years have been “tremendous.” That is because those areas' economic drivers have outweighed their vulnerability to disaster.

“There are macroeconomic drivers that make an area desirable,” Porter said. “Desirability and climate risk are almost two competing things that are increasing. If we get to a point where they get close together, you may see a tipping point.”