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ULI: CRE Insurance Availability, Affordability At 'Crisis Levels'

Flooding in Houston after Hurricane Harvey

Climate events and soaring costs are making businesses and homes in some parts of the country completely uninsurable, forcing the commercial real estate industry to scramble to find solutions.

Steady, predictable yearly insurance increases started unraveling in 2017, according to Natalie Ambrosio Preudhomme, associate director at Moody's Analytics CRE. Inflation, regulation and the increasing frequency of catastrophic weather events is driving up the prices, she wrote in the fall issue of the Urban Land Institute's periodical, Urban Land.

Preudhomme wrote that the availability and affordability of insurance have reached "crisis levels." The issue is particularly acute in Texas, Florida, California and Northeastern markets that are more prone to hurricanes and natural disasters.

Insurance premiums in the nation's largest multifamily markets have had a collateral annualized growth rate between 12.4% and 17.3% between 2017 and 2022, while rents have grown at a rate between 2.8% and 7.7% over the same period, according to Moody's Analytics.

That growth has accelerated — when the National Multifamily Housing Council released its Multifamily Risk Survey in June, it showed respondents were experiencing property insurance costs 26% higher than they were in 2022

“The CRE Finance Council has convened a group of capital markets, CRE and insurance experts to try and sort through this very significant and rapidly growing problem,” CRE Finance Council Managing Director Sairah Burki told ULI. “We are currently examining key insurance and climate peril trends, identifying data needs and thinking through potential policy solutions. We hope to present a sort of menu of solutions and policy considerations in the coming months.”

Insurance premiums on retail properties last year rose 25% above the average price of the previous five years, according to loan data from CoStar. 

For office buildings, insurance premiums were 27% higher, and multifamily properties saw rates 35% above their previous average, CoStar reported. What’s more, insurers like State Farm and Allstate have pulled out of some states that have been hit hard by weather events. 

Developers, owners and brokers have described the cost of insurance as “out of control,” and they are seeking government intervention and asking lenders to adapt their insurance requirements.

Insurance experts previously told Bisnow companies should reconfigure how they approach deals and bring insurance front and center in the acquisition process. The surge in pricing could mean deals that looked good on their face no longer work.

“Deals that may have just fit what we are buying are now off the table because the insurance costs are just too high,” Ian Bel, managing member of apartment landlord Olive Tree Holdings, told The Wall Street Journal last month.