- Expensive and scarce reinsurance, persistent inflation, regulatory restrictions, and the higher frequency of weather-related claims are driving up property insurance prices; impacting commercial real estate returns, valuations, and transactions.
- Savvy investors will need to not only identify creative coverage opportunities but also manage physical climate risk strategically to build portfolios that can attract affordable insurance policies and maintain profitability.
- Investors will also need to keep a sharp eye on insurance trends within the single-family residential market, as higher costs and diminished availability of homeowners insurance could have implications for commercial real estate demand if they prompt changes in migration patterns or market viability.
A new report by the Urban Land Institute (ULI) and Heitman, a global real estate investment management firm, explores the impact of rising insurance costs on commercial real estate, strategies for managing those costs and related considerations for industry participants.
Property owners are finding their net operating incomes reduced as insurance costs increase and – in some cases – are seeing transactions falter or valuations decline. Further, those relying on financing are facing strict covenants from lenders regarding the terms of the insurance in place. Insurance on the Rise: Climate Risk and Real Estate Investment Decisions highlights strategies for securing affordable insurance coverage, investment considerations that may make a building or portfolio more attractive to insurers, and emerging trends that could reshape the market moving forward.
“Rising insurance costs are a significant factor impacting liquidity in the commercial real estate market,” said Laura Craft, Global Head of Portfolio Sustainability Strategies at Heitman. “Investors are increasingly taking on more risk and initial out-of-pocket costs, as insurers reprice to limit increased payouts and higher risk exposure. As investors and other market participants navigate these new challenges, the Insurance on the Rise report offers actionable insights and strategies to adapt to the evolving landscape, enabling stakeholders to make informed decisions and maintain resilience in their portfolios.”
“Natural catastrophes are costing the global insurance market tens of billions of dollars, contributing to rising property insurance premiums and introducing new levels of uncertainty across the commercial real estate market,” said Lindsay Brugger, Vice President of Urban Resilience at ULI. “As extreme weather events increase in frequency, intensity, and cost, a property insurance policy can no longer be real estate’s sole risk reduction strategy. Strategic management of physical climate risk must be part of the solution.”
To manage rising costs, Insurance on the Rise considers a two-prong approach that pairs creative insurance solutions with a risk-aware investment strategy:
- Creative insurance solutions include stitching together coverage from multiple insurance carriers, opting for higher deductibles or aggregate deductibles, employing self-insurance, self-insured retentions, or captives, and leveraging parametric and/or excess and surplus line coverage.
- Risk-aware investment strategies that examine portfolio size and geographic diversity, asset and market exposure to physical climate risk, asset and construction type, and asset scale resilience measures can facilitate strategic portfolio construction to better navigate insurance implications.
The research further highlights emerging trends stemming from the single-family homeowner market that could have implications for commercial real estate; including the possibility of insurance-driven migration, the growing insurance protection gap, and the solvency of government backed insurance programs.
This report is the fifth in a series produced by ULI and Heitman examining the intersection of climate risk and real estate. More information on the previous four reports can be found here:
- Change is Coming: Climate-Risk Disclosures and Their Implications for Property Owners
- Climate Migration and Real Estate Investment Decision-Making
- Climate Risk and Real Estate: Emerging Practices in Market Assessment
- Climate Risk and Real Estate Investment Decision-Making
The full report is available on ULI’s Knowledge Finder or Heitman’s website.
