Friday, March 29, 2024
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HomeReal Estate NewsCommercialProperty insurance price increases spell pain for CRE

Property insurance price increases spell pain for CRE

Commercial real estate property insurance has increased so much over the past 2 years that the industry is requesting lending reform and government help to address the pressure these rising prices have put on the market, Bisnow reports.

“Something’s got to give or it’s just going to paralyze the industry,” Bainbridge Cos. Chief Operating Officer Kevin Keane told Bisnow. “We’ve actually lost out on a number of acquisition opportunities and development opportunities, simply because the insurance premiums have been so high.”

Commercial real estate insurance premiums went up at the end of 2022 by an average 9.4 percent across the U.S. from the year before, per the Insurance Information Institute (III). States like Texas, Florida and California saw even bigger jumps — between 30 and 50 percent, according to III. Meanwhile, construction price increases forced replacement costs to go up 40 percent more than they were 4 years ago, III Communications Director Mark Friedlander told Bisnow. Increased major weather events have also contributed to these insurance premium increases.

CRE developers, owners and brokers have called property insurance prices out of control and have requested lenders shift their insurance requirements to reflect the times. The groups also noted that companies should adjust how they approach deals — including putting insurance at the forefront of the property acquisition process.

Insurance premium increases aren’t new to the CRE industry, but after Hurricane Ian hit Florida in September, increases “got to a point where it was unsustainable,” said Danielle Lombardo, the chair of Lockton Global’s real estate practice.

Price hikes have also made the CRE lending process more challenging, Bisnow reports. Keane noted that Bainbridge was about to acquire a 400-unit apartment building in Tampa in March. The team budgeted $2,000 of insurance for each unit, but the quote was $700 more per unit, which took $5.5 million off of Bainbridge’s offering price and ruined the deal.

“It really is just out of control now — our insurance premiums across our portfolio have gone up 50% and many of our competitors have gone up 100%,” Keane said. “It’s very painful.”

Keane also said that reliable property insurance quotes often don’t come in until the bidding process’ final moments. The industry has also noted that most lenders require a property’s insurance policy to cover 100 percent of the replacement cost, which doesn’t match today’s marketplace, according to Lombardo.

A more realistic solution might be for CRE companies to take on additional risk themselves with insurance by lowering their limits and raising their deductibles. Lenders often require high limits in their loan terms, however.

“We are at an inflection point at real estate and insurance,” Lombardo said. “We have to look at purchasing insurance in a different way.”

Lombardo also suggested that the industry needs to rethink how CRE companies should do business given the current property insurance situation. This could include investors communicating with insurers to see where limits can be reduced and in what areas. Again, this would likely involve companies taking on more risk themselves. Insurance can also no longer be an afterthought in CRE deals.

“Psychologically, it’s very difficult because the deal teams are like ‘I don’t want to deal with insurance’,” Lombardo told Bisnow. “It’s a much more methodical, thoughtful approach that most real estate clients haven’t had to take in the past, and that move from that type of mindset to really what’s needed in order to set you up for success in today’s market is a huge shift.”

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