A recent report by the Urban Land Institute (ULI) and Heitman reveals that rising reinsurance costs, persistent inflation, regulatory pressures, and a surge in weather-related claims are significantly driving up property insurance prices, with detrimental effects on commercial real estate returns, valuations, and transactions.
Rising Insurance Costs Squeeze Property Owners
The report indicates that escalating insurance costs are straining property owners, resulting in diminished net operating incomes and, in some cases, leading to lower property valuations and stalled transactions. In response, lenders are tightening financing terms and imposing stricter insurance covenants, further complicating the landscape for commercial real estate investors.
Key Insights from the Report
The Insurance on the Rise: Climate Risk and Real Estate Investment Decisions report outlines strategies for securing affordable insurance coverage, highlights investment considerations that can enhance a building or portfolio’s attractiveness to insurers, and identifies emerging trends that could reshape the market.
Laura Craft, Global Head of Portfolio Sustainability Strategies at Heitman, commented on the findings, stating, “Rising insurance costs are a significant factor impacting liquidity in the commercial real estate market. Investors are increasingly taking on more risk and initial out-of-pocket costs as insurers reprice to limit increased payouts and higher risk exposure.”
Actionable Strategies for Investors
As stakeholders navigate these challenges, the report provides actionable insights to help them adapt to the evolving landscape and maintain resilience in their portfolios.
Lindsay Brugger, Vice President of Urban Resilience at ULI, emphasized the urgency of strategic climate risk management, noting, “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. 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
To address rising costs, the report suggests that investors must identify innovative coverage opportunities and strategically manage physical climate risks to develop portfolios that can attract affordable insurance policies while maintaining profitability.
Moreover, investors should be aware of trends in the single-family residential insurance market that may have implications for commercial real estate. These include the potential for insurance-driven migration, the growing insurance protection gap, and the solvency of government-backed insurance programs.
As climate risks continue to shape the real estate landscape, stakeholders must adapt to ensure their investments remain secure and sustainable in an increasingly unpredictable environment.
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