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Facing Financial Pressure: Commercial Property Owners Struggle with Skyrocketing Insurance Costs Amid Other Challenges

Owners of commercial properties, who are already grappling with the challenges of soaring interest rates and mounting vacancies, now find themselves contending with skyrocketing insurance expenses reaching unprecedented levels.

A convergence of factors, including natural disasters, inflation, and a contracting reinsurance market, has propelled insurance premiums to historic highs, mirroring the surge observed in home insurance costs across much of the United States. This predicament has left numerous property owners in a precarious situation: their property values and rental income are in decline, yet their overhead expenses continue to surge.

Moody’s Analytics reports that the cost of commercial real estate insurance has been steadily rising, with an average annual increase of 7.6% since 2017. Depending on the property’s location and size, these increments can translate to hundreds of thousands of dollars or more in additional annual expenditures, and in some cases, they can obliterate an entire year’s worth of profits.

While insurance premiums are experiencing an upswing across the board and for all types of structures, certain cities have been hit particularly hard, especially in the case of multifamily buildings. Notably, the cost of insuring rental-apartment complexes has surged annually by an average of 14.4% in Dallas, 13% in Los Angeles, and 12.6% in Houston. Some property owners are grappling with the challenge of finding insurers willing to underwrite their properties, as highlighted by Moody’s.

Alexandra Glickman, leader of the real estate and hospitality practice at insurance consulting firm Gallagher, remarked, “I have never seen such a significant and rapid change in insurance capacity as well as spikes in pricing.”

For some property owners, the impact of escalating insurance costs has been more severe than the effects of increasing interest rates. Many landlords continue to enjoy low debt costs due to long-term, fixed-rate mortgages signed before 2022, which are still in effect for years to come. In contrast, insurance contracts typically renew annually, compelling virtually every property owner to either accept a new policy at a higher cost or forego insurance altogether.

CoStar Group reveals that the number of property sales exceeding $25 million has plummeted by 79% since late 2021, with rising insurance expenses playing a significant role in this decline.

Ian Bel, managing member of apartment landlord Olive Tree Holdings, lamented, “Deals that may have aligned with our acquisition criteria are now off the table due to exorbitant insurance costs.” Bel has resorted to engaging risk-modeling firms to assess potential losses and is in discussions with lenders to secure their acceptance of insurance policies with higher deductibles, which could contain annual costs but also expose the company to greater risk in the event of a catastrophe.

The proliferation of natural disasters, particularly in cities susceptible to wildfires, floods, or storms, is a major contributor to the surge in insurance costs. Furthermore, the rising cost of reinsurance has cascaded down to elevate property insurance rates. Simultaneously, inflation has driven up the expenses associated with repairing or rebuilding damaged properties. In some instances, insurers are declining to provide quotes altogether, leaving those who do with the latitude to impose higher premiums.

Owners of rental apartment buildings are especially vulnerable because they must bear the burden of insurance costs. On the other hand, commercial landlords can often pass these expenses on to their tenants, as pointed out by Robert Gilman, a partner at the accounting and advisory firm Anchin. However, this strategy is only effective if there are tenants to share the costs with. The increasing vacancies in office and retail spaces mean that many property owners are left shouldering a substantial portion of the financial burden themselves.

Typically, mortgage lenders stipulate that property owners obtain insurance coverage for the full cost of rebuilding the property, as noted by Glickman. However, some property owners are now attempting to reduce this coverage amount, arguing that it is unlikely that the entire building will be completely destroyed. Landlords and insurance brokers contend that banks are often receptive to this approach, especially in situations where escalating costs pose a risk of default.

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