Post-pandemic vacancies and rising debt payments have plagued commercial real estate for over two years, but even as these issues start to ease, property owners of strip malls, apartments, and office buildings now face a longer-term challenge: skyrocketing insurance costs.
Homeowners across the country are already familiar with this problem. The growing frequency of climate-related natural disasters has prompted insurers to significantly raise rates or withdraw from certain markets altogether. These increases have hit coastal areas hardest, where cities and towns are more vulnerable to storms and flooding, but the reality is that no region is entirely safe from increasingly severe and unpredictable weather events.
What that looks like in South Florida
Insurance companies could be facing up to $75 billion in damage claims from Hurricane Helene, which caused deadly floods and landslides across Florida in late September, and from Hurricane Milton, which made landfall near Tampa, Florida, just weeks later.
Property owners are feeling squeezed between their insurers and lenders, who are wary of being left responsible for catastrophic losses and refuse to allow even minor adjustments to policies, denying struggling borrowers any financial relief.
While it’s difficult to quantify how many properties have gone into foreclosure solely due to rising insurance costs, industry insiders acknowledge that deals have collapsed over this issue. In an already strained market, where interest rates, labor, and materials are all increasing, insurance expenses can be the tipping point.
The Rates Keep Increasing
According to statistics, premiums on commercial properties rose an average of 11% nationwide last year, but in storm-prone areas, increases reached 50%. This year, some regions have seen premiums double.
Like homeowners, commercial property owners with mortgages are required by their lenders to carry insurance. However, the terms for commercial borrowers are often more stringent, requiring lender approval for any changes to coverage. If the loan has been securitized and sold to investors, getting such permission can be nearly impossible.
Lenders have resisted loosening insurance requirements, fearing that in the event of a major disaster, properties without full coverage won’t be rebuilt, destabilizing the real estate market and diminishing the value of their collateral.
What Can Help?
Experts believe banks could help ease the burden by allowing property owners to purchase insurance with higher deductibles to lower premiums or by approving policies that only cover the value of the loan, rather than the full cost of replacing a damaged building. But banks are unlikely to budge. They worry that landlords without comprehensive insurance might not be able to rebuild after a disaster, which would hurt the broader market and undermine their collateral’s value.
Analysts suggest that while insurance costs are a significant challenge, they’re not likely to lead to a major crisis. Data on loan delinquencies shows growing stress, but not a catastrophic collapse. Delinquencies have increased to 1.5% of all outstanding commercial real estate loans since late 2022, according to S&P Global Market Intelligence. Larger banks have seen the highest rates of delinquencies—up to 5%—though this remains far below the 10% rate seen during the 2008 financial crisis.
The Fed's Cut
The recent downturn in commercial real estate has impacted larger banks the hardest, as their portfolios include buildings—such as urban office towers—that have been most affected by post-pandemic shifts in work patterns.
In September, the Federal Reserve cut its benchmark interest rate for the first time in over a year, providing some relief for commercial property owners. However, with interest rates still much higher than during the pandemic, new loans remain difficult to secure.
Posted by Larry Mastropieri on
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