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Commercial real estate is in for some ups and downs in 2023.

2023 Real Estate Industry Trends and Their Impact on Property Insurance

Feb. 22, 2023
Interest rates will keep climbing in the coming months, but 2023 is bringing a few silver linings for commercial real estate.

While rising construction costs and property claims along with high vacancy and inflation rates may continue to drive interest rates north in the coming months, the real estate development market will find some silver linings in 2023.

Here are some of the top trends impacting the insurance industry that will continue into next year, and how real estate owners and operators can reduce their risk.

Anticipate Lower Profits, Increased Interest Rates

Office building vacancy rates across the United States have not dropped below pre-pandemic levels. On average the real estate, rental and leasing industry has grown 0.9% on average over the last five years, but real estate profits will continue to be impacted by years of high rebuilding costs, outdated or inaccurate property valuations, rising crime, chronic inflation and high interest rates.

Loans and refinancing are more expensive because of climbing interest rates, which are likely to remain higher than recent years, and increase in 2023. As a result, real estate owners and operators should plan for further premium hikes and continued high inflation, which will make it more difficult for their commercial and residential lessors to make rent.

Commercial real estate profits will also continue to be impacted by the shift to remote work.

The national vacancy rate for office buildings was 18.4% by the end of the second quarter of 2022. In addition, pension funds have pulled back on office building investments. Private real estate holdings in offices fell 11% in 2021 when compared to three years prior. Holdings in the retail space fell 7% over the same period.

These factors, along with the fact that carriers are pulling back on capacity and significantly increasing insurance rates, will tighten profit margins in 2023. To mitigate these effects on your property insurance coverage, consider the following:

  1. Ask your broker about what kind of deductible and loss limits meet your risk profile and budget.
  2. Increase your risk management tactics to help prevent damage or liability claims. It’s not surprise that underwriters prefer best-in-class properties and will expect current building valuations before considering risks. Water mitigation systems remain the most sought-after risk management tool by underwriters reviewing and rating a real estate portfolio.
  3. Make sure your broker has complete information about your real estate portfolio before approaching underwriters, because a lack of underwriting data automatically defaults to the highest premiums.

Yet there appear to be a few bright spots in the commercial real estate sector for 2023. Multifamily construction is on the rise, along with warehouse and industrial properties as e-commerce increases.

Strategically Position Your Organization

Real estate owners and operators will face a difficult insurance market due to threats from economic and financial conditions.

Commercial property-casualty insurance is projected to increase 20% or more in most geographies because of carriers’ increased scrutiny of rising construction costs, supply chain disruptions and insurance to value ratios. Expect coverage for habitational and multifamily properties to rise, which could force insureds to seek coverage from the non-admitted marketplace, where insurance companies have not met regulations set by a state’s department of insurance.

Because of the anticipated increase in nuclear verdicts, claims litigation is also threatening real estate owners. These lawsuits, which award $10 million or more in damages, may drive carriers away from insuring sectors such as older multi-family properties or properties in high-crime areas. For example, one lawsuit awarded $43 million to the plaintiff for a crime that occurred in the parking lot of a drug store.

Umbrella or Excess Liability coverage has taken the brunt of nuclear verdicts and are charging significantly more premiums. Ask your broker about higher and lower limit options when building your excess liability coverage package so that it can fit into your 2023 budget.

Top properties with lower risk profiles will have an easier time finding affordable insurance. For example, real estate companies that have Class A high-rise office buildings in their portfolios can still obtain insurance. Best-in-class property risks will find good coverage at a good rate with a minimal increase of 0-10%.

Owners or operators that are actively attempting to prevent damage or liability claims are more likely to be insured by carriers as well. Underwriters will hone in on best-in-class properties and mandate current building valuations before considering risks.

To obtain preferrable policy rates, real estate owners and operators will want to:

  1. Maintain and provide detailed data on renovations and maintenance, such as new roofing or plumbing and electrical. If you don’t document these upgrades and report them to insurers, they will presume buildings have not been renovated and assess your insurance accordingly.
  2. Analyze loss trends to understand the root causes of losses. Keep a record of the strategies you’re using to avert future claims and share those with your carriers. Then develop a strategy to determine the best time and frequency to review alternative markets.
  3. Make safety a tenet of your organization, with extra training and risk management practices for all properties. A little prevention can help you avoid lawsuits and save you millions.
  4. Evaluate what risks you can push to tenants by reviewing your leases. Many leases allow the landlord to charge tenants for common area maintenance.
  5. Implement water mitigation measures. When factoring real estate risk, water mitigation measures are the No. 1 consideration for underwriters.

Factor in Weather-Related Disasters

Worldwide natural catastrophes increased 22% from 2021; 11% of those were insurance losses. Flooding and thunderstorms caused an estimated $35 billion in insured losses in the first two quarters of 2022. Those numbers do not take Hurricane Ian into account, which caused an estimated $42 billion to $57 billion of damage from wind, storm surges and inland flooding when it hit Florida’s southwest coast in September 2022.

As a result, catastrophes will weigh heavily on insurers’ minds. Premiums in high-hazard areas could triple, and many predict that catastrophic perils will increase up to 50% in low-hazard areas. To mitigate these increases and help prevent geographical hazards from damaging your facilities, maintain your properties and use stronger building materials when upgrading them.

But organizations can take steps to mitigate the effects of weather-related disasters. Consider following these three guidelines to ease the impact of weather-related disasters on your insurance coverage:

  1. Whether you’re rebuilding or erecting a new construction, it’s important to use materials and construction techniques that can minimize losses later on. This includes fire-resistant building materials, automatic plumbing shutoff controls, and hail-resistant roofing and siding. Materials and construction techniques that exceed baseline standards can go a long way in lowering claims and premiums.
  2. Obtain a parametric policy. In regions where property insurance capacity is in short supply, do some research and see if you can obtain parametric insurance. Even if there is no loss to your organization, these special policies will reimburse holders a specified amount which is determined by the magnitude of the event.
  3. Review your lender’s insurance requirements. They may be outdated, asking for coverage that is no longer “market.”

Contending with a Shrinking Workforce and Shrinking Revenue

It appears that the labor market is still up—for now. Employment and labor demand stayed high in 2022, with labor demand exceeding supply by 2.9%.

Yet, like many other organizations, real estate companies are having difficulty finding competent employees. In today’s era of remote work, half of commercial real estate companies say geographic challenges are the top issue in hiring.

The labor shortage is also affecting real estate indirectly. Not only are construction companies facing delays because they can’t find enough workers, but many real estate operations are having difficulty securing vendors with staff as well. Many real estate operations use outside vendors to round out their staffing needs for services such as security, maintenance and cleaning.

As a result, many vendors and construction companies are raising wages to attract and retain workers. Because of this, costs are likely to be passed on to real estate owners and operators.

Just as concerning is the fact that the labor shortage is affecting renters’ ability to hire workers. Lessors were going out of business or not paying rent in 2020, but today they can’t find enough workers to remain viable or expand their operations, which is resulting in less rental income for owners.

It’s true that real estate owners and operators can do little to address the overall labor shortage, but they can do more to retain the employees they do have. Real estate owners and operators should consider improving their own recruiting and retention initiatives by personalizing employee benefits based on data analytics. In the long run, this will not only create quality employee experiences but improve employee engagement and engender workforce loyalty as well.

Step Into Action

Real estate businesses that increase their risk management efforts can reduce their risk and potentially their premium rates. Harness your brokers’ and carriers’ knowledge and work with them to help increase your resilience.

About the Author

Chip Stuart

James “Chip” Stuart is the corporate Chief Sales Officer and Practice Leader for global insurance brokerage Hub International’s real estate specialty in North America.

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