Rising insurance costs caused, in part, by climate change, are negatively affecting net operating incomes for property owners and, possibly, impacting whether certain areas will be off-limits for real estate investors, according to a recent paper by the Urban Land Institute and real estate manager Heitman.
Since 2017, insurance rates for U.S. commercial real estate grew by 7.6% per year, with rates spiking 17% in 2023 in some U.S. markets, the ULI/Heitman report said.
“Leading investment managers are monitoring potential insurance-driven migration, the growing insurance protection gap, and the viability of government-backed insurance programs,” said Laura Craft, Heitman’s global head of portfolio sustainability strategies, who led the firm’s team that produced the report, in an email. “These factors could influence the future viability of markets exposed to high climate risks.”
Typically, real estate owners budget for a 2% to 3% annual increase in property insurance costs. However, in 2023 insurance rates saw double-digit increases in the U.S. across sectors, which especially hit multifamily properties, the report said. Between 2021 and 2022, insurance costs for the U.S. multifamily sector rose at almost twice the rate of total operating expenses, according to the report.
While insurance costs surged throughout the U.S., properties in areas with higher risk due to climate change faced even steeper hikes, the paper said. These areas include metropolitan areas of Texas, the Sun Belt, the Northeast and California, the paper said quoting a Moody's report.
Insurance alone is becoming less able to provide complete solutions to risks, Heitman CEO Maury Tognarelli said in an email.
“We believe part of a balanced approach to portfolio event risk mitigation will lean into a combination of third-party insurers, self-insurance through higher deductibles or captives (a subsidiary created to provide insurance for the non-insurer parent company), all forms of displacing/shouldering risk,” Tognarelli said.
Heitman has about $49 billion in assets under management.
