2024 Fall Issue of Urban Land - 108

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NATALIE AMBROSIO PREUDHOMME,
CAGLAR DEMIR & KEVIN FAGAN
Insurance Premiums Double
Some commercial real estate owners face rising costs due to climate risk
Since about 2018, property insurance
costs marched steadily upward,
almost universally, in commercial
real estate, broadly forcing property
owners and lenders to strategically
confront the reality of soaring
premiums and shrinking availability.
But much of the industry has also
enjoyed significant rent growth,
which seemingly has muted the
overall impact to bottom-line revenues
and property values.
The impact is barbelled, however.
For a segment of properties, insurance
now eats up double the typical
share of revenue-a major caveat
emptor for buyers and lenders that
puts insurance and physical risks
much higher on the standard due
diligence checklist. For asset managers,
this throws many things out of
whack, affecting budgeting and exit
strategies, and, in some cases, forcing
owners to ask lenders to waive
requirements for minimum coverage.
Impact by the numbers
Figure 1 shows the results of analyzing
insurance costs as a share of
gross revenue since 2018 for properties
backing CMBS loans. For the
properties below the 50th percentile,
relatively little changes. For properties
with the highest share of revenue
taken by insurance, however,
this value jumps from 6.7 percent in
2018 to 13.4 percent in 2023.
All else being equal, that means a
property would need an additional
1.3 percent annual rent growth to
maintain net operating income (NOI)
and value. Otherwise, a typical 99thpercentile
property in Figure 1 could
experience roughly a 12 percent
decline in NOI and value, and its
108
URBAN LAND
FALL 202 4
FIGURE 1: INSURANCE COST AS A SHARE OF TOTAL GROSS
REVENUE BY PERCENTILE
FIGURE 2: INSURANCE AS A SHARE OF TOTAL GROSS REVENUE,
BY PROPERTY TYPE: 99TH PERCENTILE
Source: Moody's CRE
lender could have the implied loanto-value
ratio go up 9 percentage
points and the debt-service coverage
ratio (DSCR) go down 0.25x.
Of course, the higher the expense
ratio of the property, the worse the
impact.
Where the hits are hardest
Geographically, there was some
slight skew of impact to the Gulf
Coast. Texas and Florida are the only
two states that have multiple metros
in the top 20 metros with the most
properties in the worst quintile for
2023-four and five, respectively.
Other such top metros are scattered
throughout the country-particularly
in the East, Midwest, and South-
indicating insurance pains are not
limited to the Gulf.
Among property sectors, multifamily
and retail suffered the worst
impact, followed closely by hotel
and office, whereas industrial felt the
least impact. Hotel tends to have
higher expense ratios, so these insurance
premium increases can mean
significantly more to NOI and value
declines, particularly alongside other
pressures, such as declining business
travel and higher labor costs.
Finally, industrial properties were
the least affected-possibly due to
strong rent growth, being less likely
to locate near coastlines, and lower
replacement costs. UL
NATALIE AMBROSIO PREUDHOMME is
associate director of commercial real estate research at
Moody's. CAGLAR DEMIR is assistant director of
commercial real estate research at Moody's. KEVIN
FAGAN is senior director and head of commercial real
estate economics at Moody's.
2024 Fall Issue of Urban Land

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