In this episode of The Inside Look, Senior Commercial Real Estate Economist Xander Snyder highlights commercial property insurance trends. 

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Transcript:

Is property insurance keeping you up at night?

Before the pandemic, property insurance premiums were not typically an operating expense that kept building owners up at night. They usually ran somewhere between 1 and 2 percent of gross rental incomes.

But over the past five years, commercial property insurance premiums have increased significantly, more quickly than have rental in comes. 

This chart shows total growth in both rental income and insurance premiums compared to pre-pandemic. As you can see, though rental incomes have grown for most property types over the last several years, by about 20 percent, insurance expenses have increased more – about 34 percent for multifamily properties and 50 percent for nonresidential properties.

What’s Driving the Increase in Property Insurance?

So, what's driving these increases?

First, there’s the increasing frequency and severity of weather-related property damage, which has led to higher losses for insurers who raise premiums to offset those losses.

Second, replacement costs have surged, with material costs rising by almost 40% compared to pre-pandemic levels. As material costs rise, replacement costs (which is what insurers pay out to rebuild or repair a property) go up, and they’re required to charge higher premiums.

Lastly, there are trends in reinsurance. Reinsurance is coverage that insurance companies take out to insure their own exposure. When reinsurance availability decreases, regional insurers raise premiums to offset the increased risk they are liable for.

Reinsurance capacity fluctuates depending on the availability of reinsurance capital and how risk-tolerant that capital is at any given moment. While the availability of reinsurance capital declined in 2022 and 2023, which added upward pressure to insurance premiums, in 2024 it reversed and is now increasing, offering a silver lining in an otherwise challenging property insurance market.

What Can Property Owners do to manage risk?

While large institutional operators may have sufficient negotiating leverage to go directly to the insurance provider and ask for better rates, smaller operators don’t typically have this option, and those in disaster-prone areas will face the full brunt of higher insurance premiums.

For those smaller operators, other expense management options include opting for higher deductibles, in exchange for lower premiums; layering different types of coverage, or using parametric coverage, which pays out based on the occurrence of a weather event rather than actual damage done to a building. But, some of these approaches are fairly complex and require expertise to manage.

Future Events

I’ll be giving a talk in Indianapolis in September on the state of the Commercial Real Estate Economy. If you’re interested in attending, please reach out to your local First American Representative.