Commercial property insurance, often considered a fairly predictable and routine expense, has become an increasingly complex—and costly—issue for owners and investors. To provide guidance and education on the subject, Berkadia is hosting a webinar titled “Navigating Insurance Challenges in CRE Underwriting,” scheduled for Thursday, August 10. In advance of the webinar, Connect CRE sat down with Laura Bushey, VP, Insurance for Berkadia Servicing and Dori Nolan, SVP for Berkadia Institutional Solutions, for a preview of what’s going to be discussed.
Q: Regarding insurance for commercial real estate, is now an unusually volatile time for pricing? What have been some other periods in which we saw this volatility?
Laura Bushey: The short answer is yes, it is an unusually volatile time for pricing. In terms of other periods, I haven’t experienced this kind of volatility of the insurance market in my career, and I’ve been working with insurance at Berkadia for over six years. Based on the discussions that I’ve had and various committees that I’m a part of, many others haven’t seen this either. It’s largely driven by the increasing significance and frequency of catastrophic events in the last ten years. Coupled with that, because of the number of claims that have been paid out to restore various properties, the carriers have identified that in several instances, replacement costs have been historically underestimated.
Dori Nolan: For the past 30 years, increases have been going up 5% to 7% annually, according to our research. Now we’re dealing with increases that are much more significant than that. For example, premiums for commercial insurance at the end of 2022 increased an average of 9.4% across the country from a year earlier. And when we’re looking at some markets like Florida, California or Texas, the increases are even sharper and we’re seeing an increase north of 30% to even 50%. So, it’s a very unusual market that we’re in today.
Q: In terms of underwriting, what is the difference between steep increases in premiums and volatility in premiums?
Bushey: That’s a little bit of a tough question to answer because they very much go hand in hand. I think from the underwriting perspective, right now we’re more focused on trying to get the premiums and the coverage right in the moment. When we’re looking at historical insurance premiums while underwriting the property, we really must identify when that policy was written to see if it’s reflective of what’s happening in the current market. From there, we estimate what we’re seeing for current costs between the comps, as well as ranges for specific markets. We also understand the year-over- year changes. Predictions are tough, especially in the insurance market and what’s happening with the weather-related changes. We’re trying to stay ahead of the curve and focus on what we’re seeing in our own book.
Nolan: We’re interfacing with a lot of different types of investors, and they’re doing their best to budget for insurance right now. But inevitably, it’s impacting their properties. We’re seeing it on the acquisition side as well, where they feel like they’re underwriting reasonable increases over what they’ve historically underwritten. But inevitably, it’s coming in much higher, so they’re trying to find creative ways to obtain the adequate coverage.
Q: How much of an impact do insurance costs make on the NOI of a property?
Bushey: Insurance expenses certainly can have a meaningful impact on NOI, forcing our property owners to identify where there’s an opportunity to offset those increased expenses.
Nolan: We initially saw most of the increases in certain geographic markets. Now it’s starting to bleed more into other markets as well and is permeating throughout real estate investment portfolios. It’s not just strictly for property, say, in Texas or in Florida. I was with one of my colleagues this week in New York, and she covers investment sales for Denver. She said historically insurance was about $350 per unit in Denver, and now investors are underwriting $700 per unit.
Q: Are investors typically aware of this when they’re doing their underwriting? What kinds of guidance does the Berkadia team provide to investors in this area?
Bushey: I’d say more and more investors are becoming aware of the impact that insurance is having when they’re looking at new properties. We are able to leverage our significant servicing book and provide our bankers and underwriters with very location- and property-type-specific averages and ranges for insurance costs so we can provide as accurate of information to our investors as possible. Additionally, we leverage the knowledge that we gain from our participation in various insurance industry committees. Through these, we can educate and guide our clients in the challenges they’re facing in trying to secure insurance and we’re also helping them navigate the complex conversations that they’re having with their insurance brokers. I think where we provide the most value for our investors is helping to provide transparency between investors, lenders, and insurance brokers, bridging the knowledge and information gap, and identifying solutions that address the needs of everyone involved.
Nolan: I would just say start early. You can’t ignore this; this is not a short-term issue that we’re dealing with, and it really behooves the investors to start their renewals earlier and see what type of options they have or explore other ways they can purchase insurance. Getting out there early versus waiting will help provide clarity, better guidance and direction for investors on acquisitions, or even refinances as well as just dealing with their renewals. Yes, it’s unfortunate, but it’s something we’re helping our clients navigate in the murky times right now.
Register Now for Berkadia’s Beyond Insights Webinar: Navigating Insurance Challenges in CRE Underwriting.
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