Why Are Commercial Real Estate Rates Experiencing Year-Over-Year Growth?

Real estate insurance rates have surged by 33% year-over-year, constituting nearly 10% of an owner’s quarterly per-unit operating expenses, as reported by Marcus & Millichap. According to Tom Lynch, Senior Vice President at Jencap, this spike is attributed to the way insurance claims are being litigated and paid out. The responsibility often falls on property owners or managers when accidents occur due to poor building maintenance or hazardous conditions. While insurance costs in the commercial real estate sector are rising rapidly, insurers are also imposing new policy limitations to mitigate their exposure. States with higher environmental risk factors, such as Florida, California, and Texas, are especially affected.

Here are the key points from the article:

• Real estate insurance rates have increased by 33% year-over-year, accounting for nearly 10% of an owner’s quarterly per-unit operating expense.
• This spike is attributed to the way insurance claims are being litigated and their payouts.
• Commercial real estate insurance costs are rising rapidly, and insurers are implementing new policy limitations to reduce their exposure, particularly in states with higher environmental risk factors.
• Commercial insurance in the habitational or commercial real estate sector is challenging due to the presence of multiple tenants and constant visitor traffic, which increases the risk profile significantly.

• New entrants into the commercial real estate insurance market have been offering unsustainably low rates to attract consumers, driven by a “web of greed.”
• Offering low rates without a solid data-driven underwriting approach can lead to financial losses when claims exceed expectations.
• Insurers with a strong understanding of the market have been able to price and adjust their policies effectively.
• Consumers should not be deterred from purchasing insurance policies, as proper education on risk mitigation can lead to better insurance programs.
• Building maintenance and safety improvements can help policyholders reduce their risk profiles and lower insurance premiums.

Overall, the commercial real estate insurance market is experiencing significant rate increases due to a combination of factors, including litigation trends, rising claims costs, and competition among insurers. Policymakers, property owners, and insurers need to find a balanced approach to ensure coverage remains affordable while addressing the industry’s challenges.