The cost of insuring commercial real estate has skyrocketed and is set to further escalate in the US in the coming years. This spike in costs has slowed down sales processes and is altering or even killing deals.
The average insurance costs for commercial real estate properties in the US have almost doubled over the past decade, according to a Deloitte Center for Financial Services analysis released in late May.
In 2013, insurance costs averaged $1,558 per building per month, the firm wrote in its 2024 Financial Services Predictions report. At the end of 2023, that figure had risen to $2,726 – reflecting a compound annual growth rate of 5.75 percent. By 2030, Deloitte predicts the average monthly insurance cost could be as high as $4,890 per building, with the compound growth rate accelerating to 8.7 percent a year.
Tim Coy, real estate research lead at Deloitte, tells PERE a general increase in cost was not surprising, but he and his colleagues were taken aback by the pace of the increase in the last few years. “[Costs] are somewhere upwards of over 100 percent over the past five years in certain marketplaces, which was beyond what we had expected,” he says.
While inflation and covid played a big role, he says Deloitte incorporated extreme weather events modeling in predicting the pricing through 2030 – and found the jump in costs is about 98 percent correlated with extreme weather forecasts.
Real estate owners face ballooning costs with catastrophic weather events only set to become more prevalent. Last year, the US experienced a record 28 separate billion-dollar weather and climate disasters, and catastrophic weather events have also been racking up in 2024. As of mid-June, 11 billion-dollar disasters had already occurred across the US – most of which were severe thunderstorms.
Deal killer
Soaring insurance costs are now directly impacting dealmaking in private real estate. “Typically, CEOs do not want to get into the granular dealings of insurance, but they’re being forced to because it’s killing deals,” says Danielle Lombardo, managing director of insurance service provider WTW’s real estate, hospitality and leisure division. She points out that while insurance prices have moderated in recent months, they are still at an all-time high in parts of the US such as Texas and Florida. Insurance costs continue to be unpredictable, affecting a real estate owner’s ability to underwrite with certainty.
“That volatility is truly the challenge that managers need to focus on, because if you are in the middle of a deal and you’re about to close, and a big hurricane comes through, you’re not able to get the coverage you thought,” she says. “It completely strips the cashflow out of the deal, and it doesn’t make sense.”
The impacts of rising insurance costs on the market have intensified in the past 24 months, says Lauren Hochfelder, co-CEO of Morgan Stanley Real Estate Investing. “Over the last two years, the market has seen many asset sales fall apart due to rising and diverging insurance costs,” she tells PERE.
Furthermore, insurance costs have led to more stalled sales processes, particularly in multifamily, according to Hochfelder. “We have seen, say, 15 bidders on a residential building in Florida, and each has a totally different underwriting of insurance costs per unit,” she says.
“[It] has a very meaningful impact on value if you assume it’s $800 a door [in insurance costs] versus $1,500 a door.” Insurance costs affect NOI, and when buyers have a different view on the insurance required, it affects how much they will be willing to pay. As a result, deals have been taking longer to get across the finish line.
Hochfelder adds that elevated insurance costs have made net-lease investments more interesting to her firm. The ability to transfer some of the risks, at least in the initial lease term, from the landlord to the tenant makes that kind of investment relatively more insulated, she explains.
Joe Gorin, head of US and European investing at manager Barings, says his firm and others have dropped out of bidding processes because of insurance pricing.
“There are a number of examples of deals taking longer, falling apart or repricing because the buyer put the wrong assumption in or didn’t finalize their insurance until they were awarded the asset,” he says.
“We’ve stopped bidding in cases where we thought others were estimating insurance costs to be lower than what we felt were warranted. We have a very high standard for insurance and want to make sure we have the right coverage levels to satisfy the institutional investors and banks we work with.”
Gorin adds that insurance costs are now impacting valuations more than they have during the past five to 10 years, meaning the firm will be “very careful” with deal selection. With beach erosion and flooding concerns, this may mean taking a close look at the flooding history of a given area and considering a property’s proximity to the coast. “Have we made a bold statement to say, ‘We will never buy in Florida’? No – but every investment is going to be looked at from the long-term lens view of, ‘will capital be attracted to this area over the next five to 20 years?’”
Price adjustments
But while managers tell PERE they are not avoiding certain parts of the country yet, they are paying less for properties in higher-risk areas.
“If it has higher risk, we’re factoring that into higher insurance costs and building that into our underwriting,” says Pete Petron, head of asset management at Virginia-based manager Harbor Group International. “And so, where the costs are higher, it’s flowing through in terms of purchase price.” As insurance costs go up, the underwritten NOI declines, which means paying less to hit the targeted return requirements.
As costs accelerate in unpredictable ways, insurance is set to increasingly influence the kinds of properties buyers will want to acquire, how quickly they will transact on them and how much they will pay.
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