Sign In or Create an Account.

By continuing, you agree to the Terms of Service and acknowledge our Privacy Policy

Economy

Commercial Real Estate Is Getting Walloped By Climate Change

Disaster-averse insurers are jacking up rates and restricting coverage, worsening the sector’s post-pandemic crisis.

•
Buildings underwater.
Heatmap Illustration/Getty Images

It’s not just homeowners starting to feel the effects of extreme weather on their insurance bills. The commercial real estate sector, some $20 trillion worth of property from cell-phone towers to apartment complexes to office buildings to warehouses, is also seeing unexpectedly large premium increases or disappearing coverage.

The challenges of damage from wind and water, smoke and fire, snow and ice are likely to compound what’s a challenging moment for the massive industry, as work from home and migration reshape how office space is used and as high interest rates make the financing-dependent business more perilous. With higher insurance costs will likely come some combination of lower payouts for investors and higher rents for tenants.

“Rising insurance costs are a growing problem for commercial property owners, particularly in states with increasing climate-related risk, such as Florida and Texas, where costs are rising upwards of 50% and starting to threaten new development and property sales,” Yardi Matrix, the commercial real estate research firm, said in a report earlier this year.

In areas affected by large storms, not only is insurance getting more expensive, it’s getting more limited as well, according to Yardi Matrix, including “new exclusions for damages such as mold or flood endorsements.”

“Clients with coastal exposures and/or less desirable risk … have experienced more difficult renewals. They have taken what coverage they can get, where it is available, and have been ready to consider the alternatives,” the insurance broker Gallagher said in a market report.

The losses due to weather have been felt up and down the business, with insurance and reinsurance companies taking big hits. Munich Re, the large reinsurer, has seen its underwriting (i.e. the difference between premiums collected and claims paid out) “deteriorat[ing] since last year, primarily as a result of higher natural catastrophe and human-made losses in the second quarter,” according to Morningstar analysts. Insurers are then passing those losses onto customers in the form of higher premiums.

For instance, the insurer Chubb said it had $400 million in catastrophe losses in the second quarter “principally from weather-related events in the U.S.,” the company’s chief financial officer Peter Enns said in a July conference call with analysts. At the same time, the insurer is raising prices on its property and casualty clients: “In terms of the commercial P&C rate environment, rates and price increases in property and casualty lines were strong,” Chubb’s chief executive officer Evan Greenberg said on the call. Overall, pricing was up in Chubb’s North American business by 12.8 percent, Greenberg said, while property insurance pricing was up over 30 percent.

“Premiums are going up,” Cal Inman, a principal at the climate research firm ClimateCheck, told me. “It’s an issue in commercial real estate. The risk profile is changing, we’re seeing higher frequency of events and intensity.”

Higher insurance costs have been spotted all over the commercial real estate market. Equity LifeStyle, which owns and operates RV resorts, campgrounds, and manufactured home communities, said in financial filings that its insurance for its RV and campgrounds have seen its deductibles for “most catastrophic events” increase from $2 million in the aggregate to $10 million.

Most of the company’s properties in Florida experienced “flooding, wind, wind-blown debris, and falling trees and branches,” according to its annual report, while four RV sites “experienced strong winds as well as significant flooding, including from unprecedented storm surges that resulted in damage to certain common area buildings, utility infrastructure and residents’ homes.” The company incurred $40.6 million in cleanup cost in 2022 that was covered by its insurance and another $10.3 million in costs in the first half of this year.

On the other side of the country, Hudson Pacific Properties, which owns offices and studio space on the West Coast, reported an increase in insurance premiums starting in April. Last year, it had prepaid $6.5 million in insurance, up from $5.4 million in 2021. But in the first six months of this year, those costs have already ballooned to $21.7 million.

Equity Residential, which owns over 80,000 apartment units, reported in its second quarter of this year that its insurance costs had gone up by just over 14 percent from the second quarter of last year, which it attributed to “higher premiums on property insurance renewal due to challenging conditions in the insurance market.”

The higher insurance costs are not just limited to residential and office investors. Prologis, which owns over one billion feet of logistics infrastructure (think lots of warehouses), said in its most recent quarterly report that it had incurred “higher insurance costs from an unusually active storm season during the first quarter of 2023.”

“The premiums that insurers charge are changing to reflect increased risk,” Inman said. “If you put that next to everything else that happens in the industry, that’s a lot. Beyond premiums going up, you’re seeing some properties [that are] hard to get insurance on.”

That everything else is namely high interest rates. As interest rates have gone up, refinancing buildings has gotten more expensive and the commercial real estate loans that banks and other financial institutions — like insurance companies — hold on their books have declined in value. The combination of more extreme weather and a tighter financing environment presents something of a doublebind for commercial real estate — some types of buildings, like office space in New York and California, have probably gotten intrinsically less valuable, while the cost of operating and financing the business has gone up.

And like the high interest rates, there may be no good place to hide from the bad weather.

While the issues in the insurance markets in California and the Gulf Coast are well known and especially pronounced; according to Gallagher, extreme weather and corresponding large insurance losses are occurring in the central and northern parts of the country as well.

“Atmospheric rivers and severe convective storms (SCSs) during the first three months of the year drove insured losses to nearly $10 billion, resulting in one of the most costly first quarters on record,” the Gallagher report says. “Clients with exposure to Northeast wind, wildfire, and/or severe weather events across the Midwestern region may now be seen as riskier than in the past.”

Read more about climate change and insurance:

Vermont Is the Soggy Edge of America’s Flood Insurance Crisis

Blue

You’re out of free articles.

Subscribe to access Heatmap's exclusive climate and energy polling, award-winning journalism, and subscriber-only events, now just $99 $79.20/year.
To continue reading
Create a free account or sign in to unlock more free articles.
or
Please enter an email address
By continuing, you agree to the Terms of Service and acknowledge our Privacy Policy
Energy

The West Invented the Electrolyzer. China Is Building the Industry.

‘When China wants to do something, boy, they move fast.’

An electrolyzer and the Chinese flag.
Heatmap Illustration/Getty Images

The electrolyzer has come a long way in the nearly 250 years since a pair of Dutch scientists first used electricity to split water into hydrogen and oxygen. Over the decades, European and American scientists refined and commercialized this technology, yet it is China that now accounts for nearly 70% of global electrolyzer manufacturing capacity, churning out the machines that make clean hydrogen from water at a fraction of Western costs. Its factories are building far more equipment than its domestic hydrogen market can absorb, and exports are climbing. On paper, China looks poised to dominate the global electrolyzer and green hydrogen markets, much as it already has solar panels and batteries.

“It stands to reason that the Chinese would want to capture the market just like they did everything else,” Rinaldo Brutoco, a hydrogen investor and founder of the think tank World Business Academy, told me. Beijing’s latest Five-Year Plan certainly lends credence to that ambition, repeatedly calling for the development of green hydrogen, hydrogen-derived fuels, and electrolyzers, even as other nations lag behind their once-ambitious clean hydrogen targets.

Keep reading...Show less
Spotlight

Trump Hasn’t Been Advancing New Wind Farms During Permitting Talks

Only upgrades for pre-existing wind projects have been approved.

Donald Trump.
Heatmap Illustration/Getty Images

In September, the Trump administration told a reporter that the president directed the Pentagon to finally process wind projects through routine airspace approvals as required under a court order. By doing this, it created the appearance of real headway and good faith in talks with Democrats in Congress on energy permitting legislation before the November midterm elections.

But the White House’s assurances are not what they seem.

Keep reading...Show less
AM Briefing

Bye-Bye Bibi?

On methane rules, nuclear uprates, and Ethiopian electricity

A campaign sign.
Heatmap Illustration/Getty Images

Current conditions: For the first time, Miami’s king tide — a periodic exceptionally high tide brought by on astronomical alignment — crossed the threshold for “major” flooding without a hurricane, notching the highest level in 11 years • America’s Northern Mariana Islands are hunkering down as Typhoon In-Fa is set to brush past its northern reaches • India has evacuated tens of thousands from its eastern coast as Tropical Cyclone Arnab makes landfall.


THE TOP FIVE

1. Israel’s nail-biter election could bring a former long-duration storage startup exec to power

Which way? Nir Keidar/Anadolu via Getty Images

Keep reading...Show less
Blue