Skyrocketing Insurance Rates Challenge the Commercial Market

The financial challenges facing property owners and investors in the commercial real estate market continue to be relentless. One expense hitting the hardest at the start of 2024 is insurance premiums. Though essential to investment properties, the alarming rate at which these costs have rapidly increased is wreaking havoc on the commercial market. Several key factors are to blame for this crisis, but the most difficult factor is the implications on business owners and investors.

The Rate Increase Translation

Since 2017, insurance premium increases have been consistently on the rise. For a few years, the rates were manageable, but in 2023, the rates saw an average increase of 20.4% in the first part of the year, an increase the market has not seen in over two decades. 

Maybe 20% does not sound alarming at first, but when translated into dollar amounts, it’s a much harsher reality to take in. For example, two years ago, the building coverage for Wheeler Commercial cost around $8k. A year later, that rate had more than doubled to $19k. This year…the cost is now $35k.

Factors Driving the Rising Costs

Here are several factors at the root of this insurance crisis.

Natural Disasters
The severity of natural disasters such as hurricanes, wildfires, and floods in populated areas has posed major concerns for insurance companies. Insurers have to factor in the risk of property damage or loss due to these events, which results in higher rates. 

Construction Cost & Property Valuations
Construction costs have steadily increased in recent years due to rising labor and material costs. These costs directly impact the replacement cost of commercial buildings, leading insurers to adjust rates accordingly to cover these potential costs.

Along with construction, as property values rise, the potential cost of claims also increases, resulting in insurers adjusting their rates to reflect these higher property values and ensure they can adequately cover potential losses.

Increased litigation
Commercial real estate owners and businesses are facing a surge in litigation, including lawsuits related to slip-and-fall accidents, property damage claims, and tenant disputes. The rise in litigation leads to higher claims costs for insurers, leading to rate adjustments.

Underwriting performance

Insurance companies’ underwriting performance also affects their pricing decisions. If insurers have experienced significant losses or poor profitability in the commercial real estate insurance sector, they may increase rates to improve their overall performance.

The Impact on Property Owners & Investors

Though we can understand the cause of these premium hikes, the impacts on property owners and the overall market are troubling.

Limited availability of coverage
The rising insurance rates are leading to reduced availability of coverage options. Business owners are seeing renewals that only offer half the original coverage at the same rate. Full coverage options are costing business owners double the price.

Increased Expenses & Decreased property value
Higher insurance rates directly translate into increased expenses for investors. This issue can lead to reduced profitability and cash flow for property owners, impacting their ability to cover other costs or invest in new projects.

High insurance rates can potentially reduce the overall value of commercial real estate properties. Potential investors or buyers may consider the high insurance costs a financial burden, leading to lower offers or reduced interest in the property.

Limited Financing Options
Rising insurance rates are also affecting financing options for investors. Lenders may require higher down payments or increased borrowing costs due to the perceived risk associated with higher insurance expenses making it more challenging for investors to secure loans or obtain favorable terms for their commercial properties.

Inflated Operating Costs
With increased insurance rates, property owners may need to pass on additional costs to tenants through higher rents or service charges. In turn, increased costs strain the tenants, potentially leading to increased vacancy rates or difficulty attracting or retaining businesses.

Forging Ahead

Overall, the rise of commercial insurance rates is hitting an already beat up market and the rate hikes are exposing investors and business owners to greater financial risk in the process. While coverage is essential for mitigating risks, it is a balancing act of epic proportions. It is essential, especially now, for business owners and investors to understand current market dynamics, consistently review coverage options, and be vigilant in assessing evolving business needs. A proactive approach is the best way to mitigate risks and challenges as they arise in the commercial market.

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