Climate risk drives up property insurance prices, impacting commercial real estate: Report

Reinsurance costs, persistent inflation, regulations, and frequent weather-related claims are driving up property insurance prices, affecting commercial real estate returns, valuations, and transactions, according to a Urban Land Institute (ULI) and Heitman report.

According to research, rising insurance costs are squeezing property owners, leading to lower net operating incomes and, in some cases, impacting property valuations and transactions faltering.

Additionally, lenders are tightening financing terms by imposing stricter insurance covenants.

The Insurance on the Rise: Climate Risk and Real Estate Investment Decisions report highlighted strategies for securing affordable insurance coverage, investment considerations that may make a building or portfolio more attractive to insurers, and emerging trends that could reshape the market moving forward.

Laura Craft, Global Head of Portfolio Sustainability Strategies at Heitman, said: “Rising insurance costs are a significant factor impacting liquidity in the commercial real estate market. Investors are increasingly taking on more risk and initial out-of-pocket costs, as insurers reprice to limit increased payouts and higher risk exposure.

“As investors and other market participants navigate these new challenges, the Insurance on the Rise report offers actionable insights and strategies to adapt to the evolving landscape, enabling stakeholders to make informed decisions and maintain resilience in their portfolios.”

“Natural catastrophes are costing the global insurance market tens of billions of dollars, contributing to rising property insurance premiums and introducing new levels of uncertainty across the commercial real estate market,” Lindsay Brugger, Vice President of Urban Resilience at ULI, added.

She continued: “As extreme weather events increase in frequency, intensity, and cost, a property insurance policy can no longer be real estate’s sole risk reduction strategy. Strategic management of physical climate risk must be part of the solution.”

To manage rising costs, the report suggests investors will need to not only identify creative coverage opportunities but also manage physical climate risk strategically to build portfolios that can attract affordable insurance policies and maintain profitability.

Investors will also need to be aware of the trends in the single-family residential insurance market that could have implications for commercial real estate.

These include the possibility of insurance-driven migration, the growing insurance protection gap, and the solvency of government backed insurance programs.

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