Insurance premiums for CMBS properties rise 16% in 2023, says Moody’s Ratings

According to Moody’s Ratings, a financial services firm specialising in credit ratings, research, and risk analysis, insurance premiums for commercial mortgage-backed securities (CMBS) properties rose by 16.4% in 2023, far outpacing the 3.4% US consumer price inflation.

Rising insurance costs, driven by extreme weather events, are becoming a major financial strain on commercial real estate (CRE), especially for multifamily properties.

These increasing premiums, which Moody’s Ratings largely attributes to a rise in weather-related events, are now surpassing other operational expenses in CRE, jeopardising loan performance, particularly for multifamily properties.

In states like Florida and Texas, where extreme weather events are frequent, insurance costs have grown to represent a substantial portion of operating expenses.

Moody’s Ratings analysis indicates that multifamily properties, known for high-density residential use, are especially affected, with a larger share of net income now allocated to insurance compared to other property types.

This financial strain is apparent across various markets, with premiums in high-risk areas like Miami and Orlando rising even further, creating concerns about cash flow stability and property valuations.

The rating agency highlights the impact of insurance inflation on property income, especially in disaster-prone regions along the Gulf Coast.

For instance, multifamily properties in Florida report that insurance costs account for an average of 7.7% of their revenue, significantly reducing net operating income (NOI) and weakening financial resilience amid rising expenses.

For CMBS loans, this trend presents potential long-term challenges, as slower NOI growth could reduce property values and make it increasingly difficult to maintain positive cash flows.

Moody’s Ratings attributes these escalating costs to several factors, including the increasing frequency of hurricanes, floods, and fires, along with higher construction costs, rising reinsurance premiums, and more development in high-risk areas, all of which add pressure on insurers and property owners.

Hurricane Ian serves as an example of how a single major event can dramatically influence insurance pricing, which has been especially evident in Florida’s multifamily insurance market.

In high-risk states such as Texas and Louisiana, insurance expenses now make up nearly 10% of total costs for multifamily properties, underscoring the impact of insurance inflation on CMBS property performance.

If these trends continue, insurance premiums may place significant pressure on CMBS loan holders, especially if consecutive natural disasters cause coverage limits to be exceeded.

As the frequency of weather events increases, Moody’s Ratings says that safeguarding property values and achieving NOI growth will require enhanced risk management strategies to address the uncertainties of climate change and related insurance challenges.

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