Crocker notes that even though premiums have increased 50% on the REIT's properties, for coverage that includes $500,000 deductibles, the insurance adds up to about 2% of the portfolio's total operating expenses. However, the cost of coverage has increased so much on some properties that it has severely sliced into net operating income, thus reducing the value of the property unless capitalization rates go down even further from their already historic lows.
In Florida, Crocker told The Gerald Fogelson Forum on Real Estate here, insurance costs were less than $70 per unit before Sept. 11. After the terrorist attacks on the US, the costs nationwide have risen to $85 per unit. In Florida, however, renewals are coming in at $400 per unit, he says.
At Equity Office Properties Trust, not even the largest office REIT in the US is immune from a doubling of insurance costs. "We've seen a 100% increase in pricing with many of the perils you'd normally need right now being excluded," Helfand says. "So you're paying twice as much right now for less coverage."
At least Sam Zell's office REIT can get coverage. Vornado Realty Trust President Michael Fascitelli told the audience at Roosevelt University here that some properties back home are having difficulty getting coverage, and his REIT has been put on notice by its carrier that premiums will double or triple.
The panelists bosses – Sam Zell for both Equity Office and Equity Residential along with Steve Roth of Vornado – were in Washington, DC lobbying Congress on the potential insurance crisis. The industry is calling on Congress to be the insurer of last resort, perhaps employing a pooled coverage system for terrorist claims.
Ironically, Fascitelli's company lost out in an attempt to buy the World Trade Center leasehold, but learned a lesson from the buyers. Although there already had been one bombing at the twin towers, the leaseholders not only had terrorism coverage in their insurance policies, but also had it in mind with safety procedures, which Fascitelli estimated may have saved about 10,000 lives.
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