Why Commercial Owners Aren’t Sweating Fire Season

The increase in fire activity throughout California is having a major impact on the residential market. The blazes, which have destroyed whole communities in the last year, have fueled significant insurance rate increases to the tune of 300% in high-risk areas. In other cases, insurance companies have pulled out of markets completely. While this is having a huge impact in the residential world, commercial owners aren’t concerned. Why? Commercial assets tend to be built down in a flat land area, away from hillsides and brush, making them less susceptible to fire damage and rate increases.

“There doesn’t tend to be a lot of retail in these markets. I can count on one hand the retail and commercial properties that are in high impact areas,” Steve Bram, co-founder and principal at George Smith Partners, tells GlobeSt.com. “Usually, retail properties are down in the flatlands and homes are built in the hills. So, fires and insurance increases are not going to have as big of an impact on retail properties. Insurance isn’t increasing at all in the flatlands, but there is a terrible impact in the hills.”

In fact, Bram notes that in recent deals at the firm, fire risk hasn’t been an issue for lenders, even in markets where fires have roared. “One of my brokers just did a loan on a hotel in Malibu after the fires, and he was able to get that insured with a great quote,” he says.

For the few properties that are in high-risk fire zones, however, the increased insurance costs will impact asset values. “Owners of retail are going to be impacted by increased fire insurance, which they are going to want to pass on to tenants,” says Bram. “That means that insurance pass-throughs are going to go up, and they are going to have a higher cost to stay in business. If an owner was getting $2 per square foot in rent and $1 per square foot in CAMs, those CAMs will now increase to $1.50, which means that rents will go down to $1.50. That will impact the value of retail in those areas.”

Of course, there are exceptions. Commercial properties in middle class and working class markets are more susceptible to fire risk. That is because lower income communities struggle to rebuild after fire destruction, and are less able to absorb the rising insurance costs. “Paradise was a community that was nearly destroyed. The average income of the people that lived there was low, and those people could not afford to rebuild the community,” says Bram. “In areas with working class people, the fire insurance costs are either going to slowly destroy those area, or when those areas are burned down, they won’t be rebuilt. Working class and middle class areas are less likely to be built back up. In those cases, retail and commercial properties will be impacted.”