CRE Investors Should Diversify As Natural Disasters Increase

The $18 billion-plus natural disasters that impacted the US in 2022 did about $175 billion of damage with the vast majority of affecting real estate.

That’s just one of many astounding statistics from Marcus & Millichap, shared by its National Director of Research and Advisory Services, John Chang, during a company news video.

Natural disasters are becoming more frequent. Over the last three years, the U.S. experienced an average of 20 disasters with a price take more than $1 billion each.

That’s up from an average of 12.8 events per year in the 2010s, and an average of 6.7 similar events per year in the 2000s.

In addition, the financial impact of the disasters has increased – particularly when it comes to insurance rates. 

The states with the highest hurricane risk are Florida, Texas, Louisiana, and the Carolinas. And in the past five years through 2022, the US had five separate $1 billion wildfires that caused nearly $68 billion of damages.

Texas has had the most wildfire risk followed by California, Oregon, and Oklahoma.

As for floods, between 2018 and 2022, the US experienced six floods that caused at least $1 billion of damage for a total of $28 billion. The state of Washington had the most flood insurance claims in 2022, followed by Maryland and Texas.

“And all these natural disasters pose two major challenges for commercial real estate investors,” Chang said. “First, there’s the actual damage, the loss of revenue, the cost of repairs, and the time and energy that goes into cleaning up and repairing the impacted properties.”

Chang said this is all reason for investors to consider seeking a new geographically diversified investment strategy for their real estate portfolios.

“Even though the repairs and lost revenue may be covered by insurance, the damages will still cost investors time, short-term cash flow, and undoubtedly the whole process will involve a fair amount of brain damage,” Chang said.

As for insurance, nationally, homeowners insurance has gone up by more than 12% in the last year, and in some markets, real estate insurance has gone up by 40%, 50%, or even 60% in the past year.

Based on data from RealPage, US apartment insurance costs went up by about 33% last year.

In San Diego, they only went up by about 8%. But in Jacksonville, insurance costs went up by about 65%.

“While the percentage increases in some metros may be huge, the actual dollar amount may still be comparatively low in that market,” according to Chang.

For example, Jacksonville insurance rates, even after going up so much, are still below the insurance costs in Tampa or Houston.

“But still, this should be a significant consideration for investors, not just a cost of insurance, but the risks natural disasters pose to investors and how important geographic diversification can be,” he said.

“In the case of real estate, an investor who’s not geographically diversified could have their short-term cash flow driven to zero by just one natural disaster.

“Real estate investors, we need to consider more than the usual economic and business drivers like local job creation, population migration, new supply risks, and vacancy rates.

“Going forward, we also need to consider natural disaster risk and insurance costs, because investors need to consider the big picture.”