Expert: Time to Start Including Insurance Costs in Deal Prices, Valuations
It used to be that insurance was a necessary expense. Now conditions are becoming so extreme that it will become part of property valuation.
How strong is Hurricane Milton/? It has been a Category 5 storm for the most part but its winds are at the higher end of the Saffir–Simpson Hurricane Wind Scale and there has been talk of creating a Category 6 for storms of its strength. Not even two weeks after Hurricane Helene, it likely means more deaths, more injuries, and more property loss.
On the property side, it also means a challenge for insurance companies that will probably hike rates in answer. Insurance costs have soared in some areas. As Trepp reported in early October, the Tampa-St. Petersburg-Clearwater, FL MSA saw property insurance per square foot jump 132.2% from $264 to $613 between 2019 and 2023.
Former Goldman Sachs managing director Joseph Sumberg who now works for billionaire climate investor Tom Steyer told Bloomberg those in commercial real estate need to view insurance in a new way. Going forward deals and property valuations will need to include insurance costs, which are becoming high enough that it is killing some transactions.
Sumberg called it a “major factor.” As more major climate events take their toll, the insurance carriers have little chance to manage the impact other than by tightening underwriting and increasing premiums. Even then, many firms are leaving coverage areas they no longer see as profitable to cover. This will become the “single most important thing to impact” the CRE property market for decades to come.
The problem isn’t just hurricanes. It’s also wildfires, earthquakes, floods, and other disasters, whether natural or manmade. The cumulative impact is becoming unmanageable. As Bloomberg noted, getting insurance coverage is increasingly difficult. Multiple insurance companies have left Florida and California.
However, Stumberg said that the same conditions also create opportunities for investors. Asset managers closely following the appropriate climate-related data can see changes in property valuations and offer investment opportunities that many funds and investors might miss.
Stumberg runs Galvanize Real Estate, a subsidiary of Steyer’s Galvanize Climate Solutions. The division used technology to optimize “energy efficiency savings, generating renewable power, and increasing asset value”. It ultimately acquired an industrial property in Southern New Jersey as well as a second property.
They will form part of a “traditional value-add strategy” as Galvanize invests in decarbonization, it said.
The company said the anticipated investment at its real estate unit for both acquisitions and retrofits of buildings is $1.85 billion over the next three years.
“I’m hopeful that we will trailblaze some obvious case studies for people and make this clear for them because there’s plenty of opportunity here,” Stumberg said.