Natural Disaster Risks Push CRE Insurance Rates to New Heights

Whether they invest in areas known to be primed for natural disasters like hurricanes and wildfires or in supposedly safer parts of the country, CRE investors can expect insurance rates to keep growing to the point where they represent substantial challenges, according to John Yang, senior vice president, research services, at Marcus & Millichap.

“The insurance model is built on the spreading and diversification of risk,” Yang said in a video presentation. “So even though California and Florida have more risk and insurance rates there have gone up considerably, the cost will be spread among the entire portfolio of the insured. Pretty much everyone’s rates will go up. For CRE investors, the insurance challenges are substantial and it makes underwriting deals more difficult.”

Yang warned that the rising costs of insurance against natural disasters will have an impact since insurance is generally about eight to 10 percent of total costs. And the frequency of major natural disasters is increasing, along with their cost.

From 1980 to 1988, the number of natural disasters, with costs exceeding $1 billion, was 3.1 per year. Between 1990 and 1998, there were 5.5 a year, and from 2000 to 2010, 6.7 a year. However, from 2012 to 2020 the number doubled to 12.8 a year, and from 2020 to 2024 they almost doubled again to 21 – with two months still left in this year’s hurricane season.

Between 2019 and 2024 insurance rates doubled, and the increase was greatest in places most prone to natural risks. Between 2023 and 2024 rates rose 35%. Though Yang used data based on RealPage analysis of the apartment market, he said it could be applied more broadly.

In Jacksonville prices shot up 238%, in Orlando they soared 223%, and in Miami, they spiked 191%. In addition, insurance gobbled up significant shares of total apartment expenses in Florida for 2Q 2024: about 16% in Miami, 14% in Jacksonville and Tampa-St. Petersburg, and 12% in Orlando, Fort Lauderdale and West Palm Beach. For the U.S. as a whole, insurance costs consumed slightly more than 9% of apartment expenses.

In dollar terms, there were also outsize increases in the cost of insurance, Yang noted. In San Jose costs ballooned 464%, in Oakland 418%, in San Francisco 204%, in Miami 191%, in Denver 296% and in Cleveland 254%. In the cases of Denver and Cleveland, however, Yang attributed the spike in costs to the denominator effect, since both cities started from a relatively low base.

“Natural disasters can materially impact decision making and underwriting and investor strategies,” Yang said. “The trends are clear and both the magnitude and cost will continue to rise, and those are things investors will have to continue to consider as they keep their eyes on the horizon.”

Indeed, a separate report published in October by Marcus & Millichap research analyst Benjamin Kunde noted that historic insurance cost increases are altering property valuations and complicating CRE underwriting. Higher costs are also affecting operators’ and developers’ margins. “Investors with portfolios that are heavily exposed to susceptible markets may opt for greater geographic diversification to mitigate long-term risks,” Kunde stated.

He noted that Central Plains are also exposed to frequent destructive tornados, though the Midwest, Northeast and upper Rocky Mountain regions are much less vulnerable to the destruction and costs of natural disasters.

“Multifamily investors that prefer to stay within familiar markets while mitigating insurance cost risk may diversify with other asset classes such as net-lease retail, office and industrial, in which tenants are responsible for insurance expenses.”