Rising Insurance Costs Squeeze Commercial Real Estate

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A recent analysis by Moody’s reveals that for certain commercial real estate (CRE) properties, insurance expenses have doubled as a percentage of revenue since 2018.

Despite these rising costs, rent growth in many CRE sectors has helped offset the impact on net revenue and property values, albeit to a limited extent.

Over the past several years, escalating insurance rates—driven by inflation and the increasing effects of climate change—have been a growing concern. As previously reported by GlobeSt.com, insurance brokerage Marsh McLennan Agency has warned that property owners with significant exposure to last fall’s hurricanes could see rate increases between 50% and 100%.

Moody’s Findings

Moody’s analysis focuses on properties backing CMBS loans, categorized by insurance costs as a percentage of revenue. Only properties with data spanning 2018 to 2023 were included in the study.

  • Properties in the lower 50th percentile experienced an average increase of about 50 basis points.
  • The most impacted 1% of properties saw insurance costs rise from 7% of total revenue in 2018 to 13% in 2023.
  • Within this top 1%, the worst 5% saw costs jump from 4% to 8%.

Implications for Buyers, Lenders, and Investors

Although extreme cases remain a small subset, the findings signal a crucial need for buyers, lenders, and investors to prioritize insurance and physical risk assessments in due diligence. For asset managers, these cost increases can complicate budgeting, influence exit strategies, and even prompt requests for waivers on minimum coverage requirements from lenders.

On average, properties required an additional 1.3% annual rent growth just to maintain stable net operating income (NOI) and value. Properties in the worst-affected category faced an estimated 12% decline in NOI and value. For lenders, this equates to an implied loan-to-value (LTV) increase of nine percentage points, while the debt service coverage ratio (DSCR) could drop by 0.25x. Refinanced loans with higher interest rates would experience even steeper DSCR declines due to increased borrowing costs.

Geographic and Sector-Specific Trends

Geography plays a notable role, with the Gulf Coast—particularly Texas and Florida—showing a higher concentration of properties experiencing severe insurance rate growth. However, the issue is widespread, affecting metros across the East, Midwest, and South.

Among CRE sectors, multifamily properties saw the sharpest increase in insurance costs, rising from 7% of revenue in 2018 to 14.3% in 2023. Retail properties followed closely (8% to 12.8%), with hotels and offices both increasing from 5% to 10.4%. Industrial properties experienced the least impact, climbing from around 5% to 7%.

Interestingly, property size did not consistently correlate with higher insurance costs. However, despite rent growth helping to mitigate some of the burden, the median insurance growth rate in the top 100 metros has significantly outpaced revenue growth over the past six years.

As insurance costs continue to rise, stakeholders in the commercial real estate market will need to navigate an increasingly complex financial landscape, factoring in these growing expenses into their investment and operational strategies.

 

Source:  GlobeSt.

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