Commercial real estate distress is growing as more property owners struggle with their loans, and rising insurance costs are adding another challenge, especially for small landlords.

Insurance brokers and lenders predict that more borrowers will face force-placed insurance, which lenders apply when a borrower’s coverage lapses or is inadequate. This type of insurance is often 10 times more expensive than regular coverage, placing a heavy burden on small property owners.

Lenders impose force-placed insurance to protect their investments when a property is insufficiently covered against risks like natural disasters. This insurance, which typically covers fire and wind damage, is added to the loan, increasing monthly payments. Force-placed insurance becomes especially prevalent during times of financial distress, such as the 2008 Great Recession, and could become a bigger issue if the real estate market worsens.

The average cost of insuring commercial properties and apartments has risen sharply, leading to higher premiums that may force borrowers into bankruptcy or foreclosure. Some borrowers opt to keep force-placed insurance, as it’s cheaper than market-rate coverage. While force-placed insurance doesn’t directly trigger foreclosure, failure to pay these premiums can add to the loan balance, worsening the situation for both borrowers and lenders.

For properties with securitized loans, force-placed insurance can also lead to special servicing, where payments rise drastically. Though lenders are required to give borrowers 45 days’ notice before imposing force-placed insurance, many still struggle to secure appropriate coverage, especially smaller property owners who lack the resources of larger portfolios.

In the end, rising insurance premiums contribute to the growing financial strain on property owners, further complicating the already challenging landscape of commercial real estate.

Source:  Bisnow