The office market – challenged by inflation, more natural disasters and a drop in lease income – also faces insurance costs that have risen 7.6% each year since 2017.
NEW YORK – Moody’s Analytics reports that commercial real estate insurance costs rose 7.6% annually, on average, since 2017. The rising cost of insurance piles onto other current challenges, including high vacancy rates, lower rental/lease income, higher interest rates and lower building values.
Insurance premiums have risen thanks to inflation, a shrinking reinsurance market and larger natural disaster costs. Hundreds of thousands of dollars in additional annual costs, based on the size and location of a commercial property, can offset a year’s worth of profits.
In rental-apartment buildings, insurance costs rise 14.4% annually, on average, in Dallas, 13% in Los Angeles and 12.6% in Houston – and property owners say it’s hard to find insurers willing to cover their buildings in the first place.
Unlike mortgages that often cover long terms, insurance contracts are renewed annually, which has forced commercial property owners to sign more expensive policies or skip coverage altogether.
According to CoStar Group, insurance costs have impacted building values, contributing to a 79% drop in the number of property sales for $25 million or more since late 2021.
“Deals that may have just fit what we are buying are now off the table because the insurance costs are just too high,” says Ian Bel, managing member of apartment landlord Olive Tree Holdings. In many cases, commercial landlords can pass insurance costs on to tenants, but rental apartment building owners often have to absorb those higher costs.
Source: Wall Street Journal (09/26/23) Putzier, Konrad
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