The Rising Costs of Insurance and Implications for Commercial Real Estate

Terrydale Capital

Apr 16, 2024 7 Min read

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When investing in commercial real estate, it is imperative to protect that investment through a variety of different insurances. However, as we move further into the year, insurance costs have steadily risen causing their own challenges for investors. Given that investors must take into account all potential expenses when investing, insurance costs have reached a point where many deals are struggling - even failing - to pull through. This shift has become a cause for concern for many investors and requires some extra maneuvering especially when devising an exit strategy.

What’s The Deal?

The year 2023 was plagued with a variety of increases in the broader market that made investing in commercial real estate, and real estate in general, more challenging than prior years. One of the increasing costs has been insurance, and the trend continues well into 2024. Individual and group investors in certain markets have recorded a marked increase in insurance costs of up to nearly three-times prior amounts. 

This volatility in insurance rates has led many deals in 2024 being abandoned or saddled many investors with costs above their future comfortability in order to avoid missing out on opportunities. Not only have insurance costs risen, but obtaining insurance in the first place, has been a major point of contention in the investment market. 

In states that experience more adverse weather - such as Florida, California and Texas - investors are finding it more difficult to justify deals when accounting for exorbitant insurance costs. The rise in insurance premiums unfortunately perpetuates a vicious cycle as premiums will continue to rise to cover the losses in these states. Other states notably affected include Colorado, Georgia, Missouri, Kansas, and South Carolina. 

The rise in insurance costs also extends to developers especially in the SFR industry leading to higher home prices and HOA fees to cover these expenses. It is estimated that these costs will cause a rift in timing for deals for many moving forward both developers and investors. Multifamily also feels the pressure of increased insurance costs with owners unable to pass the extra costs to end users through rent increases as rental increase spikes have already been a major point of contention. 

The rise in insurance costs only adds on top of the already present difficulty in getting deals done in the current market with high interest rates, increases in debt service coverage ratios and general lower lending amounts by a variety of lending sources. 

How To Maneuver

Investors within or looking in states such as Texas, Florida, Georgia, Colorado, South Carolina, Kansas and Missouri need to be extra conscious of their investment capability and make comprehensive cost assessments when it comes to insurance. Understanding exact locations of opportunities can affect investment capability such as if the property sits in a floodplain

Connections matter. Getting a foot in the door of any insurance provider available that is willing to negotiate terms on a property is imperative. However, it is much easier said than done. Having the right team beside you can ease the stresses and difficulties of finding insurance avenues that won’t kill a deal before it starts. At Terrydale Capital, we boast not only a large breadth of connections to some of the nation’s top lenders, we also have access to a wide array of commercial insurance connections for all of our clients’ insurance needs. 

In Conclusion

Insurance costs are on the rise with the consequence of putting many deals in the market in jeopardy. On top of this, the cycle is poised to continue as insurance providers raise premiums to cover their losses. As premiums remain high, ramifications will be felt across the nation in commercial real estate. Large markets in states with higher premiums may see a decrease in investment activity due to a lessened capability giving other markets opportunities to see a surge in investment activity. 

Nonetheless, when you need the right team beside you for your commercial real estate investing goals, look no further than Terrydale Capital. Contact us today!  

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