2021 is set to be a year of reinvention for the real estate market. As the industry grapples with the challenges posed by COVID-19 and civil unrest, real estate leaders are tasked with preserving value, ensuring safety, and prioritizing risk management and business continuity planning.
The pandemic has accelerated changes already in motion, particularly in retail and office spaces. Tenant leases have been canceled, leading to the emergence of smaller office spaces. Empty anchor mall stores and vacant big box retail outlets are being replaced by entertainment venues and warehouse distribution centers. Former commercial offices are giving way to high-rise condominiums.
Throughout the years, the real estate industry has demonstrated resilience and creativity in repurposing assets and fast-tracking construction. And 2021 will be no different.
The "COVID-19 Trifecta" and Rising Insurance Costs
One significant impact of the pandemic is the convergence of vacant properties, loss of rent, and looting, which collectively contribute to future insurance costs. In high-risk areas prone to hurricanes, wildfires, or hail and windstorms, insurance rate increases are expected to reach as high as 30 percent.
Triple net leases, where tenants assume responsibility for property insurance, have been particularly affected. When a triple net lease closes, leaving the property vacant, the risk of vandalism and break-ins rises. Additionally, the building owner is left uninsured due to the vacancy clause in their policy.
Other pandemic-related risks, such as restaurants expanding onto the streets to serve patrons outside, have created uncertainties in liability. Without official contracts between venues and local governments, the responsibility for potential accidents remains unclear.
Property managers have offered some relief by overlooking a few months' rent in exchange for lease extensions. However, claims from tenants who contracted COVID-19 from surfaces must still be defended, leading to further rate increases.
To navigate these uncertain times, it is crucial to work closely with your insurance broker, understanding your policies, and mitigating risks specific to your properties.
Repurposing Brick and Mortar Spaces
The repurposing trend continues as big box retail and mall anchor tenant shells are transformed into warehouses, entertainment parks, or Amazon fulfillment centers. With businesses embracing work-from-home arrangements or reducing office space, the commercial market is being retrofitted for residential use. Downtown high-rises and old office buildings renovated into condos will replace shrinking office spaces in densely populated areas. However, such pivots come with additional risks and policy considerations, necessitating consultation with insurance brokers.
Social Inflation and Rising Insurance Costs
Across industries, settlements exceeding $10 million for property or worker's compensation-related accidents, known as nuclear verdicts, are becoming increasingly common. This phenomenon, referred to as "social inflation," has led to rising insurance costs. Umbrella insurance companies now position themselves as primary carriers, expecting involvement in lawsuits more frequently. Even when baseless cases are thrown out, insurance companies often settle to safeguard their reputation.
To combat these rising costs, effective risk management practices are essential. Document accidents in real time, take pictures, address injuries promptly, and provide proper medical attention. By showing care and preventing incidents from escalating, the chances of a large claim and a nuclear verdict are significantly reduced.
Multifamily Buildings and Increased Coverage Costs
Claims and nuclear verdicts related to fires, wind/hail, coastal hurricanes, and roof replacements have resulted in fewer insurance carriers willing to write policies for multifamily buildings. In 2021, habitational facilities can expect premium cost increases ranging from 50 to 100 percent, along with lower limits. To weather this storm, habitational property owners must demonstrate effective controls to prevent high-cost claims.
Navigating 2021 and Beyond
As the real estate sector faces higher rates and stricter underwriting requirements, underwriters now demand concrete plans for real estate portfolios entering 2021. A comprehensive risk management and business continuity plan is essential.
Creativity and resilience will be critical in telling your real estate story for the upcoming year. How has your portfolio adapted to maintain viability and reduce exposure? Working closely with your insurance broker, craft your narrative and position it in light of the industry's challenges and opportunities well ahead of your 2021 insurance renewal.