By Tom Delark and Chris Dunlap
For the real estate owner/operator, 2019 will be about looking good. That is, making your portfolio a safe bet for underwriters.
Property policies have nowhere else to go but up, the result of a long-standing soft commercial property market now headed toward correction, largely due to the lasting impacts of the catastrophic 2017 hurricane season and depressed building valuations. Building owners/operators can expect to see carriers looking for rate increases in 2019. Loss affected properties and coastal properties could experience spikes of greater than 25%.
Those that maintain or improve their standing will be best positioned to keep rising costs at bay. This will require tighter risk management, including disaster preparedness ahead of the next CAT event and engaging your broker to do what they do best – negotiate on your behalf.
Looking ahead, here’s what is in store for real estate in 2019:
- The habitational real estate challenge. The largest property policy increases will be felt by habitational real estate owners. This increase will be driven largely by traditional property loss leaders, including fire and water damage and increased property valuations. In the first half of 2018 alone, building construction costs were up 3%. Considering this rate of inflation, a property valued at $1M just a decade ago is very likely significantly underinsured today. To best position your habitational real estate, champion preventative maintenance, risk management, emergency response and have a water mitigation plan.
- Water damage maintains its standing as a major loss leader. One of the largest drivers of commercial property losses, water damage claims, will continue to wreak havoc across the country in 2019. As a result of an aging infrastructure and defects in new construction, significant claims are occurring across commercial and residential high-rises. Typically, what begins as a small event in one space becomes a massive building-wide claim. For example, a recent claim involving a residential high rise condominium occurred when a ½-in. water line broke in the penthouse unit and flowed water for 20 minutes. Due to the cascading effect, the result was a major six-figure claim, with months of headache for the affected condo owners. Underwriters are now taking note and will put additional deductibles on property policy renewals to protect themselves.
- It’s not easy being green. Sustainability initiatives are great – when they don’t lead to additional risk. When they do, property owners and operators will face limited insurance options. Photovoltaic (solar) panels on the roof introduce the chance for electric shock. If charged, fire fighters won’t spray water on them to extinguish a building fire. Near the coast, roof-installed renewables could blow off in a storm, causing additional damage to other structures. Similarly, wood structures are difficult to insure due to their increased risk of fire. Consider discussing renewable options with your broker/carrier before installation.
- Share your space. Warehouses and shared workspaces are exploding, counteracting shrinking retail demands in urban areas. The WeWorks of the world have a strong leasing power in high numbers, and they are able to pass the savings along to businesses looking for a smaller footprint. Like renting a car, it doesn’t strain the pocket to rent office space by the day, week or month - especially when someone else is taking care of the technology infrastructure, office management and building upkeep. A real option for businesses facing increased operating costs, shared work spaces are here to stay. Consult your broker/carrier to find out what type of insurance and risk transfer methods are best if you decide to offer shared workspace.
2019 Growth and Beyond
As 2018 comes to a close with few significant CAT events to date, carriers and insurers alike breathe a sigh of relief. Now it’s time for portfolios managers to look inside their facilities and employ best practices to minimize common loss leaders – fire; water damage and more - that threaten to further increase property policies into 2019 and beyond.