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HUB International 2021 Outlook

Real Estate Industry

 

Transforming Uncertainty into Opportunity

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Reinvention and Resilience

Real estate owners and operators are navigating unprecedented challenges, from vacancies to lost rent, all while re-purposing their properties. Proactively addressing their new business risks is key to shaping future success.

For the Canadian real estate market, 2021 will be about reinvention.

 

Owners will be challenged to preserve value across each portfolio and keep tenants and visitors safe. To do that, they need to emphasize risk management and business continuity planning in 2021.

“The industry has always exhibited resilience and creativity.”

The pandemic accelerated changes already in play across the real estate industry, specifically for retail and office spaces. As a result of COVID-19, tenant leases were cancelled and smaller office spaces emerged. Entertainment venues and warehouse distribution centres replaced empty anchor mall stores and vacant big box retail outlets. High-rise condominiums replaced former commercial offices.

Collectively, the industry has always exhibited the resilience and creativity needed to repurpose assets and fast track construction when necessary. In 2021, they’ll do it again.

Here’s more of what to expect for the real estate industry in the coming year:

“The “COVID-19 Effect” on the insurance market will significantly impact future insurance costs for real estate owners. Rate increases are expected to continue to rise between 15 and 25%, or even higher, in catastrophe-exposed areas where earthquakes, flooding, hail and windstorms are prevalent.”

1. The “COVID-19 Effect.”

Beginning in the fall of 2019 and set to continue well into 2021, the hardening insurance market was then exacerbated by the “COVID-19 Effect,” or the convergence of an uncertain economy, low interest rates, and global reinsurance losses. The effects of COVID-19 on the insurance market will significantly impact future insurance costs for real estate owners. Rate increases are expected to continue to rise between 15 and 25%, or even higher, in catastrophe-exposed areas where earthquakes, flooding, hail and windstorms are prevalent.

Other emerging risks specific to the pandemic have changed the risk management conversations brokers are having with real estate owners and operators as well. Changes in occupancy or vacancy will impact an insurer’s risk appetite for a property. Hotel and hospitality risks have been particularly impacted with reduced occupancy and income, increasing the potential moral hazard in this class. One positive has been the reduced frequency and severity of water claims for multi-family residential buildings as more people sheltered and worked from home.

With a sustained low interest rate environment, insurers are more focused on underwriting discipline and profits through stricter controls and scrutiny. Expect to answer more questions from your broker and provide information around risk mitigation, loss prevention and property maintenance – all of which will enhance your broker’s ability to find capacity at competitive terms. As we move into 2021 and many of the effects of the pandemic on real estate and business operations remain unknown, your insurance broker will be key to managing and transferring risk. Make sure you understand your P&C policies, what they cover, what they don’t and the best ways to mitigate the individual and unique risks of your properties.

Watch our on-demand webinar on rising real estate insurance rates and how you can take control and manage costs

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“Shrinking office space in highly populated areas will give way to a rise in residential properties.”

2. Accelerating brick and mortar repurposing.

The high ceilings and large open space of big box retail and mall anchor tenant shells are being repurposed as warehouses, entertainment parks or Amazon fulfillment centres. While some businesses are planning to make work-from-home more permanent and others are simply reducing their square footage, the office market is similarly being retrofitted for residential use. Whether it’s a downtown high-rise or an old two-story art deco office building renovated into condos, shrinking office space in highly populated areas will give way to a rise in residential properties. Hotels are being repurposed into low-income housing. Real estate owners need to consult with their insurance broker to determine what additional risks and policy considerations come with such a pivot.

“Even when bogus cases are thrown out, they still have to be defended.”

3. Social inflation continues to erode the real estate market.

In the U.S., settlements exceeding $10M for an injury or property accident are known as nuclear verdicts. They’re no longer uncommon there, which makes Canadian insurance companies nervous that a similar trend is likely to follow here, north of the border. This phenomenon, which has led to rising insurance costs, has been dubbed “social inflation,” and it’s occurring across industries. These nuclear judgements are often much higher than what was previously awarded for the same infraction or injury. As a result, umbrella insurance companies are now considering themselves as primary carriers. If there’s going to be a lawsuit, they expect to be involved sooner and more often. Even when bogus cases are thrown out, they still have to be defended, and often insurance companies will understandably settle for large sums just to safeguard the business’ reputation.

Work with your insurance broker to determine what risk management best practices can be implemented across your portfolio to minimize claims. Keep records of maintenance and have a snow-clearing contract in place. Document accidents in real time, including taking pictures of the injured person, the location and any property damage, and make sure your business addresses the suffering of the injured person immediately after the accident. Make sure you show care and help the injured obtain the proper medical attention without admitting liability.

 

Collectively, the industry has always exhibited the resilience and creativity needed to repurpose assets and fast track construction when necessary. In 2021, they’ll do it again.

“Residential apartment and condominium properties will need to show underwriters the controls they have implemented to prevent common, high-frequency claims.”

4. Multi-family risk increases, coverage costs follow.

An uptick in claims in the apartment and condominium market due to fires, water escape, wind/hail and flooding have reduced the number of insurance carriers willing to write this class. For this reason, moving into 2021, multi-family residential can expect to see another 20 to 50% increase, along with further increased deductibles in their general property coverage.

Residential apartment and condominium properties looking to weather this storm will need to show underwriters what type of controls they have implemented to prevent common, high-frequency and severity water and fire claims. Work with your broker to evaluate and improve your risk management, ensuring underwriters will want to take on your risk in 2021.

2021 Growth and Beyond

As rates and underwriting requirements have increased across the real estate sector, more and more underwriters want to see a concrete plan in place for real estate portfolios moving into 2021. This includes a capital investment plan for building repairs and maintenance and a risk management and business continuity plan.

Risk management and resilience will be key themes in telling your story moving forward. How has your real estate portfolio pivoted to maintain viability and reduce exposure? Work with your broker to craft your narrative and position your properties in the best light, well ahead of your 2021 insurance renewal.

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