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HUB International 2022 Outlook

Real Estate Industry

 

Stability, Creativity and Growth

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Real Estate Will Tell a New Story

A hoped-for “return to normal” in real estate isn’t yet on the horizon. Instead, 2022 will be about how owners and operators position themselves to maximize opportunities while still coping with the impact of COVID-19.

A new view of risk in real estate

Real estate owners and operators will shape their risk story as 2022 will bring difficulties in securing coverage.

To survive, some real estate owners and operators reinvented themselves in 2021, repurposing property to meet new market demands.

To secure coverage, real estate owners need to show underwriters strong risk management and operational controls

In 2022, they’ll continue such efforts to deal with ubiquitous catastrophe exposures, rising liability risk and shifting demand. At the same time, residential real estate portfolios face heavy challenges.

Foot traffic in Canadian cities remained 80% below pre-pandemic levels, even lower than in the U.S.1 Yet commercial real estate is showing early signs of recovery.2

Retail has rebounded somewhat, benefiting from pent-up demand, but the transformation of the sector — think repurposing empty storefronts and turning vacant shopping malls into warehouses — will accelerate.3

At the same time, residential property risk increased. As a result, real estate owners with multi-family high-rises in their portfolio must layer policies to secure even baseline coverage needs.

Because coverage is harder to secure and policies cover less, many small single-property and large portfolio owners fear frequent and significant claims without adequate coverage during another pandemic lockdown or catastrophe.

But some real estate sectors — entertainment, institutions and to a lesser extent, retail — are seeing improvement in business and insurance. Painting a picture of risk management and operational controls for underwriters is now essential to securing coverage.

1 Real Estate News Exchange, “Vitality Index measures return-to-office activity in Canada, U.S.,” September 20, 2021.
2Canadian office leasing market showed early signs of recovery in second quarter of 2021: Morguard,” August 11, 2021.
3 PwC, Urban Land Institute, Emerging Trends in Real Estate 2021, accessed September 17, 2021.

Here’s what to expect in real estate in 2022:

While weather catastrophes are extreme, they are no longer rare

Strict adherence to risk management will be indispensable for success in real estate

1. Catastrophe exposures will shrink coverage options and raise rates

Extreme weather doesn’t discriminate. Properties built on hills near woodlands or next to rivers or lakes are now susceptible to wildfires and flooding.

Western Canada faced an extreme heat wave that shattered all previous records, and wildfires led to 181 evacuation orders and the burning of 8,700 square kilometres of land in British Columbia alone.4

While these catastrophes are extreme, they are no longer rare. Real estate owners and operators should expect more of the same in 2022, affecting all sectors (though residential in particular).

The result is that carriers, are being prudent in how they deploy their capital in catastrophe prone areas, resulting in less capacity available and tighter terms. That directly translates into real estate owners and operators having fewer coverage options and higher rates, particularly in areas where catastrophes are more frequent.

Perhaps most unsettling? This type of market will be the new normal through the 2020s. It also means strict adherence to risk management—and consulting with an insurance broker—will be indispensable for success in real estate.

4 CBC, “A look back at the 2021 B.C. wildfire season,” October 4, 2021.

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CAT modeling and tried-and-true risk management solutions will help secure coverage

2. Risk management tools like catastrophe modeling will look even better in 2022

With global first-half 2021 catastrophe losses of $42 billion USD — of which $40 billion USD was related to natural disasters5 — real estate portfolio owners will start to see catastrophe (CAT) modelling and other tech tools as a necessary cost of doing business.

CAT modelling will be critical in helping property owners understand the extent of their risk, estimate necessary policy limits and secure coverages accordingly. Underwriters have taken notice, with some requiring CAT modelling and other predictive tech for large portfolios.

However, old-fashioned, non-tech risk solutions and controls, such as water mitigation and disaster recovery planning, will never go out of style. Lower rates follow a tried-and-true formula: Provide proof that risk mitigation plans are bespoke to the facility, train staff to engage those plans and conduct frequent on-site inspections.

5 Business Insurance, “Insured cat losses $42B in first half: Swiss Re,” August 12, 2021.

When a building is repurposed, its risk profile changes as well

3. Boosted by low interest rates, repurposing chugs ahead

Losses and vacancies have brought new opportunities to every market. Repurposing means an unprofitable asset can be reimagined and rebuilt anew.

Perhaps most notably, failed big box stores and anchor mall tenants have found new life as warehouses — instead of retail outlets, these buildings now warehouse products bought online. Other buildings will be repurposed as entertainment and restaurant space. And the trend of using ghost kitchens to make meals for multiple delivery services and restaurant brands will continue.

Repurposing will gain steam in 2022. Low interest rates have helped drive repurposing, and interest rates are expected to remain relatively stable through the end of 2022.6

Owners and operators eager to repurpose property need to remember that when a building’s purpose changes, so does its risk. The closed restaurant repurposed as a cannabis dispensary takes on a whole new set of risks and needs to be designed for purpose. Evaluating new risks and coverages with a broker is an absolute must when repurposing.

6 Bloomberg, “Fed Likely Needs to Raise Interest Rates As Soon As Late 2022, IMF Says,” July 1, 2021.

For habitational and residential real estate overall, insurance rates will rise 20% or more

4. The multi-family housing insurance market will require creative solutions

Multi-family housing coverage will remain problematic in 2022, although we anticipate insurance capacity will increase in some multi-family housing sectors nationwide.

The high frequency of property claims, in particular water damage, will continue to affect portfolio owners of multi-family housing. Along with the lack of major capital upgrades and maintenance, the high frequency of claims has scared off many mainstream carriers, which will only offer coverage for residential properties with higher deductibles and rating. The exception is the BC Strata insurance market, in which capacity is increasing, resulting in a more stable rating — and, in some cases reduction in deductibles.

There will continue to be more scrutiny: Underwriters will put loss history, previous damage and updates to electrical, plumbing and roof structures under a microscope in 2022. We estimate that in the habitational and residential real estate market overall, rates will rise 20% or more.

As a result, owners and portfolio managers are often having to secure coverage at the time of quote, without the ability to shop around.

That doesn’t mean all doom and gloom for residential real estate owners. Instead, it’s incumbent upon them to implement proper risk management measures, and to tell the property’s risk management story to underwriters, painting an accurate picture of controls implemented to prevent high-cost claims.

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Moving forward in 2022

Rebuilding and repurposing properties may be necessary for some owners and operators. But it won’t be easy, requiring fit-for-purpose planning and valuation that reflects how the pandemic, social unrest and adverse weather have changed property use and operations.

Owners who want to reduce their exposure and increase resiliency will need to engage both new tech and traditional controls across their portfolio — regardless of location, property use and catastrophe exposure.

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