Climate Change & COVID-19: Will They Continue to Make an Impact on Real Estate?

By Elizabeth Fiegehen

December 30, 2021

It wasn’t just COVID-19 that shaped the risky 2021 Real Estate Market. The continuous and growing impact of climate change has played a key role in many property owner’s risk profiles over the last decade and are hitting the U.S. harder than ever before. Wildfires, coupled with an unexpected deep freeze in Texas, ate up a significant portion of property insurance capacity. Hurricane Ida alone packed a $25 Billion punch.

Unfortunately, a “return to normal” for the Real Estate Industry is not yet in sight. And who knows what the “new normal” may be. Instead, the upcoming year looks to be more of the same — a challenging environment that will require real estate owners and operators to use experience and tools to take as much control of their risk as possible and shape their risk story to worried insurance carriers.

As they take on this challenge, here is what Real Estate owners and operators in South Florida can expect in 2022.

Catastrophic weather will continue to impact insurance rates.
Extreme natural catastrophes are no longer rare. Nearly one third of Americans live in a county impacted by a weather disaster in 2021 and this year’s Atlantic tropical season brought 21 named storms to Florida alone.

In 2020, the Federal Emergency Management Agency (FEMA) started the process of reevaluating property flood risk lines in all areas for the first time in almost 50 years, with FEMA 2.0. Previously, only basic statistics such as a property’s elevation were taken into consideration, but now FEMA is factoring in rainfall, storm surge and how much it costs to rebuild to determine risk level. The enlarged flood zones in some counties will force thousands to buy flood insurance, and it’s predicted that over 75% of existing policyholders will see an increase in premiums.

This new attention to risk is causing many portfolio owners to evaluate property coverage costs and exclusions before buying. Reinsurers are exiting the market at a higher rate, drying up capacity and rates and consequently leaving fewer coverage options and higher rates for Real Estate owners and operators in the area.

While potentially unsettling, this is projected to be the new normal as climate change continues to bring frequent and extreme storms to coastal regions.

Catastrophic modeling will be even more important.
Global catastrophic losses in the first half of 2021 exceeded $40 Billion. Insurance providers have taken notice and are reevaluating their application requirements.

Catastrophe (CAT) models, which simulate potential catastrophic events and estimate the potential loss, are already heavily used across the real estate sector. However, it will become more and more critical to help property owners understand the extent of their risk moving forward, as well as estimating necessary policy limits and even securing coverages. In fact, some underwriters now require CAT modeling for large real estate portfolios.

For the remainder of the 2020s, a strategic combination of CAT modeling, water mitigation and disaster recovery planning will be required for portfolio owners to secure the right coverage in high-risk areas.

More scrutiny for multi-family housing owners is expected.
Insurance companies have been tightening conditions for insuring multi-family housing properties in recent years in response to worsening weather conditions. Recent headline-making disasters such as the collapse of a Surfside condo building have only intensified these concerns, leading many insurance providers to require proof of passed inspections before coverage.

At the same time, the market has experienced a long-standing rise in claims frequency which has led many mainstream carriers to only offer coverage with reduced limits for residential properties, forcing layers of policies on property owners in order to meet even baseline coverage needs.

Unfortunately, multi-family housing owners and operators can expect more scrutiny in 2022 as underwriters continue to put loss history, previous damage and updates to electrical, plumbing and roof structures under a microscope. A clear risk management plan will be vital to paint an accurate picture of controls to prevent high-cost claims.

Opportunities in repurposing.
Losses and vacancies due to the impact of the COVID-19 pandemic on businesses large and small have brought new opportunities to every local market and South Florida is no exception. Big box stores and anchor mall tenants are finding new life as warehouses, office space is being repurposed as restaurants and entertainment venues, and vice versa.

Luckily for real estate owners, the low interest rates that helped push repurposing along in 2021 are expected to remain relatively stable through the end of 2022.

From an insurance standpoint, owners will need to remember that when a building’s purpose changes, so does its risk. Evaluating new risks and coverage with a broker will be an absolute must as they take on these new opportunities.

Owners who want to reduce their exposure and increase resiliency will need to engage both new tech and traditional proactive controls across their portfolio in South Florida and beyond.