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The commercial real estate market is getting hammered by rising costs. Not only are higher interest rates scaring away potential buyers, but high insurance costs are also killing demand. Konrad Putzier reports in The Wall Street Journal:
Commercial property owners, already struggling with high interest rates and rising vacancies, face exploding insurance costs that keep hitting new highs.
Natural disasters, inflation and a shrinking reinsurance market have pushed insurance premiums to record levels, echoing the surge in home insurance rates for much of the U.S. That leaves many landlords in a bind. Their building values and rental income are down, yet expenses keep rising.
Commercial real-estate insurance costs have risen 7.6% annually on average since 2017, according to Moody’s Analytics. Those increases can result in hundreds of thousands of dollars or more in additional annual costs, depending on location and size of the property. They can be steep enough to wipe away a year’s worth of profits.
While insurance premiums are rising virtually everywhere and for all building types, some cities have been particularly hard hit, especially for multifamily buildings. Costs to insure rental-apartment buildings rose 14.4% annually on average in Dallas, 13% in Los Angeles and 12.6% in Houston. Some owners struggle to find anyone willing to insure their buildings, Moody’s said.
“I have never seen such a significant and rapid change in insurance capacity as well as spikes in pricing,” said Alexandra Glickman, leader of the real estate and hospitality practice at insurance consulting firm Gallagher.
For some property owners, the impact of rising insurance costs has been more punishing than rising interest rates. Many landlords still have low debt costs because they signed long-term, fixed-rate mortgages before 2022 that don’t expire for years to come. But insurance contracts typically renew every year. That means virtually every property owner has been forced to either sign a new policy at a higher cost, or skip insurance altogether.
Action Line: It isn’t just commercial real estate suffering from rising costs. Americans everywhere, especially those in retirement, are suffering from the worst inflation in decades. The best way to prepare for inflation like this is to save til it hurts, and trust in the power of compounding. When you want help, I’m here.
E.J. Smith - Your Survival Guy
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