As new sources of financing and liquidity slowly return to the real estate markets, investors, property owners and managers are bracing for stable growth in 2016.
According to London-based professional services company PWC's 2016 Emerging Trends in Real Estate report, strengthening U.S. macro-economic performance is bolstering absorption and improving occupancy in the majority of American real estate markets. The flow of capital into U.S. real estate continues to increase, with total acquisition volume for the 12-months ending June 30, 2015, up 24.6% to $497.4 billion, the report states.
Despite these positive growth indicators, the smartest players in the industry remain cautious, incorporating stronger risk management techniques to manage potential unforeseen risks and headwinds, which may come in 2016.
There are four important insurance trends to watch for this year that could have a significant financial impact on commercial real estate businesses:
Real estate companies should take a new look at their policies and take advantage of falling property insurance rates. (Photo: iStock)
1. Soft property insurance market
The property insurance market is currently in the middle of a soft market in which carriers are offering rate reductions in the 10% to 30% range.
This trend is expected to continue in 2016, creating opportunities for property owners and managers to save more on insurance costs, provided they employ smart risk management strategies.
For example, real estate companies should look into consolidating policies, reviewing property values and rental income data for accuracy, and providing additional building details for locations exposed to natural catastrophes.
Case in point: A model was run on a property location schedule for earthquake coverage, revealing five locations had been driving 80% of the loss estimate. Additional information pertaining to the earthquake design of those five buildings was received, and the model was run again.
The additional building characteristics led to a reduction in the loss estimate and corresponding rate by 20%. Also, as a result of careful analysis and negotiations with carriers, the property earthquake premium was reduced by $40,000.
Buying and renovating older buildings is in favor right now, but they come with their own risk issues. (Photo: iStock)
2. Increased exposure from older property acquisitions
PwC’s report confirms much of the capital pouring into real estate is going toward acquisition of older properties. “Renovation and redevelopment are not new concepts, but the fervor with which the market is embracing older space is making the market consider a wider range of potential investments,” the report states.
Older properties are creating risk issues not seen in ground-up or new development. These include many policies that are not properly aligned with contractual exposures or with increases in third-party-related liabilities.
Case in point: A real estate company’s liability program contained language that did not address contractor exposures adequately. During a renovation and installation of a new roof, several pedestrians were injured when roof materials fell and struck them. A claim was filed against the contractor and the building owner.
Following a review, the building owner broadened its coverage position with the contractor to include additional insured status. This allowed the building owner to receive coverage from the contractor’s policy, eliminating a $250,000 claim against the general liability carrier. The resulting premium increase would have been $75,000 to $80,000 per year with a total premium charge of $375,000 to $400,000.
Banks and other lenders are more focused on making sure real estate companies have appropriate insurance coverage for properties that have loans against them. (Photo: iStock)
3. Lender insurance requirements
Real estate companies are seeing an increased focus on lender insurance compliance and the need to be diligent in obtaining and maintaining coverage that meets or exceeds loan covenants.
Some lenders are requiring owners to purchase higher limits for law and ordinance exposure. In the event of damage to an existing property, law and ordinance coverage pays for the increased cost of renovations necessitated by changes in building codes.
Whereas many carriers offer low sublimits for this coverage, companies should be aware of the details and obtain limits that either meet or exceed those required by loan covenants. Doing so helps to ensure a company has the appropriate coverage in case of a loss.
Real estate managers and owners have to make sure that they data they collect from their tenants is protected. (Photo: iStock)
4. Cyber security
PwC analysts warn that managing the risk of hacking issues and paying attention to cyber security will penetrate ever more deeply into the real estate business in the coming years.
Specifically, real estate managers and owners could be held financially liable if they fail to secure confidential tenant information — typically shared in rental applications, credit reports, leases and rental agreements — from cyber criminals. Real estate companies should look for cyber and privacy protections that include:
- Identifying the number of confidential records handled by the real estate company.
- Outlining the program benefits (for example, breach notification costs and defense costs outside the limit).
- Determining the appropriate limits.
Case in point: A laptop was stolen from the management office of a large apartment complex, and company executives feared criminals would gain access to sensitive tenant data. The potential breach required roughly 10,000 past and present tenants be notified and their credit monitored.
The real estate notified the affected tenants immediately and provided credit monitoring services for a year. Because the company had the right coverage, the company did not sustain any significant rental income loss or the cost of notification and credit monitoring, which totaled $115,000.
Like any other business, real estate companies are obligated to protect tenants’, clients’ and partners’ sensitive data. Understanding where their organization might be vulnerable to a cyber attack will remain a major challenge and opportunity in 2016 and beyond.
Brian Dove is the national real estate practice leader for Valhalla, N.Y.-based insurance brokerage and consulting company USI Insurance Services. He is based in Dallas and can be contacted at email@example.com.
We’re on Facebook, are you?