'It's Killing Deals': Florida's Troubled Insurance Market Increasing Concern For CRE Investors

Less than two weeks after Hurricane Ian churned up the southwest coast of Florida, the devastation of the storm has become clear: more than 120 people dead and an estimated $60B to $70B worth of property damage.

Now that search-and-rescue efforts are over, attention is shifting toward recovery and rebuilding, but a huge cloud looms over the efforts: the state’s property insurance market, which is teetering on the brink of collapse.

A dozen homeowners insurance companies have either left the state or folded in the last two years, and the insurers that remain have dramatically raised their rates in the last two years.

While the situation is less dire for commercial property insurance, there is still widespread concern about the impact the storm will have on owners’ ability to insure their properties going forward.

“I think we’ll lose more insurers as a result of this storm. The ones that stay, I’m sure, are going to look at this risk … and say, ‘We probably need to think about repricing,’” Shelton Weeks, the director of the Lucas Institute for Real Estate Development & Finance at Florida Gulf Coast University in Fort Myers, told Bisnow. 

“That has to show up in the rates for commercial real estate. When you think about it from an operator’s perspective, no matter what kind of real estate you’re operating, those come straight out of your bottom line and have an impact on doing business in the state.”

Weeks said it is "very likely" that, within the next year, some insurance companies will just stop offering policies to properties in the state — especially those built before construction codes were upgraded in the wake of Hurricane Andrew.

That could have dramatic impacts on the industry.

“For me, that’s a real concern,” he said. “I think if we get to that as an outcome, then you’re forced to either self-insure or take the older structures down and replace them. That immediately translates to slower future growth in the industry here in Florida.”

Premiums have gone up 20% to 25% in the last 18 months alone on commercial properties in Florida, said Spencer Morris, the president of developer Allen Morris Co., which owns offices, hotels and apartments in the state.

“That single line item definitely has continued to increase faster than almost any other operating cost line item within a building’s [operational expenses] stack,” Morris said. 

Morris said his company has shifted its investments strategically away from South Florida in recent years to other markets that are at less risk of climate change. While he said he hasn’t seen insurance options dwindle for commercial properties, if insurers stop underwriting new policies it would be “a huge problem.”

Mark Friedlander, chief communications officer for the Insurance Information Institute, said that, relative to the homeowners’ insurance market, the commercial property insurance ecosystem in the state is much healthier.

The high rate of failures and losses in the industry is largely a result of widespread litigation that has ensnared the state, he said. Florida accounts for 9% of homeowners’ insurance claims nationwide and 78% of litigation, according to the III. 

“Litigation in residential insurance from Hurricane Ian may fall between $10B and $20B,” Friedlander said in an interview. “It’s off the scale. We see trial attorneys already being extremely aggressive in the aftermath of Hurricane Ian. This could be a contentious event.”

The same contentiousness isn’t playing out in commercial real estate. But a different one is taking hold — insurance premiums rising fast, straining the delicate math equations investors are using to acquire property in the hottest markets in the country. 

“This will not help the hard market, everyone was thinking it was going to start softening a bit,” said Adam Sandler, the chief customer officer at Archipelago, a proptech firm that tracks companies’ disaster risk on a property-by-property basis and counts giant CRE firms like Brookfield, JLL and Prologis among its clients. 

Premiums are rising more because of the rapid increase in replacement costs than changes in climate risk calculations, Friedlander said.

Construction cost escalations, as well as litigation, have made paying out claims more expensive, to the point where even in 2020 and 2021 when there were no major hurricanes in Florida, property insurers lost over $1B each year, according to the III.

As prices have spiked, more and more companies are looking to find solutions beyond traditional capital insurance, Sandler said.

Large companies are increasingly using mechanisms called “captives,” in which they set up a separate entity to insure their properties with a stash of interest-generating cash. 

“These companies have so much money, they have such huge balance sheets, that they’re able to make decisions about their capital, they don’t want to give it to Chubb,” Sandler said. "These big corporates — and most of our focus is on the larger end of the market — for years now they’ve been ... using their own balance sheet [to insure properties]."

Danielle Lombardo, the chair of the global real estate practice at insurance brokerage Lockton, said the insurance market for property in Florida is in desperate need of reform, to the point it has grabbed the attention of national lenders.

Trepp estimated more than $50B of commercial real estate debt exposure in the path of Hurricane Ian. Roughly $2B of that is in the Cape Coral-Fort Myers region that took the brunt of the storm.

“I was just having this conversation with some some high-level executives in the lending community: At some point, we need to get together with the real estate community and the lending community in the state of Florida to come up with an insurance solution, because private insurers are not incentivized to come into Florida at this point,” she said.

Lombardo said she has clients that are already rethinking their acquisitions in Florida because of the increase in insurance premiums and decrease in willing insurers. The state’s population surge — and the development boom that has followed — has added to the burden of providers alongside the rise in construction costs and billions in expected damages. 

“As the population growth increases, development increases, there's more and more insurance capital needed and less and less insurance companies that want to write business. So it's a supply/demand issue,” Lombardo said.

“They're increasing deductibles to a point where lenders are not accepting their deductible structures, and the costs are skyrocketing to the point where it's killing deals. Like, people can't do deals in Florida because of insurance costs.”

Alex Gratereaux and Miriam Hall contributed reporting for this article.