It’s not exactly news that the United States (or the world) has been in the grip of climate-change-driven weather hazards. Terms like “super storms,” “atmospheric rivers,” “wildfires,” and others are seen more and more.

According to Deloitte’s just-released Financial Service Industry (FSI) Predictions Report for 2024, “the United States is leading the world in extreme weather catastrophes.” As a result, commercial real estate insurance rates are increasing, especially in states with the highest expected annual loss. How bad is it? Here goes:

• Insurance costs in these states increased by 31% year-over-year

• Insurance costs in the states increased by 108% over the past five years

• In 2023, there were 28 separate billion-dollar extreme weather events; estimated recovery costs totaled $92.9 billion

“We were generally aware of the substantial increase in insurance pricing for commercial real estate, but we didn’t expect that it had nearly doubled from five to ten years ago,” Deloitte’s Renea Burns and Tim Coy told Connect CRE.

Burns, Deloitte Audit & Assurance Partner and National Eminence Leader and Coy, Deloitte Center for Financial Services’ Commercial Real Estate Research Manager, co-authored the report with Niall Williams, Deloitte Center for Financial Services Research Manager.

Burns and Coy also commented that the types of extreme weather events have sounded alarm bells. “Cold waves in Texas or hurricanes in California probably weren’t on anyone’s bingo cards 20 years ago,” the experts added.

Stormy Weather

Nor is the outlook much better. The report said that by 2030, the cost premium of being in a higher-risk, extreme weather state could be 24% greater than the national average, compared to a 32.5% discount in lower-risk states.

According to FEMA’s National Risk Index, California, Florida, Texas, North Carolina, and Washington State are the top five states with the highest risk of extreme weather. In addition to increasing insurance rates, extreme weather events have driven some insurers to reduce coverage or leave states.

Nor is inflation helping the scenario. “If inflation persists, especially for labor and building materials, insurers are likely to adjust their prices up accordingly on top of the extreme weather,” Coy and Burns pointed out.

A Move Toward Solutions

More bad news: climate-change hazards aren’t going away any time soon. The American Red Cross dubbed 2024 “the most active year for tornadoes since 2017.”

U.S. tornadic storms killed at least 22 people across four states over Memorial Day weekend. Flooding in areas is becoming more common. In addition to the horrific loss of life, tornadoes, flooding and wildfires continue to destroy property.

What can real estate owners do to mitigate some of these extreme weather risks? The report suggests conducting regular risk assessments to pinpoint vulnerabilities associated with a property and its location.

Additionally, “enhancing security and monitoring measures, like cameras, access control, flood monitors and fire prevent tools are some strategies that might be easier to implement before delving into more capital or time-intensive efforts like captive formation or full relocation” Burns and Coy said.

The report also highlights resiliency efforts, such as more robust building materials, reinforced structures, and incorporating rain gardens or permeable pavement for better stormwater management. Renewable energy systems can help mitigate power disruptions while working with fire-resistant materials, and landscaping to reduce wildfires could also help.

Coy and Burns explained that while discounts and tax credits might not be as formalized for CRE owners as for homeowners, efforts to protect property should be similar. For example, “Florida offers sales tax exemptions for impact-resistant windows, doors and garage doors,” they said. Furthermore, some private insurers in the state also offer discounts to policyholders that strengthen and secure roofs and shutters to protect homes against hurricane-force winds.

Burns and Coy said that CRE occupiers and tenants can implement their own resiliency efforts to help reduce losses. The experts suggested working with brokers and insurance agents to see if discounts are available for such steps.

It is important to tailor these measures to the specific property and consult with risk management and insurance experts for guidance.

The Takeaway

Burns and Coy stressed the importance of understanding the connection between climate change, the increase in extreme weather and its hazards and increasing insurance costs for those involved with CRE. Still, all isn’t lost. Real estate investors don’t necessarily need to leave their properties in high-risk states.

“There are viable paths companies can take to help reduce the impact to the bottom line,” Coy and Burns commented. “These can be as simple as installing prevention and monitoring tools to as complex as forming their own insurance captives and insuring themselves.”