Home / Commentary / Risk Management in Real Estate Investment
Print This Post Print This Post

Risk Management in Real Estate Investment

For the real estate owner/operator, 2019 will be about looking good. That is, making your portfolio a safe bet for underwriters.

The long-standing soft commercial property market that led to lower loss ratios and lower premiums for many underwriters is now headed toward correction. Property policies have nowhere else to go but up, thanks to the catastrophic 2017 hurricane season and subsequent depressed building valuations. Building owners/operators can expect to see carriers instituting rate increases throughout 2019. When it comes to loss-affected and coastal properties, the rates are likely to spike 25% or more.

Properties that maintain—or improve—their standing will be best positioned to keep costs at bay. The proven way to do this is to invest in tighter risk management, including disaster preparedness ahead of the next catastrophic event and engaging your property policy broker to do what they do best—negotiate on your behalf.

Here’s what is in store for real estate in the months ahead.

Habitational Real Estate Price Increases

Driven largely by traditional property loss leaders, including fire and water damage and increased property valuations, the largest property policy increases will be felt by habitational real estate owners. In the first half of 2018 alone, building construction costs were up 3%. Considering this rate of inflation, a property valued at $1 million just a decade ago is very likely significantly underinsured today. To best position habitational real estate, champion preventative maintenance, risk management, emergency response, and have a water mitigation plan.

Water Damage Remains a Major Loss Leader

One of the largest drivers of commercial property losses, water damage claims, will continue to wreak havoc across the country in 2019. Aging infrastructure and defects in new construction are causing significant claims to occur across the country. What begins as a small event in one space often becomes a massive claim. For example, a recent claim involving a residential high-rise condominium occurred when a half-inch water line broke in the penthouse unit and wasn’t stopped for 20 minutes. Due to the trickle-down of water to many other building units below, the result was a six-figure claim, with months of headache for the affected condo owners. Underwriters have been seriously affected by water damage claims over the last few years, and are therefore including additional deductibles on property policy renewals to protect themselves.

Collaboration Has Never Been Easier

Warehouses and shared workspaces are exploding, counteracting the losses and foreclosures in retail in urban areas like New York, Chicago, Charlotte, Atlanta, and Los Angeles. The “WeWork”s of the world have a strong leasing power in high numbers—and they’re passing the savings along to businesses looking for a smaller footprint and cost. Like renting a car, it doesn’t strain the pocket to rent office space by the day, week, or month—especially when someone else is taking care of the back-of-house technology infrastructure, office management, and building upkeep. A real option for businesses facing increased operating costs, shared work spaces are here to stay—at least for a while. Consult your broker/carrier to find out what type of insurance and risk transfer methods are best if you decide to engage shared workspace.

It’s Not Easy Being Green

Sustainability initiatives are great—when they don’t lead to additional risk. When they do, property owners and operators will face limited insurance options. Photovoltaic (solar) panels on the roof introduce the chance for electric shock. If charged, firefighters won’t spray water on them to extinguish a building fire. Near the coast, roof-installed renewables could blow off in a storm, causing additional damage to other structures. Similarly, wood structures are difficult to insure due to their increased risk of fire. Consider discussing renewable options with your broker and underwriter before you decide on installation.

Looking Ahead: 2019 and Beyond

Portfolio managers hoping to minimize property policy increases in 2019 and beyond will need to look inside their facilities and strategically institute best practices in the hopes of minimizing common loss leaders like water damage. They’ll need to institute only sustainable initiatives that don’t increase risk and consider investing in. They’ll also need to consider shared workspaces to engage millennial workers. Those who engage their insurance broker to minimize premiums and optimize policy language will be best positioned in 2019 and beyond.

About Author: Chris Dunlap

Chris Dunlap, MS, ARM-E, CBCP, CFPS, CLCS, CRIS, is VP and Risk Services Lead for Hub’s National Real Estate Practice.

Check Also

Federal Reserve Holds Rates Steady Moving Into the New Year

The Federal Reserve’s Federal Open Market Committee again chose that no action is better than changing rates as the economy begins to stabilize.