Property insurance has become one of the fastest-changing costs in commercial real estate, especially in areas exposed to hurricanes, wildfires, floods and severe storms. Higher premiums and reduced coverage affect net operating income, loan terms and values. This article explains what is driving costs, how they affect owners of properties leased to investment grade tenants and other commercial property, and how owners can respond. Note that properties themselves are not credit-rated; “investment grade” refers to the tenant’s rating (see the investment grade guide).
What Is Driving Insurance Costs
- Costly weather and climate disasters. NOAA’s National Centers for Environmental Information counted 28 separate billion-dollar weather and climate disasters in the U.S. in 2023, a record number, costing at least $92.9 billion. In 2022 there were 18 such events, costing about $165 billion, led by Hurricane Ian. The number of events and their total cost vary a great deal from year to year, and annual figures are later adjusted for inflation, so compare years using the same vintage of data.
- Reinsurance and rebuilding costs. Insurers buy reinsurance to protect themselves against large losses, and higher reinsurance prices and construction costs are passed on to property owners.
- Flood insurance pricing. The National Flood Insurance Program’s Risk Rating 2.0 bases premiums on each property’s individual flood risk rather than mainly on flood zone, which raised premiums for many higher-risk properties and lowered them for some others.
- Insurers pulling back. In May 2023, State Farm General Insurance Company stopped accepting new applications for all business and personal lines property and casualty insurance in California, citing construction costs, growing catastrophe exposure and a challenging reinsurance market. When carriers pull back, owners may face fewer options, higher prices or state-backed insurers of last resort.
Effects on Commercial Property
- Net operating income: where the landlord pays insurance, higher premiums reduce NOI, which lowers the debt service coverage ratio and the value at a given cap rate.
- Net leases: under a typical triple net lease, the tenant reimburses or pays insurance. Higher premiums then raise the tenant’s occupancy cost rather than the landlord’s expenses, but they still matter: they affect the tenant’s store profitability, renewal decisions, and the landlord’s exposure if the tenant leaves and the property is vacant. Read the lease to see who buys the policy, what coverage and deductibles are required, and who pays uninsured losses.
- Development and renovation: higher insurance and stricter lender requirements can make projects in exposed areas harder to finance.
- Values and liquidity: buyers price in higher and less predictable insurance costs, which can mean higher cap rates and fewer bidders in the most exposed markets.
How Lenders Respond
Commercial mortgages require borrowers to keep specified insurance throughout the loan, and failing to do so is generally a default. In areas where coverage is expensive or scarce, lenders may underwrite higher insurance costs, require larger reserves or more equity, insist on specific coverage such as windstorm or flood, or limit deductibles. Requirements vary by lender and property, so confirm them before committing to a purchase.
What Owners Can Do
- Resilience upgrades: roof, opening and flood protection improvements can reduce risk and, in some cases, premiums.
- Market early: work with an insurance broker well before renewal, with complete property data and evidence of risk reduction.
- Coverage structure: review deductibles, limits and named-storm terms, and the trade-off between premium and retained risk.
- Captive insurance: large portfolio owners sometimes retain part of their risk through a captive insurer; this requires scale and capital.
- Lease terms: for net lease property, confirm that the lease allocates premiums, deductibles and uninsured losses clearly, and that the tenant’s coverage meets lender requirements.
Evaluating a Net Lease Property?
We can review how a lease allocates insurance costs and risks, alongside the tenant’s credit and the price against current listings. On the majority of transactions, there is no separate fee to you as the buyer for representation; the listing broker pays a cooperating commission.
Frequently Asked Questions
How many billion-dollar disasters did the U.S. have in 2023?
NOAA counted 28, a record number, with a total cost of at least $92.9 billion. In 2022 there were 18, costing about $165 billion.
Who pays insurance under a triple net lease?
Typically the tenant, either by buying the policy or reimbursing the landlord. Check the lease for required coverage, deductibles and who bears uninsured losses.
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