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A Guide to Help Reduce Your Commercial Property Risk

 
The last three years have been unequivocally stressful for commercial real estate. As we collectively navigate the unknown – from pandemic aftershocks to extreme weather – it’s important to understand how the commercial property market has been affected, and the steps you can take to better protect your business from disruptions. Professionals at The Hartford highlight the current economic, industry and underwriting risks that will impact commercial real estate.
 

Economic Shifts May Boost the Property Market

The rapid rise in interest rates reduced activity in the property market over the past year. However, data suggests that housing is generally mixed, though building activity is slowing. And nonresidential is seeing resilience in select areas.1
 
“For the commercial property sector, we are seeing strong growth in funding for manufacturing centers and highways. This is likely on account of geopolitical shifts that are encouraging companies to build high-end technological products domestically, such as semiconductors,” said Shailesh Kumar, head of economic and geopolitical risk at The Hartford.
 
Currently, the Consumer Price Index (CPI) declined to 3.2% year-on-year in June, bringing inflation back to its lowest level since early 2021.“We anticipate geopolitical shifts to continue and for this to be a growth area for businesses. While there remains growth in spending on commercial buildings, this is an area that otherwise shows some headwinds due to structural changes in this section of the economy,” said Kumar.
 

Shifting Conditions in the Property & Casualty Space

Though economic conditions are improving, natural disasters will have prolonged effect on coverage in the property and casualty space. Particularly, extreme weather is having a large impact on:3
 
 
 
 
  • Increased Deductibles and Limitations for Water Damage: Insurers have begun adding protective safeguards, using policy forms with built-in limitations for weather-related water damage. Additionally, they are encouraging businesses to create water mitigation plans before they will provide a quote.
  • Increased Market Scrutiny on All Valuations: To account for increased material costs, supply chain disruptions and labor shortages, insurers are requiring property appraisals before quoting renewals to account for changes in building valuations. Insurers are also using various software, or benchmarks, to improve rate accuracy and determine if reported values are within expected ranges.
  • Risk Quality Will Be Vital in Underwriting Decisions: Insurers are evaluating risk quality in greater detail than ever. This will affect the ability for businesses who have outstanding loss control recommendations, unaddressed hazards and lack of engagement in loss prevention to properly insure their company.
  • Lender Requirements Will Become More Expansive and Detailed: When financing properties there may be specific insurance requirements for limits, coverages and deductibles. If not met, building loans could be subject to default. These requirements have become more expansive and, in some cases, very difficult to meet in today’s market conditions.
 

The Risk of Being Under-Insured

Many businesses are under-insured and might not even realize it. 68% of buildings valued from 2020 to 2021 were underinsured by 25% or more.Appropriate commercial property coverage is essential.
 
“Replacement costs have risen significantly over the course of last three years, beginning during the COVID-19 pandemic and persisting well into 2023. The market has seen a dramatic increase in building material and labor costs driven by supply chain challenges, labor shortages, and catastrophic weather events,” said Ryne Carney, head of property product at The Hartford.
 
Rob Sullivan, real estate industry practice lead at The Hartford, agrees. “The elevated labor and material costs can leave a client under-insured. If there is a major loss, the limits might not be enough to cover replacement costs at today’s higher prices. “Commonly used construction materials including steel, copper, lumber and aluminum went up. Plus, construction delays and supply chain challenges drove up replacement costs as well,” said Sullivan.
 
A timely, accurate assessment of replacement costs can be the difference between your business recovering quickly or incurring additional costs. If you face an under-insured issue on a total loss, you can experience out-of-pocket costs on top of the deductible, which impacts business profitability. “The most common sign of potential under-insurance is policy limits that have experienced little to no increase in recent years, in contrast to labor and material costs, which have risen dramatically. This imbalance can result in policy limits now being significantly undervalued,” said Carney.
 

Valuation Process Is Essential for Commercial Property

Risk will always exist for the commercial property market. Consistent valuations are essential to maintain accurate coverage for your company and stay ahead of potential losses. Without proper valuations, an insurer cannot accurately estimate loss potential or obtain adequate pricing at the individual and portfolio level.
 
“Property valuations should be revisited at a minimum on an annual basis. For most insureds, insurance renewal is a natural time to undertake this process. While building valuation is often top of mind, it is important for buyers to also review other key property insurance coverages, such as business personal property and business interruption,” said Carney.
 
Work with your agent or broker well ahead of the policy expiration to ensure adequate time to plan for all aspects of the renewal, including identifying replacement costs critical machinery and equipment, property valuation, and calculating income replacement if a loss were to happen.
 
 
1,2 “US Inflation (Monthly),” The Hartford’s Global Specialty Insights Center, July 2023
3 “2023 Commercial Property & Casualty Market Outlook,” USI One Advantage, August 2023
4 “Underinsured Properties Are Crushing Reinsurers. Why Proper Valuations Will Be a Focus for Years to Come,” Risk & Insurance, March 2023
 
The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations contained herein are as of September, 2023.
Links from this site to an external site, unaffiliated with The Hartford, may be provided for users’ convenience only. The Hartford does not control or review these sites nor does the provision of any link imply an endorsement or association of such non-Hartford sites. The Hartford is not responsible for and makes no representation or warranty regarding the contents, completeness or accuracy or security of any materials on such sites. If you decide to access such non-Hartford sites, you do so at your own risk.
 
The Hartford Financial Services Group, Inc., (NYSE: HIG) operates through its subsidiaries, including the underwriting company Hartford Fire insurance Company, under the brand name, The Hartford,® and is headquartered in Hartford, CT. For additional details, please read The Hartford’s legal notice at https://www.thehartford.com.

 

The last three years have been unequivocally stressful for commercial real estate. As we collectively navigate the unknown – from pandemic aftershocks to extreme weather – it’s important to understand how the commercial property market has been affected, and the steps you can take to better protect your business from disruptions. Professionals at The Hartford highlight the current economic, industry and underwriting risks that will impact commercial real estate.
 

Economic Shifts May Boost the Property Market

The rapid rise in interest rates reduced activity in the property market over the past year. However, data suggests that housing is generally mixed, though building activity is slowing. And nonresidential is seeing resilience in select areas.1
 
“For the commercial property sector, we are seeing strong growth in funding for manufacturing centers and highways. This is likely on account of geopolitical shifts that are encouraging companies to build high-end technological products domestically, such as semiconductors,” said Shailesh Kumar, head of economic and geopolitical risk at The Hartford.
 
Currently, the Consumer Price Index (CPI) declined to 3.2% year-on-year in June, bringing inflation back to its lowest level since early 2021.“We anticipate geopolitical shifts to continue and for this to be a growth area for businesses. While there remains growth in spending on commercial buildings, this is an area that otherwise shows some headwinds due to structural changes in this section of the economy,” said Kumar.
 

Shifting Conditions in the Property & Casualty Space

Though economic conditions are improving, natural disasters will have prolonged effect on coverage in the property and casualty space. Particularly, extreme weather is having a large impact on:3
 
 
 
 
 
  • Increased Deductibles and Limitations for Water Damage: Insurers have begun adding protective safeguards, using policy forms with built-in limitations for weather-related water damage. Additionally, they are encouraging businesses to create water mitigation plans before they will provide a quote.
  • Increased Market Scrutiny on All Valuations: To account for increased material costs, supply chain disruptions and labor shortages, insurers are requiring property appraisals before quoting renewals to account for changes in building valuations. Insurers are also using various software, or benchmarks, to improve rate accuracy and determine if reported values are within expected ranges.
  • Risk Quality Will Be Vital in Underwriting Decisions: Insurers are evaluating risk quality in greater detail than ever. This will affect the ability for businesses who have outstanding loss control recommendations, unaddressed hazards and lack of engagement in loss prevention to properly insure their company.
  • Lender Requirements Will Become More Expansive and Detailed: When financing properties there may be specific insurance requirements for limits, coverages and deductibles. If not met, building loans could be subject to default. These requirements have become more expansive and, in some cases, very difficult to meet in today’s market conditions.
 

The Risk of Being Under-Insured

Many businesses are under-insured and might not even realize it. 68% of buildings valued from 2020 to 2021 were underinsured by 25% or more.Appropriate commercial property coverage is essential.
 
“Replacement costs have risen significantly over the course of last three years, beginning during the COVID-19 pandemic and persisting well into 2023. The market has seen a dramatic increase in building material and labor costs driven by supply chain challenges, labor shortages, and catastrophic weather events,” said Ryne Carney, head of property product at The Hartford.
 
Rob Sullivan, real estate industry practice lead at The Hartford, agrees. “The elevated labor and material costs can leave a client under-insured. If there is a major loss, the limits might not be enough to cover replacement costs at today’s higher prices. “Commonly used construction materials including steel, copper, lumber and aluminum went up. Plus, construction delays and supply chain challenges drove up replacement costs as well,” said Sullivan.
 
A timely, accurate assessment of replacement costs can be the difference between your business recovering quickly or incurring additional costs. If you face an under-insured issue on a total loss, you can experience out-of-pocket costs on top of the deductible, which impacts business profitability. “The most common sign of potential under-insurance is policy limits that have experienced little to no increase in recent years, in contrast to labor and material costs, which have risen dramatically. This imbalance can result in policy limits now being significantly undervalued,” said Carney.
 

Valuation Process Is Essential for Commercial Property

Risk will always exist for the commercial property market. Consistent valuations are essential to maintain accurate coverage for your company and stay ahead of potential losses. Without proper valuations, an insurer cannot accurately estimate loss potential or obtain adequate pricing at the individual and portfolio level.
 
“Property valuations should be revisited at a minimum on an annual basis. For most insureds, insurance renewal is a natural time to undertake this process. While building valuation is often top of mind, it is important for buyers to also review other key property insurance coverages, such as business personal property and business interruption,” said Carney.
 
Work with your agent or broker well ahead of the policy expiration to ensure adequate time to plan for all aspects of the renewal, including identifying replacement costs critical machinery and equipment, property valuation, and calculating income replacement if a loss were to happen.
 
 
 
 
 
1,2 “US Inflation (Monthly),” The Hartford’s Global Specialty Insights Center, July 2023
3 “2023 Commercial Property & Casualty Market Outlook,” USI One Advantage, August 2023
4 “Underinsured Properties Are Crushing Reinsurers. Why Proper Valuations Will Be a Focus for Years to Come,” Risk & Insurance, March 2023
 
The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations contained herein are as of September, 2023.
Links from this site to an external site, unaffiliated with The Hartford, may be provided for users’ convenience only. The Hartford does not control or review these sites nor does the provision of any link imply an endorsement or association of such non-Hartford sites. The Hartford is not responsible for and makes no representation or warranty regarding the contents, completeness or accuracy or security of any materials on such sites. If you decide to access such non-Hartford sites, you do so at your own risk.
 
 
The Hartford Financial Services Group, Inc., (NYSE: HIG) operates through its subsidiaries, including the underwriting company Hartford Fire insurance Company, under the brand name, The Hartford,® and is headquartered in Hartford, CT. For additional details, please read The Hartford’s legal notice at https://www.thehartford.com.

 

 

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