MSCI: Insurance Taking Bigger Bite From Commercial Property Income

(Illustration courtesy of MSCI)

Higher insurance premiums are increasing commercial real estate operating costs and cutting into net operating income, according to MSCI, New York.

“Asset managers individually will be aware of their increased insurance premiums pushing up operating costs and cutting into net operating income,” MSCI Research Senior Associate Michael Savino said in an MSCI Quick Take. “And it’s clearly visible at the benchmark level: for properties tracked by the MSCI U.S. Quarterly Property Index, insurance costs as a share of income receivable have doubled over the last five years, reaching 2.4% in the 12 months through Q3 2024.”

Savino noted disparities between regions of the country and said not all the differences should be ascribed to climate-change pressures. “For instance, regulations and rebuilding costs are also factors,” he said. “Still, Orlando and Tampa–metros vulnerable to hurricanes–face some of the highest insurance costs relative to income, at 4.6% and 4.1%, respectively. In contrast, Chicago, a market with lower physical-climate-change risk exposure, has one of the lowest rates among U.S. metros, at 1.3%.”

Looking at different property types, Savino said the apartment market has seen the sharpest insurance-cost increase over the past five years, increasing from 1.4% five years ago to 3.0% currently.

“The impacts of hurricanes Milton and Helene in late September and early October underscored the risk to commercial property and the pressures on the insurance industry,” Savino said. [MSCI analyzed those risks here.] “Rising insurance premiums will compel investors to reassess their underwriting assumptions and adopt strategies to mitigate escalating insurance expenses.”