State Of Emergency In The Commercial Real Estate Market In Florida – An Insurance Claims Adjustor’s View

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January 11, 2023

Home » State Of Emergency In The Commercial Real Estate Market In Florida – An Insurance Claims Adjustor’s View

Ron Snouffer is the Owner and CEO of National Claims Negotiators LLC
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State of Emergency in the Commercial Real Estate Market in Florida
An Insurance Claims Adjustor’s View

Florida is no stranger to natural disasters. Every year the state deals with at least one type of disaster, whether it’s a tropical storm, flooding, wildfire, tornado, or hurricane—and they all bring insurance claims. While all natural disasters create destruction, according to the National Oceanic and Atmospheric Administration (NOAA), hurricanes have accounted for over 216 billion in damages and economic loss in the past five years for Floridians from hurricanes Irma, Michael, Ian, and now Nicole. Residents know that part of their cost of living in paradise is dealing with these devasting hurricanes. There is no shortage of demand for new assets in Florida, but an increase in insurance interest rates and building supply chains are making it less profitable.

Originating from a tropical storm, Hurricane Ian was a large and destructive Category 4 hurricane that was the deadliest hurricane to strike the state of Florida since the 1935 Labor Day hurricane. It was the ninth named storm, fourth hurricane, and second major hurricane of the 2022 Atlantic hurricane season and caused widespread damage across western Cuba and the southeast United States, especially the states of Florida and South Carolina.

Hurricane Ian landed in Florida on September 28, 2022, with average wind speeds of 155 mph, making it a category-four hurricane. Fort Myers beach and Naples were ground zero for the hurricane’s landfall and the storm surges hit Sanibel Island and Pine Island hardest. The bridge and the causeway to the two islands are no longer standing, leaving only limited access to the islands. The two islands were devastated by a storm surge of 12 to 15 feet. As this goes to press, it has been three months since the hurricane hit land, and most residents of the area are no closer to returning to normal. According to local contractors, it will take commercial property owners two to three years to rebuild.

The sheer volume of damage is certain to bring in unqualified contractors. Even those who are qualified will undoubtedly try to handle the build-back far beyond their ability. Everyone wants to believe they can take on a large loss insurance claim, but in the end, the proof is in the execution of the claim. Commercial claims are more difficult to manage and oversee.
Staffing shortages across Florida will lead to inexperienced people handling construction and building back, and the long-term effects will reverberate in the commercial market long after repairs are complete. Some property owners will be patient and wait for an experienced contractor to do the repairs, but all-too-often impatient property owners will rush to go with the next available contractor. Doing so leads to an old saying, “if you think it’s expensive to hire a good contractor, wait until you hire a bad one.” Poor construction will lead to poor finish out, impacting the overall quality of assets.

In real estate, as in many other businesses, the supply rises when the demand is high to offset the shortages. Once your supply outpaces demand, prices will fall again. The scarcity for the next several years will cause an increase in market rates across the board, especially in areas close to the storm’s most devastated areas. Already, over the last several years, Florida has seen an increase in businesses relocating there.

The politics don’t lie. Florida was one of the first states to ‘re-open’ after Covid. With the shutdowns across the country, many companies fled to Florida for an open workforce. Florida was open for business and ready for companies to move to the state. The economics are simple. When demand is high, more supply is needed. We will continue to see increases in demand as businesses and consumers move to Florida, which, in turn, will impact insurance and rental rates, as well as construction costs.

Other factors that affect the supply side are the labor shortages in other parts of the country. Materials available to build will factor into the supply side. The government’s policies are to release permits quickly and ensure properties fit current building codes. Florida has one of the strictest building codes in the country; these building codes have reduced the damage buildings sustain during hurricanes.

Supply will be an issue for the next 12-24 months while the state rebuilds after the 2022 hurricanes. Market rates will look different; insurance, interest, and property taxes will significantly impact future rental rates, starting with interest rates at a 40-year high for new construction and bridge loans. Insurance premiums had already gone up 33% in 2022 before Hurricane Ian, and many insurance carriers are fleeing the state due to large insurance claim losses. Fewer carriers for coverage will create supply issues, increasing property owners’ costs. These costs are later reflective in tenant rental rates. According to Core Logic, the estimated cost to rebuild is between 41-70 billion dollars in property value, which means tax value will increase because of all the new construction and building updates.

Insurance carriers continue to struggle to keep up with claims from prior hurricanes. There have been multiple insurance companies that have left the state due to the risk. Commercial property owners will have fewer options on who to get coverage from in the next couple of years. According to the Wall Street Journal, Builders’ Risk Insurance premiums accounted for 2% of new construction projects costs in 2019. Now, the same insurance coverage accounts for an average of 8%. As prices skyrocket for materials, labor, taxes, and insurance, many commercial projects will no longer make sense to build or re-build.

Many insurance carriers have been downgraded from their A rating status. One such carrier was United Property and Casualty which is now likely insolvent with over a billion dollars in claims that it cannot pay. Earlier this year UPC already had plans to leave Louisiana in 2023 after several years of losses. Many property owners will need to turn to the state fund for payment of their claims. Unfortunately, the state doesn’t move quickly when it comes to paying off the claims from insolvent carriers. This will create additional strain on the already short supply of available properties in Florida. A smaller number of carriers means less options to shop prices which will create higher insurance rates for Floridians.

We have a perfect storm of all the factors that would make for a considerable increase in the market rate in Southwest Florida. The assets with little or no damage will reap the rewards in the next couple of years. Several institutional buyers already had their eyes on Florida because of the workforce in place and the state’s being pro-business. Florida’s commercial real estate market is looking hot for the next several years. Demand for new properties will continue to bring new projects and new construction to Florida.


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