The Rising Cost of Commercial Insurance: A Challenge for Real Estate in 2025
As we look toward 2025, one of the growing challenges for property owners and investors is the rising cost of commercial insurance. With premiums surging, particularly in the "smile" states—those along the coasts and the southern U.S.—property owners are seeing a direct hit to their net operating income (NOI). Bob Waun, broker-owner of DIRT Realty, weighs in on how these rising costs are reshaping real estate dynamics and why alternative insurance options are critical for mitigating their impact.
Insurance Costs and Their Impact on NOI
The rise in insurance costs is cutting into NOI, one of the most critical metrics for real estate valuation. "Higher insurance premiums mean higher operating costs," Waun explains. "When NOI decreases, property values often follow, as investors factor in these additional expenses."
The situation is particularly acute in states like Florida, Texas, and California, where increased risks of hurricanes, wildfires, and other natural disasters have driven premiums to unprecedented levels. These "smile" states, traditionally known for their growth and appeal, are now facing new challenges that may shift investment focus elsewhere.
The Midwest Advantage
While the coastal states grapple with rising premiums, the Midwest and central states are becoming increasingly attractive. With lower exposure to natural disasters and, consequently, lower insurance costs, these regions offer a more stable operating environment for property owners.
"The Midwest is emerging as a safe haven for investors seeking to protect their NOI," says Waun. "The combination of lower costs and consistent demand makes these markets a compelling alternative to high-risk areas."
The Need for High-Risk Insurance Options
Waun advocates for the development of more flexible insurance options tailored to property owners' needs, particularly those who own properties outright and can manage higher deductibles. "Many property owners who don’t hold debt don’t need comprehensive coverage with sky-high premiums," he says. "What they need is disaster coverage with higher deductibles and lower premiums—a product that aligns with their ability to absorb some of the risk."
This approach could help reduce operating costs and maintain property valuations, providing a lifeline for owners in high-risk regions who are currently forced into one-size-fits-all policies.
Balancing Costs and Risks: The Importance of Property Insurance
Skipping property insurance altogether can be a risky gamble. Natural disasters, theft, and liability claims can create catastrophic losses for property owners. "Insurance is the safety net that protects your investment," Waun warns. "Going without it leaves you vulnerable to losses that can far outweigh the cost of premiums."
To help property owners manage their premiums without compromising coverage, Waun suggests four strategies:
Increase Your Deductible: Opting for a higher deductible can significantly lower your monthly premiums, especially if you have the financial resources to handle larger claims.
Bundle Policies: Combining property insurance with other types of coverage, such as liability or umbrella insurance, often comes with discounts.
Invest in Risk Mitigation: Installing security systems, fire suppression equipment, or storm-resistant materials can reduce risk and qualify you for premium discounts.
Shop Around: Comparing quotes from multiple insurers ensures you’re getting the best rate for the coverage you need.
The Road Ahead
As insurance costs continue to rise, property owners and investors must adapt. Strategies such as exploring alternative insurance products, diversifying portfolios to include lower-risk regions, and incorporating these cost considerations into acquisition analyses will be critical.
"Real estate has always been about adapting to changing market dynamics," Waun notes. "With the right strategies and products, we can navigate these challenges and continue to find success in the market."
Learn More
DIRT Realty is here to help you navigate these complex market dynamics. Whether you’re investing in the Midwest or exploring insurance solutions, our team is ready to guide you every step of the way. Contact DIRT Realty today.
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