Another devastating hurricane season underscores CRE portfolio risk

OakNorth

December 31, 2024

The 2024 Atlantic hurricane season officially concluded on November 30, setting new records with implications for commercial real estate (CRE) portfolios.

The season saw 18 named storms, including 11 hurricanes and five major hurricanes. Hurricane Milton alone put over 235,000 commercial properties worth approximately $1.1 trillion at risk, with post-storm assessments revealing structural damage to roughly 100,000 properties valued at around $400 billion (Moody’s).

Hurricane Helene further demonstrated how storm impacts can extend well beyond traditional high-risk coastal zones, affecting properties previously considered lower risk and forcing banks to take a look at their portfolio vulnerabilities. 

Today's insurance crisis 

The outlook for insurance premiums is becoming increasingly dire. Recent research from Deloitte projects that premiums in high-risk areas could double by 2030 as insurers grow increasingly reluctant to maintain exposure in vulnerable regions. For perspective: a commercial property currently paying $100,000 annually in premiums could face costs of $200,000 or more by 2030 if current storm trends continue. 

The insurance market's response to the 2024 season has been particularly felt in Florida. Following Hurricanes Helene and Milton, many insurers either exited the market entirely or drastically limited their coverage. Commercial property owners in high-risk areas like Miami now face an impossible choice: they must either obtain coverage through specialty markets at premium rates often 2-3 times higher than traditional carriers, or accept potentially catastrophic exposure to their assets. 

Hurricane impact on credit risk 

This year’s storm season has exposed critical vulnerabilities in commercial real estate lending that banks must address: 

  • Insurance cost impact on operating income: Insurance costs now consume up to 13.4% of property revenue in high-risk areas, nearly double the 6.7% share recorded in 2018 (MPA). These increases directly impact a property's ability to generate enough income to cover loan payments and maintain profitability. 
  • Capital exposure risk: Without adequate insurance coverage, property owners face major direct liability and have to absorb the cost of damage out-of-pocket. For instance, a $10 million commercial property suffering a 25% loss from flood damage could leave the owner responsible for $2.5 million in repairs, affecting their ability to make loan repayments. 
  • Long-term value deterioration: As insurance costs rise and coverage becomes harder to obtain, property values in high-risk areas decline. This complicates both refinancing options and exit strategies for current borrowers. 

 

Future-proofing CRE portfolios 

With climate-related risks only expected to intensify in the coming years, it’s more important than ever for banks to take a proactive, data-driven approach to managing climate risk in CRE portfolios. This includes: 

  • Early risk identification: Leveraging tools like ONCI's CRE Climate Physical Risk suite to identify properties facing increased exposure to climate perils before insurance costs surge. 
  • Cash flow analysis: Incorporating projected insurance cost increases into underwriting models to better assess long-term debt repayment capabilities 
  • Portfolio stress testing: Evaluating how insurance market changes might affect overall portfolio performance, particularly in regions where coverage is becoming difficult to obtain. 

The 2024 hurricane season has made it clear: the relationship between extreme weather events, insurance availability, and credit risk has become inextricably linked. 

For commercial banks, this means understanding that climate risk is credit risk and using the latest technology and tools available to prepare. Those which can accurately identify and price these risks today will be better positioned to maintain strong portfolios, while continuing to serve their markets effectively in an increasingly complex lending environment. 

Reach out to us at hello@onci.com to learn how ONCI's climate risk solutions can help translate today’s climate risks into actionable portfolio insights.

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