Archives for 2021

Changes in carrier decisions also play a part in a new flood insurance scene.

Flooding is an ugly and devastating way of seeing property value wiped away. According to the Federal Emergency Management Agency’s standard warning, an inch of standing water in a single-story 1,000 square foot home can cause $11,000 of damage.

But the potential for damage to commercial buildings is just as grave, if not more so. For example, a 2017 study out of the University of Nebraska at Omaha showed that “[c]ommercial buildings represent 13% of all structures in the 100-year floodplain in Sarpy County (Omaha, NE) and 16% in Fargo/Moorhead (ND and MN), yet account for half of total potential flood damage exposure as represented by depreciated structural replacement values (DSRVs).”

Both having and understanding flood insurance is critical to CRE property management. Some recently changed plans and practices require businesses and investors to reevaluate where they stand.

FEMA updated its National Flood Insurance Program (NFIP) through a new approach called Risk Rating 2.0. Using new technology and data analysis, the agency is changing how it views the risk of floods. New policies incorporated the new approach starting on October 1, 2021, while renewals on April 1, 2022 or later also will use the changed methodology.

The new approach uses new physical models and actuarial models, looking at flood frequency, flood type, distance between the property and water body, and property rebuilding cost, according to Carter Bumgardner, a producer at Graham Company, one of the largest insurance brokers in the US.

“Because technology is getting so much better and the carriers and FEMA can run much better predictive models, they are better at pricing. Whether that’s going up or down depends on the risk itself,” Bumgardner tells GlobeSt.com. “I believe over 70% of insureds that buy a national flood insurance policy [will see] their rates for that specific policy go up.”

Blame climate change. Large floods have scared carriers and the federal government into reassessing the likelihood that a property will face a loss from flooding.

“Flood insurance has been changing drastically over five to ten years with how underwriters are evaluating the risk,” Bumgardner adds. Carriers “felt they could give higher limits with lower deductibles and collect less premiums” for structures considered not to be in high hazard flood zones. No longer. “They’re now offering less limits, higher deductible with a higher premium” using new modeling techniques”

As prices go up, there are strategies companies can use to try containing the cost. “A national flood insurance policy is normally only going to provide limits of $500K for the building, $500,000 for the contents, and no coverage for business interruption,” says Bumgardner. Commercial coverage typically has a $500,000 deductible. Put the two together, and it’s possible to bridge coverage.

Bumgardner also says that stripping flood insurance out of a normal property and casualty policy and getting it through an alternative carrier can help contain costs.

Source: “New Flood Insurance Rules Will Matter to CRE Property Owners“

“The number of new lenders entering the market or existing lenders expanding their programs is extraordinary.”

Commercial real estate lending picked up major steam in the third quarter, in a trend that parallels a similar uptick in property acquisitions.

CBRE reports that the pace of closings of commercial loans it originated in the third quarter is up 31.6% over June figures and up 29.1% from February 2020. Its overall index is up by 135% over its pandemic low in September 2020.

The percentage of loans carrying full or partial interest-only terms exceeded 61%, and CBRE notes that underwritten cap rates and debt yields were lower.

“The number of new lenders entering the market or existing lenders expanding their programs is extraordinary. Capital chasing equity-like returns has found it more difficult to invest, and many have pivoted to high-yield debt strategies, such as real estate, that provide attractive risk-adjusted returns,” said Brian Stoffers, Global President of Debt & Structured Finance for Capital Markets at CBRE. “Lending on value-added assets remained strong in Q3, supporting debt funds and other alternative lenders’ leading share of non-agency commercial mortgage origination activity.”

US sales volume approached $180 billion in the third quarter, and some experts are saying Q4 is also poised to shatter records. Pricing is strong and increasing across all asset classes, particularly multifamily. In a recent analysis, Marcus & Millichap’s John Chang said “the current pricing [for multifamily] is substantiated by revenue growth, at least at a national level. In addition, there are numerous signs we are in a severe housing shortage that will fuel demand for apartments.”

Activity by alternative lenders like debt funds and mortgage REITs were the volume leaders in Q3, comprising 39% of all non-agency loan closings, followed by banks.  Bridge loans accounted for almost 80% of alternative lender loan closings year-to-date.

CMBS loan origination activity also picked up steam in the third quarter and accounted for 17.6% of loan closings in Q3 2021, an increase over the prior quarter as well as year-over-year. Around $77.1 billion in CMBS loans have been issued so far this year, double 2020’s count.

Source: “CRE Lending Boomed In Q3“

Earnings reports suggest that the sector is on the upswing, which is good news for retail properties.

For those who own, operate, and invest in retail space, it might be time for some broader relief, if big company financial results have anything to say.

Some big names have been doing quite well even ahead of the crucial holiday shopping season in the fourth quarter.

“There is a real sense of optimism heading into the heart of the holiday and shopping season, and recent announcements from top retailers is only adding to that,” Ethan Chernofsky, vice president of marketing at data firm Placer.ai, tells GlobeSt.com. “The combination of pent-up demand and a clear reason to shop drove significant retail success in the summer, and the same combination is already making itself felt in the early stages of the holiday retail season.”

Data from S&P Global Market Intelligence shows the retail sector of the S&P 500 to be in welcome strong shape. Out of the 22 companies in the sector index, 12 so far have reported earnings for the third quarter of 2021. Of them, 10 beat expectations while two missed. In the second quarter, all 22 beat earnings estimates.

Two of the beats, both in revenue and earnings, came Tuesday from Walmart—which benefited from its logistics power and supplier relations—and Home Depot’s windfall of consumers investing in home improvements during the pandemic, according to Nasdaq.

Target just released numbers showing 12.7% year-over-year comparable sales based on traffic. Even though 2020 was heavily in the pandemic, potentially a low starting point for a comparison, Target was one of those essential businesses delivering what consumers needed. The company saw sales growth of $15 billion over 2019, according to Minnesota’s Star Tribune Media, making the jump between 2020 and 2021 even more pronounced.

Similarly, TJX had open-only comp stores sales growth of 14%, year over year in its latest reported quarter. Net sales were 20% above last year in a category that fared well in a homebound consumer scenario.

Weekly retail foot traffic averaged across all categories is up 3.9%—and that’s compared to the same period in 2019, not in 2020 when many physical locations were shut down—according to data from Placer.ai. Inventories are much higher than a year ago at retailers, according to the Wall Street Journal, so there should be plenty of draw for consumers.

Strong performance in large retail doesn’t necessarily mean that smaller companies are doing well. But bringing shoppers in on foot to anchor stores increases the chance of spillover traffic to others. And when businesses are selling more, they’re more stable, which is probably better music to CRE ears than the latest version of the Little Drummer Boy.

Will things keep improving? “The prospect of nagging inflation appears to be a concern for consumers, but counterintuitively the U.S. economy saw increased retail spending,” Bradley Tisdahl, CEO of Tenant Risk Assessment, tells GlobeSt.com. “It’s unclear how long this will last, but larger retailers are likely to be better equipped to capture this spending by compressing margins to gain share of wallet amid an uncertain inflationary environment.” But there is a potential lump of coal: “Smaller independent retailers are less likely to weather inflationary pressures longer-term,” Tisdahl adds.

Source: “Retail On Track to Have an Abundant Holiday“