The real estate sector has experienced notable growth from shiftingconsumer demand and the COVID-19 pandemic. Grand View Research forecasts a 5.2%annual growth through 2030. However, real estate businesses must prepare for challengessuch as insurance market difficulties, more natural disasters, labor shortagesand social inflation concerns. Explore trends shaping the real estate industryin 2024 to protect your business from emerging risks.
Top Trends in the Commercial Real Estate Market
Navigating Insurance Challenges
Claims Frequency & Severity
Adequate insurance coverage is crucial for protectingagainst property and liability losses. However, the insurance market facesmounting pressure driven by increasing loss frequency and severity. Large-scalenatural disasters (e.g., hurricanes, tornadoes, wildfires, flooding) have surgedproperty insurance catastrophe (CAT) exposures and related losses. Additionally,inflation-driven construction material and labor costs have heightened the expenseof property repairs and replacements. As economic conditions inflate overall propertyvalues, your company must update its policies to reflect current propertyvaluations and mitigate coverage gaps and potential losses.
Rate & Capacity Concerns
Amid these challenges, property insurers have issuedconsistent rate increases and capacity restrictions. The Council of InsuranceAgents & Brokers (CIAB) reports double-digit premium increases in the realestate market, with an average rate increase of 17% in 2023. Moving forward,real estate investors with properties in CAT-exposed regions and withinadequate risk management practices may face continued premium hikes andcoverage limitations. Notably, habitational real estate investors may encounterheightened difficulty in obtaining property insurance, potentially facing ratehikes of 35% due to the perceived higher risk associated with frame construction.
Bracing for Litigation & Legal Developments
Rising litigation trends in the real estate sector, stem fromcontractual tenant and contractor disputes, construction and renovation projectincidents, and third-partylosses from poor property maintenance or security measures. Theseconditions have motivated insurers to increase premiums and reduce capacity. Insuredshave been experiencing average premium increases of around 5%, in addition tostricter underwriting standards and increased documentation requirements. In2024, failure to meet these standards or heightened liability risks may resultin ongoing rate increases and restricted coverage for the real estate industry.
Addressing Natural Disaster Exposures
Global losses from natural disasters reached $250 billion in2023, surpassing a 10-year average. The U.S. witnessed a record-high 28-billion-dollar weatherand climate disasters in 2023, causing $93 billion in overall losses and492 fatalities. This represents a considerable increase from the prior recordof 22 distinct billion-dollar disasters in 2020 and exceeds the five-yearaverage of 20 events. Munich Re found that convective storms (e.g.,thunderstorms, tornadoes, hailstorms), accounted for 54% of all U.S.weather-related losses in 2023, costing $50 billion, nearly double the pastdecade’s average.
The real estate industry is facing significant propertydamage and associated CAT losses. Property insurers have limited coverage forCAT exposures, leaving real estate businesses vulnerable to financial ruin. Climateexperts warn these disasters may worsen in the future, underscoring the urgencyfor your firm to recognize and address its unique CAT exposures.
Mitigating Labor Shortages
Labor shortages have emerged as a top concern impacting thereal estate sector, affecting over two-thirds of businesses recruiting skilled workers.The National Apartment Association reported a 33% turnover rate for propertymanagement staff in 2023, 10% above the industry average. Elevated turnoverrates in property management exacerbate maintenance challenges, increasing therisk of cleanliness and safety issues and potential liabilities. Challengesfrom remote work and wage inflation further complicate recruitment efforts,necessitating alternative strategies to attract and retain talent. Hybrid work arrangementsare not favorable for property management, underscoring the importance ofalternative solutions to address workforce shortages effectively.
Unraveling Social Inflation Issues
Social inflation, driven by societal attitudes toward riskabsorption and litigation, poses significant challenges in the real estatesector. Rising third-party litigation funding, altering tort reforms and risinganti-corporate culture, empower stakeholders to hold businesses accountable fortheir perceived wrongdoings, prompting additional litigation and insuranceclaims.
Growing public perception views larger businesses as capableof absorbing the financial consequences of damages. This has led to an increasein nuclear verdicts (jury awards of $10 million or more), particularlyimpacting the real estate sector. As litigation escalates, real estatecompanies may encounter substantial underinsurance gaps and higher out-of-pocketexpenses. Reduce your company’s risks by taking proactive measures to limitliability exposures and reduce litigation.
Risk Prevention Strategies for Real Estate Businesses
Your businesses can adopt several risk management strategiesto successfully navigate current industry trends, reduce related risks andprevent significant losses. Consider these best practices:
- Regularly assess your property and liabilityexposures, implementing mitigation strategies accordingly.
- Evaluate your CAT risks and implement weatherproofingsafeguards for disaster-prone properties.
- Ensure accurate property valuations to reflectcurrent inflation trends.
- Modify employee attraction and retentioninitiatives (e.g., flexible scheduling, wellbeing efforts) to address laborshortages.
- Prioritize property management to upholdmaintenance standards and mitigate cleanliness and safety risks.
- Establish business continuity and emergencyresponse plans to facilitate prompt recovery from incidents.
- Ensure timely claims reporting and documentationto manage claims losses effectively.
- Collaborate with your trusted insurance advisorto stay informed on market conditions and secure adequate coverage oralternative risk financing solutions.
Source: “Commercial Real Estate Trends & Challenges in 2024 ”
