Insurance rates are increasing due to climate change, prompting builders to incorporate weather protection measures.

• The increase in natural disaster losses due to climate change has led to a surge in real estate insurance premiums.
• The stability of investments in major commercial real estate trusts and developments is seen as threatened by climate change.
• Properties with climate-resilient features that protect from hurricanes, flooding, fires, and wind have been able to secure cheaper insurance premiums and reduce long-term costs by lowering their risk of property damage.

The Eddy, a two-building luxury apartment complex located on East Boston's waterfront, boasts unobstructed views of the Boston skyline. However, its harbor-side location also makes it susceptible to sea surges and flooding.

In 2014, developers considered weather exposure when imagining The Eddy.

The Urban Land Institute (ULI) reports that the developers constructed The Eddy nine inches higher than the previous property on the site. They also installed an emergency generator on the roof, an 18-inch floodgate with sandbags at the base, and planted coastal vegetation that can withstand saltwater immersion. Additionally, the walls of The Eddy were built to withstand up to 100 miles per hour of wind.

According to ULI, the renovations at The Eddy reduced its estimated flood loss risk from $10 million to $1 million, resulting in ten-times cheaper annual flood insurance premiums and savings on wind insurance.

Due to the completion of The Eddy in 2016, insurance rates have increased due to the increased occurrence of extreme weather.

Architectural frills that were once considered unnecessary are now helping commercial real estate owners reduce long-term property costs by making buildings climate-resilient.

According to Lindsay Brugger, vice president of urban resilience at ULI, climate resilience can not only lower insurance premiums but also generate savings through reduced operating expenses, increased marketability of a building, and avoiding construction costs during natural disasters.

Brugger stated that resilience is not a luxury that should be reserved for only a few, but rather it should be accessible to everyone.

According to a 2018 study by FM Global, every dollar invested in hurricane protection can reduce a building's loss exposure by $105.

A 2019 report by the National Institute of Building Sciences stated that implementing mitigation measures according to modern building codes could save 600 lives and prevent 1 million nonfatal injuries.

Climate’s insurance crisis

Since 2017, commercial real estate properties have experienced an average insurance rate increase of over 7%, which is significantly higher than the typical yearly increase of about two to three percent, as stated in an August Moody's report.

According to Kevin Fagan, the report's author and head of Moody's commercial real estate analysis division, while not entirely caused by climate hazards, this is a significant issue.

Insurers are withdrawing from high-risk markets such as California and Florida due to the growing frequency of extreme weather events, which has scared them off and made it unprofitable.

As a result of the recent changes, Christine Chipurnoi, an executive at USI Insurance Services, stated that her clients have experienced "astronomical" increases in their premiums. For instance, the annual wind insurance quote for one Florida office property she advises jumped from $30,000 to $44,000 in just four weeks.

“The market is just changing so fast,” she said.

Climate risk has been identified as a major threat to the financial stability of major commercial real estate trusts.

Vornado Realty Trust acknowledged in February that its focus on markets such as New York, Chicago, and San Francisco exposes it to higher risks of natural disasters and increased costs. Climate change may lead to an increase in property insurance, energy maintenance, and damage repair expenses, the company stated.

The company stated in the filing that over time, the conditions could lead to a decline in demand for office and retail space in their buildings or the inability to operate them.

Boston Properties and Highwoods Properties made similar statements in their own 10-K filings.

To mitigate the risks of climate change, commercial property owners are taking proactive measures to safeguard their assets, rather than solely relying on expensive insurance to cover damages.

"Relying on insurance coverage rather than investing in the asset is no longer logical nowadays, according to Tony Liou, president of Partner Energy," said Tony Liou, president of sustainable engineering firm Partner Energy.

Climate resilience is ‘not a nice-to-have’

Securing discounted insurance and lowering long-term costs is no longer a luxury expense with climate-resilient architecture.

In California, insurers must reduce rates based on the property owner's mitigation measures, such as installing fire-resistant vents or a Class A fire-rated roof.

Fagan stated that although the expenses for weather-proofing are high, the benefits are worth it.

A south Florida resort saved an estimated $500,000 in annual insurance premiums by implementing hurricane-proof windows, positioning electrical units above storm-surge zones, and installing other climate resilience measures, as per a ULI case study.

Sometimes, securing insurance is more important than finding cheaper options.

Chipurnoi stated that climate-resilient architecture "makes you more attractive to insurance companies, encouraging them to provide quotes."

AEI Consultants' chief executive, Holly Neber, has witnessed how clients can be excluded from insurance coverage due to not incorporating climate change mitigation measures into their commercial real estate properties.

In Miami Gardens, Florida, a property owner recently sought advice on three 1970s vintage multifamily buildings whose wind insurance policy needed to be increased by 850% from $5 million to over $47 million in order to meet new lending requirements. Insurance firms only agreed to cover an additional $5 million after an initial risk assessment.

"If the required wind coverage was not available, how could the owner refinance?" Neber questioned.

The buildings underwent a weatherproofing renovation, including new roof truss framing, hurricane ties on the rafters, plywood sheathing, and new windows.

Renovations that were once deemed unnecessary now provided the client with a new risk assessment of wind damage, which convinced more insurers to finance the $47 million insurance policy.

It has become increasingly difficult to obtain insurance coverage without weather-resistant features.

Integrating climate resilience into risk management and investment is crucial, according to Neber.