The Vital Role of Property Resilience in Commercial Real Estate Insurance

In the face of mounting natural disasters and continued inflation, the landscape of the property insurance industry is shifting dramatically. Escalating costs and increasingly frequent catastrophic events are forcing insurers and policyholders to reassess their strategies. Nowhere is this more evident than in the realm of commercial real estate (CRE). As premiums soar and coverage becomes more limited, the concept of property resilience is gaining traction as a vital component in the battle for stable, affordable insurance.

What is property resilience?

Property resilience is the ability of a physical property to adapt to and withstand external disturbances, including those resulting from climate risks. It addresses both physical and business risks.

These risks can arise in tandem or in isolation. For example, flooding that damages a building and its contents can affect a business’s ability to continue operations. But so too can nearby flooding that leaves a building on an inaccessible island.

Why is property resilience important?

In 2023, the United States experienced 28 weather and climate disasters that each resulted in more than $1 billion in property damage. Both the number and size of such disasters are likely to rise in years to come. Higher temperatures, stronger storms, more frequent flooding, and longer droughts are putting severe stress on communities and businesses across the country.

Lenders and insurers are increasingly focusing on property resilience, as are regulators. Failure to address potential impacts can affect property insurance rates and the ability to obtain favorable loan rates and even regulatory approvals. Conversely, improving property resilience could create a competitive advantage in a challenging business environment.

What is a property resilience assessment?

A property resilience assessment is a comprehensive analysis of a property’s ability to withstand and recover from climate disturbances and other external challenges. The assessment focuses on both physical and regulatory risks, highlighting issues building owners should mitigate to ensure business continuity, comply with regulations, and satisfy lenders and insurers.

AEI Consultants offers property resilience assessments, environmental assessments, sustainability consulting and other services, equipping you with actionable information that forms the bedrock of informed decision-making. We help you predict, prepare for and even prevent issues that compromise your facilities and operations.

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The Many Benefits of Property Resilience

Reduction in Damages and Downtime:
Properties designed or modified with resilience in mind may be fortified against potential damages. This means less downtime in the aftermath of a disaster, ensuring businesses can resume operations swiftly or do not have to close at all.

Lower Insurance Premiums:
Insurers are beginning to recognize the value of resilient properties. By investing in building resilience assessments and implementing measures such as structural retrofits, storm water drainage systems, and wildfire defense systems, property owners demonstrate a commitment to mitigating risks. In return, insurers might offer lower premiums, making insurance more affordable in the long run.

Insurability in High-Risk Areas:
Resilient properties are more likely to meet insurers’ risk criteria. By adopting resilience measures, properties in high-risk zones might become insurable, providing peace of mind to owners, lenders and investors.

Long-Term Cost Savings:
Resilient properties are equipped to withstand adverse conditions, reducing the likelihood of extensive damage during natural disasters. This translates to significant cost savings in the long run. Property owners spend less on repairs and restoration, preserving the property’s overall condition. Consequently, the property retains its aesthetic appeal and functional integrity, ensuring that it remains a valuable asset over time. The reduced need for frequent repairs and maintenance leads to substantial cost savings, enhancing the property’s overall value.

Enhanced Attractiveness to Buyers and Investors:
Resilient properties are inherently more attractive to investors and buyers alike. When a property is fortified against natural disasters and climate-related risks, it becomes a secure investment. Potential buyers and investors are more likely to view such properties favorably, knowing that their investment is safeguarded against unforeseen calamities. The assurance of reduced physical risk creates a sense of confidence, making the property an appealing choice in a competitive real estate market.

Environmental and Social Impact:
Embracing resilience is not just about financial benefits; it’s also a commitment to environmental stewardship and community well-being. Resilient properties contribute to sustainable, disaster-resistant communities, fostering a sense of security among residents and businesses alike.

What climate risks affect commercial real estate?

Recent wildfires and hurricanes have highlighted some of the most significant physical risks. But those aren’t the only risks. S&P Global Physical Risk identifies eight hazards:

Coastal flood
Fluvial flood (which happens when a lake, river, or other body of water overflows)
Extreme heat
Extreme cold
Tropical cyclone
Wildfire
Water stress
Drought

Each of these hazards can lead to a host of problems, from waterlogged HVAC systems to destroyed buildings.

Short-term events like wildfires, hurricanes, and floods get the most attention. But the incremental risks of sea level rise, heat stress, and water shortages could be just as impactful and costly. For example. 40% of commercial buildings in the United States were built before 1970 and may require extensive retrofits to adapt to extreme heat.

Companies should also consider regulatory risks. Most notable are more stringent standards for building efficiency and carbon emissions.

How big is the problem?

The problem is big, although the magnitude varies by location. Consider these statistics related to hurricanes, flooding, and sea level rise:

In the next 30 years, we can expect a 25% increase in annual CRE loss estimates due to increased flooding
In the next 30 years, we can expect an increase of 4 million business interruption days due to increased flooding
The total value of assets with the highest exposure to sea level rise in major coastal areas is $130 billion
10 million buildings may need to be relocated due to sea level rise over the next 50 years
Properties directly impacted by recent major hurricanes have experienced a 7% decrease in net operating income
2 years after a top-10 storm, commercial real estate sees a 10.5% decrease in value

Double-digit increases in commercial property insurance are now an annual reality. In fact, increases of 25% are possible in 2024.

A property resilience assessment can help your organization mitigate those problems. Contact AEI Consultants today to learn more.

What is the process of a property resilience assessment?

A complete assessment includes three phases:

Hazard Screening: desk-based screening and identification of hazards
Risk and Resilience Evaluation: site inspection and assessment of safety, potential damage, functional recovery time, and impact of broader community resilience
Identification of Resilience Measures: identification of specific resilience measures

Here’s what happens in each phase:

Stage 1 (PRA 1) – Hazard Screening

Our team reviews regional hazard data from public and/or commercial risk modeling and mapping sources to identify potential risks. We then complete a site-specific desktop review of available local and regional hazard risk plans and maps.

Stage 2 (PRA 2) – Risk & Resilience Evaluation

We conduct a site inspection and review of all relevant building characteristics, including age, construction, and occupancy.
We assess safety, damage, and functional recovery time, along with material impacts related to community resilience/lifelines.

Stage 3 (PRA 3) – Identification of Resilience Measures

We identify specific resilience measures and provide cost estimates, if possible. Measures could include installation of flood barriers, relocation of critical equipment, development of alternative power supplies, and installation of hurricane-rated glass and roofing.

What is ASTM WK62996?

ASTM WK62996 is a proposed guideline that outlines best practices for the building resilience assessment process. It describes a systematic approach that includes, at minimum, “a baseline assessment of safety, damage, functional recovery time, and a limited consideration of community resilience or other material dependencies, such as the ability of utilities to deliver service to a property following a hazard event.”

AEI Consultants CEO Holly Neber is chair for the new standard.

What related services does AEI Consultants offer?

Property Condition Assessments
Facility Condition Assessment with Physical Risk Review & Sustainability Recommendations
Commercial Energy Audit & Sustainability Consulting
ESG Consulting

In addition to these and other individual services, we offer bundled services that take a more holistic approach. This streamlined and efficient process leverages technology, experience, and data analytics to deliver actionable insights and property information promptly, saving you time and resources.

Billion-dollar disasters are a biweekly occurrence in the United States. Is your organization ready for the next one? Call 800.801.3224 to speak with an AEI Property Resilience Assessment consultant today.

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