Although it has been several years since a major hurricane ravaged South Florida, commercial property owners are still feeling the insurance hangover.
First came the storms of 2004 and 2005 — Jeanne, Frances, Wilma, Katrina, Charley and Ivan. Then came the insurance losses — $71 billion worth, according to the Insurance Information Institute. And then came the skyrocketing commercial property insurance costs. The cost of coverage for South Florida commercial property has seen average combined increases of 75 to 100 percent in the past two years, said Dr. Robert Hartwig, president and chief economist of the Insurance Information Institute, based in New York.
One pricey remedy to the problem is to offset the subsequent insurance costs by retrofitting buildings and constructing office towers to meet the same safety standards as public hurricane shelters.
Owners are also passing their higher insurance costs on to tenants, and some have altered the types of leases they offer.
Those shifts — and a spate of decent weather — are having an effect. Rates have jumped only 10 to 20 percent this year in the wake of an uneventful
weather year in 2006, Hartwig said.
While the increases have slowed, rates haven’t started going down, and that’s forced owners to take action.
One of the primary ways to lower property insurance rates is to “build a better building,” said Debra Kremblas, vice president of Boca Raton developer Procacci Development Corporation. She said that the office developer has recently “devised a new type of construction” — Class A office buildings built to the specifications of a public shelter that she said can withstand winds of up to 185 miles per hour, which is the velocity of a Category 5 hurricane. The company’s new, highly reinforced office buildings are armed with a “tremendous amount of structural concrete and large missile high-impact glass,” Kremblas said.
Procacci Development is using these specifications in several new projects. The company is currently building a 700,000-square-foot Class A office space in Miami, the Crossroads at Dolphin Commerce Center. In March, Procacci opened the Emerald View at Vista Center West Palm Beach, a pair of 73,000 square-foot Class A office buildings. A third, 40,000-square-foot building will be completed soon.
Kremblas said construction costs for such buildings are 15 to 22 percent higher than traditional Class A office space. To cover the costs, base rental prices are slightly higher. Operating costs, however, are lower thanks to the lower insurance premiums.
The general rule in South Florida is: The newer the building, the lower the insurance rate. While not all buildings are up to these highly reinforced specifications, projects built under updated building codes usually get insurance breaks.
“The biggest criterion for insurance costs is the age of construction,” said Colin Lowe, head of the Fort Lauderdale office for insurance broker Brown & Brown Inc. He added that buildings erected in South Florida after 2001 under “the new codes” could mean “the difference of an insurer considering writing it, versus not even considering it.”
Owners of older buildings don’t necessarily have to raze their properties and rebuild to cut their insurance costs. Lisa Miller, a private insurance consultant with Tallahassee-based One Eighty Consulting, said the best way for commercial property owners to lower insurance is to “explore ways to strengthen or harden the structures that they currently own.”
Techniques to do so include “roof strap-ping,” or securing the roof to the building to resist high winds. Putting hurricane shutters on windows and installing impact-resistant glass can reduce insurance costs for commercial property owners by about 30 percent, she said.
Most owners pass higher insurance costs on to their tenants.
“We are seeing costs passed through in the operating costs of rent,” said Jonathan Kingsley, managing director for South Florida at Grubb & Ellis Co. He said that since the 2004 and 2005 hurricanes, operating costs are up 10 and 15 percent in South Florida, depending on proximity to the coast.
Calum Weaver, marketing director at CB Richard Ellis, said he has seen commercial property insurance increases of up to 500 percent in the past two years in South Florida. He agreed that operating costs have been inflated to offset this expense. “In the past three years [operating costs] went up $3 to $4 per square foot,” he said.
Some owners have migrated to triple-net lease structures from full-service leases, Weaver said. A triple-net lease designates the tenant as being solely responsible for all costs relating to the space being leased in addition to the rent fee applied under the lease.
A full-service lease lumps operating costs into rent and can not be readily altered if costs change, he explained. He said that Miami has historically been a full-service market, but he is “seeing a lot of Miami owners going triple-net, because it allows them to more easily raise and pass operating costs.”
Some commercial property owners have also tried other approaches, such as finding strength in numbers.
“Owners that own two or three properties are trying to team up with other [regional] owners for insurance. They are pooling properties with others to get lower insurance rates,” Weaver said.
National real estate management companies are also trying to cut their clients’ insurance costs by pooling costs on a larger national level.
Hartwig said that some commercial property owners have banded together with similar companies to create self-insurance groups, which he said could prove less expensive in the short-term than turning to more traditional insurance providers.
Another option for commercial business owners is Florida’s state-sponsored Citizens Property Insurance Corporation. Initially established to serve homeowners, Citizens launched commercial coverage for small busi-nesses in June, according to its Web site.
However, what South Florida is waiting for is an actual cut in costs.
“If we have another quiet hurricane season, we will see a softening of rates,” said Lowe. “This insurance industry has relatively short memories.”