Powering Opportunity Across the Entire Real Estate Lifecycle

Where are regional investors looking for opportunity in commercial real estate (CRE) in 2022, and which sectors do they expect to outperform? SitusAMC Insights surveys regional investors every quarter, asking them to gauge their outlook for the coming quarter for more than a dozen different commercial property types in their geographies. In the most recent survey, we asked investors to share their expectations for the full year 2022.

Robust consumer demand for goods, combined with supply chain unease, continued to drive investor interest in warehouse properties in the fourth quarter of 2021, especially in California. That’s according to the latest SitusAMC Insights’ Top 5 Bottom 5 Metro ranking. Meanwhile, gateway cities dominated the laggards, dragged down by office and retail performance, as companies delayed plans to bring workers back to the office. 

In this episode of On the Hill, Tim Rood, Head of Industry Relations, talks with Kristy Fercho, head of Wells Fargo Home Lending and chair of the Mortgage Bankers Association (MBA), where she also serves as vice chair of the Diversity & Inclusion Advisory Committee.

Many homeowners will not be shocked if their insurance premiums go up this year. A slew of natural disasters – and the collapse of the condo in Surfside, FL – have increased public awareness about inherent vulnerabilities in the real estate and the insurance markets. Real estate investors, however, may be underestimating how much insurance costs will rise in the near future. SitusAMC Insights explores the risks in a new white paper, “Burgeoning Insurance Cost for Real Estate,” which can be downloaded here. The U.S. is seeing an increase in the number and severity of natural disasters such as hurricanes, tornadoes, and wildfires, which has greatly increased the short- and long-term risk for insurers and led to increases in insurance costs and reductions in coverage for property owners. Some of the states with the largest population inflows over the past several years are also mired in a drought – much of the Mountain West and Northwest – and are likely to face ongoing fire threats from a drying climate. The growth in population also increases risk. Demographic data from California suggests that as the population grows, residents will push farther and farther from the metro core in search of affordable space. The sprawl abuts development with vegetation and fire-prone areas, increasing the likelihood of fire. Soon, about 35 million people spread over four states – California, Texas, Arizona and Nevada – will live in fire-prone areas from this exurban push. Property damage stemming from natural disasters is not the only risk factor. Others include regulatory burdens and property or portfolio considerations. Another consideration is the condition of the property itself and its ability to withstand weather-related disasters. In a 2020 study conducted by the Federal Emergency Management Agency (FEMA) estimating the savings associated with building properties that conform to International Codes (I-Codes), the agency found significant positive benefits from switching buildings to improved codes. Nationally, the average annualized losses avoided (AALA) were $1.6 billion from implementing these building codes in post-2000 construction and could lead to $132 billion in cumulative savings by 2040. Because commercial real estate is a long-term investment strategy and is capital intensive, even small differences between anticipated and realized insurance cost increases can lead to a significant overestimation of net operating income. Valuers are modeling a 10 percent to 15 percent insurance growth rate in year one and inflationary increases (typically 3 percent) for the duration of the holding period. According to the USI Mid-Year Market Update for 2021, premiums on properties outside of catastrophe-prone zones should be expected to rise 5 percent to 10 percent, while properties inside catastrophe zones may see premiums rise between 10 percent and 15 percent each year. SitusAMC proprietary valuation modeling resulted in no discernable difference in property values for a retail portfolio, when annual insurance price growth was set to three times the inflationary rate that is typically used in valuation models. But an underestimation of insurance rate increases would be particularly acute in a flat or increasing cap rate environment, or in situations where space market conditions do not allow for rent increases to fully offset the increase in expenses. Some investors will be able to command lower rates from the size of their portfolio, but overall it will be difficult to reduce premiums through reduced coverage because of strict lender requirements. With uncertainty, more up-to-date and accurate valuations are needed to properly assess replacement costs. Real estate investors will be better prepared and able to model insurance cost increases more accurately if they understand the multitude of risk factors to which a property is exposed. How can investors be prepared for the brewing storm of insurance costs? Learn more in the SitusAMC Insights white paper, “Burgeoning Insurance Cost for Real Estate,” available here.

From California to Georgia, the apartment sector saw record-breaking returns in the third quarter of 2021, according to the latest SitusAMC Insights’ Top 5 Bottom 5 Metro ranking. Rocketing rent growth and appreciation bolstered these markets, along with continued strength in industrial properties -- which shows no sign of waning. Our proprietary analysis is based on the weighted average of NPI-NCREIF total returns across commercial real estate sectors (apartment, industrial, retail, office) in the third quarter, compared to the previous quarter. Explore all of the top performers and laggards in our slideshow below. To learn more about SitusAMC’s research and data offerings, click here.