July 2003

Commercial Mortgages & Real Estate Loan News:
Insurance Relief

Over a year ago the topic of rising insurance premiums was examined relative to its adverse effects in obtaining commercial real estate loans. Runaway rate hikes not only hit a property's bottom line NOI, but values were negatively impacted as a result and lender underwriting practices further restricted available loan proceeds. Fortunately, current interest rates continue to help stem some of the pain, and now it looks as though we're beginning to get some positive news from the insurance industry.

Capital for commercial real estate loans is readily available, and at incredibly attractive rates. Insurance costs, however, were quickly becoming a wildcard in managing operating costs and predicting returns. As you may recall, Melanie Ransford, a principal at Doell & Associates gave us her take on what she saw in the insurance market place and how it translated to the commercial real estate industry. She made the following statement in April 2002:

"The first quarter of 2002 saw renewal increases of anywhere from 20% - 50%, but the trend to increase premiums will drastically slow down in 2003. Huge increases have had a crippling effect on businesses of all sizes and insurance companies are being forced to change their hard-line stance. However, there are two important factors helping to rein in runaway insurance costs: 1) a proposed federal safety net to cover future terrorist attacks, and 2) buyer discontent and unwillingness to tolerate further increases.

Well, hat's off to Melanie for calling the market and providing valuable insight for all of us involved…it seems that both factors highlighted in Ms. Ransford's commentary have come to fruition. The Wall Street Journal provided the following update relative to property insurance:

"After skyrocketing in 2002, the rate of increases in the cost of property insurance for commercial real-estate owners has slowed. The average rate increase for policies renewed in January ranged from 0% to 10%, compared with 80% to 90% in January 2002, insurance brokers estimate. And if January serves as any indication, owners renewing for the year beginning July 1 should expect to see, on average, smaller or no increases in their rates. Some may even see reduced rates."

"It's a lot easier to find a good deal in the insurance business than last year," says J. Robert Hunter, director of insurance at the Consumer Federation of America in Washington, D.C. "The business is becoming competitive again."

Robert P. Hartwig, chief economist of the Insurance Information Institute, a New York-based trade group, says property-insurance rate increases have slowed partly because there were no major catastrophes in 2002, meaning insurers didn't experience as many losses, and partly because rates rose so much after Sept. 11, 2001. The passage of a terrorism insurance act last year also "helped take some pressure off the property [insurance] market," he says. The Terrorism Risk Insurance Act, enacted last November, provides a backstop in the event of foreign acts of terrorism on U.S. property that cause at least $5 million in damage. The federal government will pay for 90% of any losses above the insurance company's deductible."

Managing operating costs can be extremely challenging given all the variables that ultimately affect the bottom line, and this news is certainly welcomed among property owners and mortgage lenders alike. Steelhead Capital works diligently to advise its clients of pertinent changes that take place within our industry, and the news of declining insurance premiums should resonate well with all commercial real estate investors.

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