Unlock the Secrets of Hurricane Risk Mitigation in CRE Lending

Real-time Event Analytics and Stakeholder Engagement

Real-time event analytics show which portfolio properties are exposed to potentially damaging levels of wind, storm surge, and precipitation. These tools play a vital role in informing stakeholder engagement and property-level risk mitigation action. By having this real-time information, lenders and investors can take proactive measures to protect their assets.

For instance, in a portfolio of 290,000 commercial real estate properties in Florida, more than 100,000 are modeled to have experienced structural damage from Hurricane Milton. However, only a small percentage of the total building value was affected. This highlights the importance of accurate real-time analytics in assessing the true extent of hurricane damage.

Post-event Modeling and Credit Risk Analysis

Post-event modeling estimating potential property-level damage informs detailed credit risk analysis. It helps translate hurricane damage into impacts upon a bank’s loan portfolio. By understanding the potential damage at the property level, lenders can better assess the credit risk and make informed decisions.

For example, Moody’s RMS estimates that 85 percent of the hypothetical damage from a Florida property would be covered by insurance. This information is crucial for lenders in determining the credit risk and potential losses. It also helps in developing strategies to manage these risks over time.

Insurance Industry Loss Estimates and Property Renewals

Insurance industry loss estimates communicate how an individual hurricane compares to others in terms of impacts on the insurance industry. Alongside property-level damage estimates, this information helps inform how individual properties may face particularly tough insurance renewals due to storm damage.

After hurricane damage, a property resilience assessment (PRA) informed by engineering assessments and catastrophe modeling can help identify the most cost-effective repairs. This can potentially translate into lower insurance premiums and better manage insurance risks.

Assessing Long-term Exposure and Insurance Negotiations

Assessing properties’ likely exposure to damage from extreme events over the life of the loan by looking at potential loss on average and under different levels of extreme events informs insurance negotiations and portfolio strategy.

For instance, lenders can use catastrophe models to estimate the likely building damage under different levels of extreme events. This helps in creating insurance coverage requirements that balance the risk of loss during extreme events with the cash-flow risks to borrowers.

Lenders' Credit Risk Assessments Post-storm

Damage to a building during a hurricane doesn't directly translate into credit risk in a commercial real estate portfolio. Many factors influence the credit risk presented by storm damage, including insurance coverage and loan quality.

For example, in a hypothetical portfolio, more than 100,000 properties were modeled to have experienced structural damage from Hurricane Milton. But only a small portion of the total building value was affected. This shows the complexity of assessing credit risk and the need for a comprehensive approach.

Integrating Insurance and Climate Risk in Refinancing

Understanding which portfolio properties experienced the most damage during a hurricane informs preparations for insurance renewal. Properties with large claims are likely to face the most challenging renewals.

Lenders can use tools like ASTM's property resilience assessment (PRA) to identify the most cost-effective repairs and potentially lower insurance premiums. By considering the shifting landscape during loan refinancing, banks can mitigate financial risks.

Investors' On-site Resilience Measures

Investors have more direct control over their properties and can leverage climate risk screening and real-time analytics to manage portfolio risks and inform long-term strategy.

Before a hurricane like Milton, Moody’s estimated that there were more than 235,000 commercial real estate properties exposed to certain wind speeds. Portfolio managers can run similar analyses for other hazards and ask property managers to deploy relevant risk mitigation measures.

Factor Insurance into Net Operating Income Calculations

Many investors are coping with higher insurance premiums, which affects their properties' net operating income (NOI) and revenue growth projections. Insurance as a share of property revenue is increasing nonlinearly across property types.

For example, for commercial mortgage-backed securities (CMBS) properties, insurance as a share of revenue has increased significantly. This highlights the need for investors to understand the climate risk and its impact on NOI.

Developers' Resilient Development Opportunities

After each hurricane, examples emerge of resilient communities that have fared better. Hunters Point in Florida is one such example, designed with hurricane resilience in mind.

Climate-resilient buildings are in high demand, and residents can save on insurance premiums. Screening potential development locations for climate hazards helps developers identify business opportunities and integrate resilient design elements.

Rippling impacts are seen as lenders, investors, and tenants grapple with surging insurance costs. Climate-resilient design is in demand, and participants in the commercial real estate value chain are working to measure and manage risks while seizing financial opportunities.