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Published Sep 11, 2023

What Rising Rates and Surging Insurance Prices Are Doing to Real Estate

David O'Reilly, CEO of Howard Hughes Holdings, delves into the impact of rising interest rates and insurance costs on real estate development, offering a comprehensive analysis of market dynamics across retail, office, and housing sectors, while discussing strategic approaches to financing and overcoming development hurdles amid challenging economic conditions.
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Episode Highlights

  • Insurance Surge

    The real estate market is grappling with a dramatic surge in insurance rates, posing significant challenges for property developers. highlights that insurance markets are experiencing unprecedented hardening, with rates increasing by 30% to 50%, far beyond the typical 4% to 5% rise 1. This surge is attributed to a drying reinsurance market and a reluctance among insurers to take on risk, exacerbated by the frequency of natural disasters 2.

    Rates have taken off over the past year in ways that we've never experienced and I've never seen in 20 years.

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    These factors are making it increasingly difficult for developers to secure affordable insurance, impacting the feasibility of new projects.

       

    Disaster Impact

    The rising frequency and severity of natural disasters are significantly impacting insurance costs and availability. explains that the increase in natural disasters has reduced the supply of insurance, as reinsurers tighten their financial markets 3. This scarcity drives up costs, making it challenging for developers to obtain necessary coverage.

    We built Bridgeland to the 500-year floodplain when code said you only had to build to 100. And as a result, we didn't have a single home in Bridgeland take water during Harvey.

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    Innovative building practices, such as constructing to higher floodplain standards, are essential to mitigate these risks and protect investments 4.

       

    Insurance Challenges

    Securing insurance has become a complex challenge for property developers due to the current market conditions. describes the Sheridan Laird program, a method of slicing insurance by risk, which highlights the difficulty in filling insurance layers due to limited supply 2. This situation forces developers to pay higher premiums, impacting project viability.

    There's not as much availability as there used to be, and therefore, certain pieces of the insurance stack get more expensive.

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    Developers must navigate these challenges by leveraging diversification discounts and strategically offsetting high-risk locations with lower-risk areas to manage costs effectively.

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