Could Rising Insurance Rates Cool Florida's Hot Development Market? 06/07/23

florida insurance
By: James Petrylka, BLDUP FL

A confluence of events, a perfect storm if you will, has had a major impact on commercial real estate in Florida and the ripple effects are being felt across the country. Rising insurance rates, largely attributed to claims from storm damage, along with rising interest rates and costs of building materials, cloud the future of new construction in Florida.

Commercial real estate industry experts cite the increase in insurance rates as having the biggest effect on slowing construction starts. In the last two years, the price of commercial property insurance in Florida has risen drastically. According to the Insurance Information Institute, premiums for commercial insurance increased Nationally an average of 9.4% in 2022 compared to 2021. In Florida, Texas, and California, premium increases were much higher, 30% to 50% cost increases were experienced. 

Adding to the distress for commercial real estate developers, construction replacement costs have risen 40% in the last four years according to the Insurance Information Institute. The rising replacement costs, combined with an increase in catastrophic weather events, have led to insurers raising rates. 

Insurance rates nationally have been steadily increasing for years. According to SwissRE, for the last 30 years, increases have risen from 5% to 7% annually. An inflection point in Florida came with Hurricane Ian in September 2022 which caused a Florida state record $112 billion in damage. 

In the aftermath of Ian, according to the Florida Office of Insurance Regulation, approximately a dozen firms that provided homeowners insurance in Florida became insolvent due to the large number of claims and the amount of the payouts. Other providers have stopped offering policies in Florida.

“For many insurance companies across the country, Florida doesn’t exist due to the costs,” said Jack Cowie IV Senior Vice President - Commercial Real Estate with the Varney Agency, a National insurance firm specializing in insuring projects up and down the Eastern Seaboard. “New England has been subsidizing the rest of the country, but with re-insurance rates rising, particularly in Florida, that is not sustainable.

One trend Cowie has seen is that multiple carriers are sharing coverage on developments, thus reducing and/or eliminating competition among insurers. Another outcome Cowie sees is that insurers will stop covering buildings that utilize wood framed structural construction methods, which would have a major impact on Florida construction moving forward.

The impact of the insurance market on the commercial real estate industry in Florida has already been profound. Developers have passed on acquisitions and new projects because the insurance premiums were too high. Additionally, projects have been put on hold as developers are waiting for a moderation in insurance costs. 

One example is the redevelopment of the downtown Clearwater Waterfront, a $400 million project. Citing rising insurance costs, construction costs and interest rates, the developers, Clearwater-based DeNunzio Group and New York-based Gotham Organization submitted a document to the Clearwater City Council requesting to scale down the project. The original proposal called for two 27-story residential towers with a total of 600 residential units, along with 40,000 square feet of retail space and a 13-story 158-key hotel with retail, restaurant space, and a conference center. Now, the developers are seeking to reduce the project to 400 living units in one tower and reduce the retail space to 15,000 square feet. The hotel would still be included. In addition, the developers have proposed amending the purchase agreement for the land. The city council has agreed to give both sides more time for negotiations and due diligence.

In South Florida, the winds have changed since Hurricane Ian made landfall. Florida has experienced a large influx of new businesses and new residents and developers seized the opportunity to start new projects to meet demand with multifamily development being at the top. As demand for apartments reached new heights, rents went up accordingly. In the two-year period ending in March 2022, South Florida outpaced the nation with a 58 percent rate growth.

Due largely to the rising insurance costs, that momentum has slowed. One developer estimates that approximately 5,000 apartment units that should have broken ground across South Florida in 2023 are now on hold. 

There has been a corresponding effect on rents. In January 2023, rents in South Florida went up 9.6 percent year-over-year from January 2022, but in January rents fell by 0.12 percent from December 2022 according to the Waller, Weeks, and Johnson Rental Index.

While developers are seeing some signs that materials costs could be leveling and expect that interest rates will stabilize, the outlook for insurance is not as sunny. 

As a solution, some in the real estate industry are calling for government intervention and reform. One suggestion is for the Florida state government to set up a multifamily insurer pool along the lines of Florida's Citizens Property Insurance Corp., a state-run insurer that provides insurance for homeowners unable to get private insurance. The issue has not come before the legislature, though funding would be a concern for the state as the government has already been subsidizing insolvent insurance companies' claims.


Though there is major uncertainty in the air, real estate development in some sectors, such as high-end and luxury housing, has not slowed. Taking into account all of the various factors, how does the forecast for insurance look moving forward? According to Cowie, more of the same. “I don’t see any real relief in the next several years in Florida,” said Cowie. “Increases will slow down, but rates will remain high”, leaving developers and consumers to weather the storm.