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THROUGH THE ROOF

Insurance rates skyrocket for those coastal landlords lucky enough to get it

By Steve McLinden

The hurricane season this year has been comparatively tame. But the financial fallout from last year’s devastating storms continues to haunt coastal retail operators mired in an insurance limbo that is quickly devolving into a budgetary hell.

“We have a full-fledged crisis,” said Lee E. Arnold, CEO of Tampa, Fla.-based Colliers Arnold, a Florida arm of Colliers International. “As the result of Florida windstorms of the past two years, we’ve had $35 billion in losses and brought in only $10 billion in premiums. All across the state we’re seeing severe availability and pricing problems.”

The mess only promises to get worse, says Craig Sher, president of The Sembler Co., a St. Petersburg, Fla.-based firm that owns and develops shopping centers, three-fourths of them in Florida. Property insurance rates in the state are up more than fivefold on existing properties on renewals this year following the hyperactive 2005 storm season, he says. “What were once costs of 15 to 20 cents per square foot are now $1.25 per square foot routinely.”

Quotes for projects under construction are even higher, typically as much as 10-fold, says Sher. Insurance for Legacy Place, soon to open in Palm Beach Gardens, was originally budgeted for $125,000 but now exceeds $1 million. No competing bids were available, Sher says.

Some center owners have been forced to “go bare,” that is, to opt out of hurricane coverage entirely, says Dulce Suarez-Resnick, an agent with the HBA Insurance Group, Miami, which represents major insurers. A four-year-old shopping center on 152nd Avenue in Miami, 10 miles west of Biscayne Bay, saw premiums more than triple, from $70,000 last year to $238,000 this year. Its private owner, whose windstorm deductible would have risen to $400,000, simply chose to go without. Windstorm rates are even higher closer to shore, she says.

Many older coastal-area buildings, particularly those constructed before 1996 when more-stringent building codes were enacted, are not being renewed for hurricane coverage this year, Suarez-Resnick says. “You have to be the perfect risk to get it.” Underwriting has tightened considerably too. Some policies now cover only hurricanes and not certain tropical storms, she says.

Equity One, a North Miami Beach-based open-air center REIT with a high concentration of properties in Florida, Louisiana and other hurricane-prone states, says its operating expenses on stores at least a year old increased by $1.5 million in its second quarter, ended June 30, because of insurance and property-maintenance expenses. However, Equity One’s centers escaped catastrophic damage in 2005 storms and have suffered few weather-related problems through mid September this year. Howard Sipzner, Equity One’s chief financial officer, says its property insurance package is up only 30 percent after 2006 renewals. “Of course, we have $20 million square feet of retail space and that is a lot purchasing power,” he said. The REIT is currently paying 30 cents a foot, or $6 million, for property insurance, he said. “Not too many years back it was 14 cents a foot and insurers were falling all over us to get our business. That’s not the case today.”

With rising real estate taxes, higher impact fees and other expenses soaring, landlords are often left wondering how they can pass along such lofty rate increases to retail tenants without chasing them away. “My sense is that those that are in a good market position will survive them,” said Arnold, “while those marginal ones will not.”

Said Sher, “I don’t think we can push our tenants much further.”

Shopping centers unable to get insurance through policies regulated by the Florida Office of Insurance Regulation must turn to surplus-lines companies, which are unregulated insurers that handle hard-to-place risks. . Most retail properties, except in a few counties, lack the federally backed Citizens Property Insurance Corp. to fall back on as insurer of last resort, unlike homeowners. Some of those unable to find coverage have joined business insurance pools or else strung together several small policies, although those can be costly options, insurers say. A state survey indicates that some 17 percent of Florida businesses are locked out of commercial property coverage.

Relief may be on the way, however. On Aug. 15, the state established an emergency joint property and casualty underwriting association that would insure such businesses as a stopgap measure. Arnold says a more lasting, affordable solution, such as a joint federal-state mega-catastrophic fund, could be created to buffer losses. “But for now there’s no silver bullet,” Arnold said.

Housing demand and high-end demographics, though, will keep Florida retailers and centers, storms or not, says Arnold. “Reinsurance market executives have indicated they can’t help but deal with the demand for retail space in Florida,” Arnold said. “It is really a function of population — we have enjoyed generous growth, fueling retail, and the market will find ways around these obstacles.”

That is fine for Florida, perhaps, but such is not the case in New Orleans, which has recovered only half the population it lost to Katrina. “New Orleans is still finding a new identity,” said Joseph Pappalardo, president of New Orleans-based Latter & Blum Property Management. “The city is going to be smaller, and that affects the normal amount of retail. As we find that new level of ‘normal,’ part of the process will be accepting that insurance rates are going to be much higher.” Centers in the New Orleans area have seen property rates rise as much as 400 percent, with significantly higher deductibles, he says. “Some owners can pass that through [to merchants] in operating cost provisions. Others can’t.”

Coastal Louisiana property owners face a catch-22. Many are unable to get quotes because their properties are still damaged, and yet they are unable to get the damage repaired because of insurer backlogs, says Pappalardo. That scenario continues to deter investors and rehabbers, because it is hard to calculate risk without first knowing insurance expenses.

Most of the federal money earmarked to assist New Orleans businesses remains tied up in the appropriations process, according to Thomas Weatherly, a spokesman for the Louisiana Restaurant Association. Meanwhile, he says, business owners have grown increasingly leery of purchasing commercial insurance products.

Restaurants with business-interruption coverage waited six months on average to collect, while those with full-blown wind coverage faced the frequently impossible task of proving that a building had been damaged by the winds before any water came in, says Weatherly. “People have reopened anyway, especially the independents,” he said. “You can’t stay closed, because most of these cases are going to be tied up in court for years, so many are just self-financing their recovery.”

Pappalardo says settlements were slow to arrive in part because insurers were wary of overpaying. “Landlords and tenants can’t collect on the same claim, and that [confusion] has impacted landlords’ ability to repair and start recouping rent.”

Flood coverage remains available for retail businesses, but wind coverage is much tougher to find and far more expensive. “It has shot through the roof,” said Weatherly. Most national chains have said they would shrink their presence to adjust to a smaller New Orleans, he says. “If you had three stores before Katrina, you’re consolidating down to two.”

Through August, about half the businesses serving food in the New Orleans metro area have reopened, though only 34 percent reopened in Orleans Parish itself, according to the association. Fewer than three-fourths of the McDonald’s restaurants in the Louisiana Gulf region have reopened, Weatherly says.

As a result of Katrina alone, the property-casualty industry will pay out an estimated $40.6 billion in claims. Together with the losses from last year’s two other major hurricanes, Rita and Wilma, the 2005 industry payout totals $57 billion.

Given such catastrophic losses, insurance access problems became acute this summer, as primary carriers and the reinsurers that take on the risks of the primary carriers started reducing renewal business in hurricane-prone areas. “The issue is really the lack of reinsurers now,” said Sher. “We used to get a lot of competing bids, but now the sentiment is, ‘Why operate in Florida when you can go elsewhere?’ ”

Some retail chains are buying into a different form of business-interruption “insurance.” Lakeland, Fla.-based grocery chain Publix, which says it lost about $100 million in perishables over the past two hurricane seasons, is spending another $100 million on 400 high-powered emergency generators for its most storm-prone stores in Florida, Georgia and South Carolina.

Some retail landlords were faced with insurance snafus of their own making in the aftermath of 2005. Those who failed to adjust for appreciation often found themselves woefully undercovered, insurers say. If an owner bought a $20 million shopping center in 2000 that appreciated to $25 million by 2005, for instance, it would find itself covered for only 80 percent of the value if it had not adjusted for that. A survey by Los Angeles-based Marshall & Swift, which supplies building-cost data to the real estate industry, says three-fourths of all commercial buildings are underinsured by some 40 percent.

Last year’s hurricanes drained the federally backed National Flood Insurance Program when flood damage hit approximately $25 billion, or 10 times the amount of premiums generated for the year, a Congressional study says. Following a Congressional bailout, the program was forced to set new coverage limits of $500,000 for structural damage and $500,000 for contents, amounts considered inadequate to protect many centers.

“We have seen deals fall apart at the table once insurance gets factored in,” said Suarez-Resnick. “It’s been very frustrating.” In the quest for financing, some landlords have had better luck with state banks that are willing to look at properties on a case-by-case basis while securing “force-placed” insurance, which is coverage that protects only the lender’s interest in the property at the property owner’s expense, she says.

During a recent public forum in Miami on the Florida insurance crisis, local entrepreneur Chris Rayneri complained of his inability to find affordable insurance for a new Jimmy John’s sandwich shop he is opening in Coral Gables. At prevailing rates, he quipped, his sandwiches would cost $8 each: $3 for the food and $5 for insurance overhead. “In the end, the consumer always pays.”

Indeed, it is the independents that are facing the worst squeeze, says Arnold. “While the larger guys are paying dearly, they have blanket coverage, and that minimizes risk. It’s the smaller guys who are getting tattooed, and that’s a real tragedy.”

Richard Stone, director of commercial sales and leasing for NAI Latter & Blum, says the situation may improve slightly as insurers recognize the breadth of opportunities in a New Orleans that is rebuilding. “I think we are all hoping,” he said, “[that] this is all a little bit of knee-jerk reaction.”