Hurricanes damage and disrupt communities, properties, and economies in various ways, whether direct, indirect, or both. Translating these impacts into credit risk and other financial implications can be complex. However, a range of tools and analyses enables lenders, investors, and developers to pre-emptively anticipate hurricane damage when a storm approaches, as well as to adjust long-term strategy to mitigate risks and seize opportunities over time.
Moody’s recent report, “Three Steps to Mitigate Hurricane Risk in CRE Lending Portfolios—Lessons Learned from Hurricane Milton,” outlines how lenders can anticipate hurricane risks, measure damage and identify associated credit risks, and manage implications for insurance costs and availability.
The techniques cover multiple angles on a storm, including real-time exposure assessments, post-event damage estimates and credit analysis, and longer-term future exposure modeling, which can be considered as four complementary approaches:
1. Real-time event analytics show which portfolio properties are exposed to potentially damaging levels of wind, storm surge, and precipitation. These tools inform stakeholder engagement and property-level risk mitigation action.
2. Post-event modeling estimating potential property-level damage informs detailed credit risk analysis to translate hurricane damage into impacts upon a bank’s loan portfolio.
3. 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.
4. 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.
Here are some takeaways for lenders, investors, and developers that highlight what the above workflow means for them.
Lenders
Conduct credit risk assessments post-storm
Damage to a building during a hurricane doesn’t translate directly into credit risk in a commercial real estate portfolio. Rather, the credit risk presented by storm damage is influenced by many factors, including insurance coverage and loan quality.
For example, in a hypothetical portfolio of 290,000 commercial real estate properties in Florida from Moody’s commercial real estate database, more than 100,000 are modeled to have experienced structural damage from Hurricane Milton. However, Moody’s estimates that, for these properties, building damage from the extreme wind and water conditions during the storm affected just under 1 percent of total building value. This finding shows that there is unlikely to be substantial portfolio impacts from Hurricane Milton.
The most severely damaged properties, however, were modeled to have double-digit damage ratios (cost of physical damage divided by the estimated replacement value of the building). In today’s insurance landscape, most major damage at this level is expected to be covered by insurance. Moody’s Commercial Mortgage Metrics (CMM) tool shows the credit risk implications of a hypothetical 40 percent damage ratio at a property in Florida by looking at both a healthy loan and a distressed loan, with higher loan-to-value (LTV) and lower debt-service coverage ratio (DCSR). Moody’s RMS estimates that 85 percent of this hypothetical damage would be covered by insurance for this Florida property.
Figure 1. The impact of insurance coverage and loan quality on credit risk
This analysis shows that loan quality and insurance coverage have substantial impacts on the credit risk presented by hurricane damage. The delta between credit risk under the baseline compared to properties with hurricane damage is larger for distressed loans backing properties that have insurance (or no insurance) than it is for a healthy loan. This conclusion highlights an incentive for lenders to identify distressed loans and pay close attention to their exposure to/recovery from hurricanes and other extreme events.
Integrate insurance and climate risk into refinancing
Understanding which portfolio properties experienced the most damage during a hurricane also informs preparations for insurance renewal, because individual properties with large claims are likely to face the most challenging renewals. Lenders face more frequent insurance waiver requests from borrowers already on their books, because borrowers can’t get insurance or because insurance premiums are too high.
ASTM (formerly the American Society for Testing and Materials) International recently published a guide outlining a consistent approach to property resilience assessments (PRAs) that can be integrated into lending decisions and insurance negotiations. For example, after hurricane damage, a PRA informed by engineering assessments and catastrophe modeling can help identify the most cost-effective repairs that will best mitigate future damage and, thus, potentially translate into lower insurance premiums.
Likewise, lenders can use catastrophe models to estimate the likely building damage under different levels of extreme events to create insurance coverage requirements that better balance the risk of loss during extreme events with the cash-flow risks to borrowers that stem from high premiums. Requiring less than full replacement cost coverage would also help loosen supply in the insurance industry.
The annual nature of insurance renewals presents challenges, but banks have an opportunity to consider the shifting landscape during loan refinancing. For example, by leveraging a PRA to understand properties’ likely damage from extreme events and the potential for reducing that damage with structural changes, lenders could request that borrowers reserve funding for certain climate resilience capital expenditure or consider adjusting other loan terms. These strategies can help banks mitigate the financial risk they face, whether from extreme events, costly insurance, or both.
Investors
Directly inform on-site resilience measures both before and during a storm
Investors tend to have more direct control over their properties than lenders do, which puts investors in a powerful position to leverage climate risk screening and real-time analytics to manage portfolio risks and inform long-term strategy.
Ahead of Hurricane Milton, Moody’s estimated that there were more than 235,000 commercial real estate properties with a cumulative value around $1.1 trillion exposed to wind speeds of at least 50 mph (80 kph), which is the threshold at which some damage is expected. Portfolio managers could run similar analyses for other wind speeds and hurricane-related hazards, such as storm surge and precipitation, and ask property managers to deploy relevant risk mitigation measures as the storm approaches.
Many investors screen portfolio properties proactively for hazard risk exposure. Doing so provides opportunity to work with property managers in developing response plans around safeguarding tenants, equipment, operations, and buildings from whichever hazards a property is most likely to undergo. Once a specific hazard unfolds, those property managers are prepared.
Factor insurance into net operating income calculations
Although some investors are exploring captives and different self-insurance strategies, many are coping with higher insurance premiums, which has implications for 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, Moody’s found that for commercial mortgage-backed securities (CMBS) properties in the 99th percentile of insurance premiums as a share of revenue over the past five years, an average of 13.4 percent of revenue was taken by insurance in 2023 compared to 6.7 percent in 2018. Thus, properties would need an additional 1.3 percent annual rent growth just to maintain their annual NOI.
As lenders require replacement cost insurance coverage and some begin to charge higher rates for debt in hazard-exposed areas, investors may be particularly incentivized to understand the climate risk of their new acquisitions. Meanwhile, screening properties for their exposure to different climate hazards and their likely damage from those risks over the hold period will help inform cost benefit analysis for asset-level risk mitigation measures.
Although there is not yet a clear, consistent way that property-level risk mitigation translates into lower insurance premiums, some insurers do offer resilience-related premium credits, some states require that insurers offer discounts for certain hazard-specific risk reduction measures, and insurers often consider resilience measures when developing quotes.
Developers
Identify the business opportunity in resilient development
After each hurricane, examples emerge of above-code communities that have fared much better than nearby houses have. Hunters Point, for example, is one such Florida development. It was hit by both Helene and Milton but emerged unscathed. It was designed specifically with hurricane resilience in mind.
The three-story, single-family homes in Hunters Point are built higher above sea level than Florida code requires and feature first-floor concrete garages with drains for floodwater. Each entire building is anchored together with steel straps. Solar panels attached to its roof securely enough to withstand wind, together with onsite batteries, keep the lights on, even when the surrounding area faces post-storm power outages.
These developments are expensive, but climate-resilient buildings are in increasingly high demand. Likewise, over time, their residents will save on insurance premiums. A storm like Hurricane Milton won’t move the insurance industry as a whole, but properties that filed large claims will face the most challenging renewals—probably with updated policies that have higher deductibles or premiums, or that have lower limits. Developments that don’t incur damage will be more insulated from the continued increase in insurance premiums.
Screening potential development locations for their exposure to climate hazards can help developers identify the business opportunity in designing resilient communities that will be in high demand. Meanwhile, they can examine different potential building structures—such as roof styles, framing techniques, and elevations—by running them through catastrophe models that estimate the damage under different severities of extreme event. Doing so can inform development that integrates the most effective resilient design elements for the exposure faced by a specific development, based on its location and use.
Rippling impacts
As lenders, investors, and tenants grapple with surging insurance costs and concern over property damage, climate-resilient design will be increasingly in demand. Developers of above-code communities rely on innovative design techniques related to wind-resistance, energy resilience, and flood mitigation. Meanwhile, flood resilience is in demand in hurricane-exposed communities and ones far from the coasts. Landscape architects with expertise in biofiltration and leveraging green space as flood defense are increasingly sought after. The interconnections between storm damage, insurance costs, mortgage insurance requirements, and property NOI will increasingly drive participants—ones throughout the commercial real estate value chain—to measure and manage risks while seizing financial opportunity.
