BIGGEST RISK with Jeremy Friedman

Commercial Real Estate Pro Network

J Darrin Gross 0:00

And I'd like to ask you, Jeremy Friedman, what is the BIGGEST RISK?

Jeremy Friedman 0:05

But as we discussed before the call, that's actually the one largest risk item that we that does keep us up at night and that we're working diligently on at the moment is our insurance. And I think it's so this is not to be clear to your listeners, you did not prompt me for that at all this is this is our biggest risk at the moment, as we see it. We being located on the coast, the Gulf Coast of Alabama, and we have several coastal properties in Pensacola, Florida, Baldwin County, Alabama, we are being hit with tremendous increases in all of our property insurance, especially in the wind policies. And they're becoming increasingly hard to get. And to give you a couple and give your listeners a couple of examples we have we have a property in Pensacola, Florida and we put it under contract the insurance was in this was under contract and 2022. The insurance policy was $27,000 a year. By the time we closed on it in early 23. That policy had renewed to $47,000 from 27. However, we needed a new policy in the same carrier. And I will not name names with the same carrier quoted us a new policy one month after they just renewed for 47 at $72,000. I just yesterday got a quote for this year's renewal. And it will it will go to just under six figures. It's $99,000. So from 27, so quadrupling, in two years, essentially. Now, the problem at that facility is we have gross leases at that facility. Now, we have been very successful at getting the tenants to renew at significantly higher lease rates. And all we have to do is say, Hey, guys, y'all know what's going on with insurance, property taxes and expenses. This is the new rate, and they've all signed it. And so we've luckily been able to mitigate that all of our self storage facilities are gross rents, of course. So the these higher operating expenses are a drag the NOI a lot of our facilities, thankfully, our net leases, however, you know, we there's a limit to the total rents that these these tenants will pay can pay, right. So if the cam charges increased significantly, that lowers what we can get out of them for rent, or, you know, what we can attract new tenants for for rent. So we consider this an extreme risk of our industry, nationwide and all aspects of real estate commercial real estate. So this is what keeps us up at night we work with, we work with a large broker, an international broker who carries a pretty big stick. But we're still having a very hard time controlling these costs. We're working on putting together some master plans we are working on, we're exploring a captive policy that we can bring in house and manage ourselves to try to reduce the expense and and potentially be able to save money and or, you know, be able to refund money back to those certain assets after after a period of time. We see the risk is to twofold one is rate. So all of the insurers have increased their rate tremendously, but we also see it on the replacement cost side the total insured value of these properties. Because you know, we buy it at one price. And as you know, I mean we are well aware we're buying it below replacement costs. But we get in arguments all the time about what is replacement costs with our insurers and of course with coinsurance. We can't be underinsured or else that leaves us very, very vulnerable in the long run, so, you know we don't see replacement costs or construction costs coming down anytime soon. You know, so you know that part of the the insurance premium, I think is for probably all going to have to stomach. Hopefully though we can get some more competition back in these cat markets in these in these high rated higher risk markets to be able to bring the rates back down. But I think I think it you know, I think though with the replacement costs, where they are truly where they are, and where they probably will remain, it's going to be hard to get any real relief here for for a while. And I think it's all going to have to transfer through eventually to the tents and it's all going to continue to keep rolling down and held the consumers and so I mean, I think we see inflation continuing for many years, we don't see it under control by any means. And which is also why we like you know, multi tenant value and flex industrial properties where we can raise continue to push rents. So that's a long story to say insurance keeps me up at night. And, you know, what we're, how we think about it and what we're trying to do to help mitigate that risk.