CRE deals need to reflect rising insurance costs amid hurricane risk

Joseph Sumberg, a former managing director at Goldman Sachs Group Inc. who now works for billionaire climate investor Tom Steyer, says commercial real estate deals will increasingly need to price in rising insurance costs, as hurricane seasons get more destructive and coverage less reliable.

It’s a “major factor for us,” Sumberg, who left Goldman in late 2022 to build and oversee the real estate division of Steyer’s Galvanize Climate Solutions LLC, said in an interview. “And property insurance across the US is going up.”

Investors in commercial real estate are finding they now have to monitor the fallout of extreme weather patterns as they decide where to allocate funds. Sumberg has said he expects the repercussions of climate change — spanning physical risks to regulations and tenant preferences — will be the “single most significant thing to impact” the property market in the decades to come.

As the east coast of the US gets battered by what meteorologists have warned will be one of the most active hurricane seasons in recent memory, assets caught in the crosshairs are increasingly at risk. The latest storm to morph into a major hurricane is Milton, which is barreling toward Florida’s coastline threatening communities already battered by Hurricane Helene. 

Milton is already the Atlantic’s strongest hurricane this year, and is set to approach the Florida peninsula as a catastrophic Category 5 storm.

For properties in hurricane-prone areas, insurance coverage is proving increasingly hard to get. And the expectation is that “insurers are going to continue to increase their premiums to protect across the US no matter where you are, and that needs to be factored in,” Sumberg said. It’s “going to become a more important part of valuations.”

For asset managers tracking the right data, though, the investment opportunities are considerable, according to Sumberg. Addressing climate-change related metrics that have the potential to alter commercial real estate valuations represents an investment “opportunity set” that’s “better than I thought it was going to be,” he said. “So we’re acquiring assets.”

In June, Galvanize made its second real estate acquisition, “with the aim of optimizing energy-efficiency savings, generating renewable power and increasing asset value,” the firm said at the time. The industrial property, One Gateway Boulevard in New Jersey, will form part of a “traditional value-add strategy” as Galvanize invests in decarbonization, it said.

Galvanize’s targets for such investments are currently centered in New York, New Jersey, California, Maryland and Massachusetts, according to Sumberg. Galvanize says the anticipated investment at its real estate unit for both acquisitions and retrofits of buildings is $1.85 billion over the next three years.

“I’m hopeful that we will trailblaze some obvious case studies for people and make this clear for them because there’s plenty of opportunity here,” he said. “The question I get asked the most now on panels is: Is this scalable? I haven’t looked up the total investible value of our top five target markets, but I’m pretty sure if you take California, New York, Massachusetts, Maryland and New Jersey, it’s scalable.”