Key Takeaways

• Insurance and climate risk in commercial real estate increasingly affect property values. Higher premiums and environmental risk can change how investors price assets.
• Operating expense pressure in CRE is becoming a bigger part of investment decisions. Buyers look closely at whether expenses will remain stable over time.
• Rising deductibles for commercial property increase the financial risk for owners. As a result, many investors set aside larger reserves and use more cautious underwriting.
• Climate risk in real estate underwriting is influencing insurance costs and lending requirements. Environmental exposure has become part of market and property selection.
• Expense growth vs. rent growth in commercial real estate is a growing concern. If costs rise faster than rents, property returns can shrink.

Investors often focus on rent trends when markets shift. In today’s market, operating expenses can matter just as much. Insurance premiums, taxes, and utilities can change quickly, and rising costs can directly reduce property income.

Many buyers now look as closely at expense durability as they do at rent growth. Insurance volatility and environmental risk have made operating costs less predictable.

As a result, investors are reviewing deals differently. Insurance is no longer just a line item on the operating statement, and climate risk is no longer a secondary diligence issue. Together, they are shifting underwriting away from rent growth alone and toward a broader view of expense durability.

When Insurance Becomes a Valuation Variable

For decades, property insurance was one of the more predictable costs in a CRE portfolio. Premiums rose gradually, coverage terms were relatively stable, and insurance rarely shaped pricing conversations. That is no longer true.

That assumption has changed. In many markets, premiums have risen sharply and coverage terms have shifted. First American notes that over the last five years, commercial property insurance premiums have “increased markedly,” with some cases “doubling in the course of a year,” and cites Minneapolis Fed research showing multifamily insurance premiums rose at an average annual rate of 45% in 2024.

Many policies also now include higher deductibles, tighter terms, or new exclusions. For owners underwriting to historical norms, the gap between projected and actual insurance costs has created real cash flow pressure.

The valuation math is straightforward: higher insurance costs reduce net operating income (NOI). Lower NOI reduces implied value under any cap rate. Buyers who identify that gap during diligence will often reprice the deal or walk away, which means sellers with elevated insurance costs are already at a disadvantage before negotiations begin.

Benchmarking a property's insurance costs against comparable assets in the same market is now becoming a standard early step in underwriting. Crexi Intelligence aggregates expense history, ownership records, and transaction comps in one place, making it easier to see whether a property's insurance costs are in line with the market or quietly eroding its value.

How Rising Deductibles Affect Underwriting Assumptions

Premium increases are only part of the story. Policy structure has also changed. Insurers have responded to elevated catastrophe losses not just by charging more, but by changing what they cover and when coverage actually begins.

In coastal markets and wildfire-prone regions, deductibles have climbed into six figures for some property types. That means an owner can face a major loss event and still absorb a significant out-of-pocket cost before coverage applies. In practice, many owners are self-insuring for a meaningful portion of their risk, regardless of what the policy summary suggests.

Higher deductibles can affect several aspects of CRE underwriting:

• Reserve requirements
• Cash flow stability
• Debt service coverage sensitivity

With that added exposure, lenders are examining operating resilience more closely. Debt service coverage ratios (DSCR) are being scrutinized more carefully in high-exposure markets, and buyers are stress-testing downside scenarios that would have seemed overly conservative just a few years ago. 

Properties with high deductibles in catastrophe-exposed submarkets now carry  different reserve requirements than those in lower-risk areas, and that difference affects how aggressively a buyer can bid.

Operating Risks Buyers Now Model Explicitly

Investors once focused primarily on rent growth when evaluating properties. Today, operating costs receive just as much attention.

Insurance may be the most visible pressure point in 2026, but it's part of a broader category of operating risk that investors now model more rigorously. The shift is from income-driven underwriting to durability-driven underwriting, which asks whether the expense structure will hold up over the full hold period.

Several categories of risk can create operating expense pressure in CRE, especially when costs rise faster than income.

Buyers often review operating risks such as:

• Insurance cost changes
• Property tax reassessment
• Deferred maintenance needs
• Utility and energy price swings

None of these risks are new, but they are increasingly showing up at the same time. An asset that could absorb one of these pressures may struggle when several of them move in the wrong direction at once.

In many markets, expenses are rising faster than rents. When that happens, margins shrink and cash flow becomes less stable.

To manage this risk, investors can examine several data points together. Historical expenses, tax records, and ownership history can help explain how a property has performed over time. This analysis approach supports more disciplined operating risk modeling in CRE. Platforms like Crexi Intelligence surface this data alongside market comps, reducing the odds of inheriting someone else's optimistic assumptions.

Why Expense Growth Matters More Than Rent Growth in Some Markets

The standard CRE underwriting model often starts with a simple sequence: project rent growth, apply a cap rate, and arrive at value. That works reasonably well when rents and expenses move together. When they diverge, the model can produce valuations that look reasonable on paper but conceal real return compression.

In some markets, rent growth has slowed while operating costs continue to rise. When expense growth outpaces income growth, property returns shrink and valuations come under pressure.

Office and retail rents in some submarkets have softened or stagnated while insurance costs, tax burdens, and operating expenses keep climbing. Multifamily owners who bought at peak 2021–2022 NOI projections have found that even modest expense creep can push cash flow below pro forma.

To understand this risk, investors often review operating history and key data points including:

• Historical expense ratios
• Insurance premium trends
• Property tax escalation patterns

These factors help investors evaluate whether a property’s income can remain stable over time.

Careful expense analysis also reduces the risk of valuing assets too heavily on optimistic rent projections. Many investors review lease data, tax history, and recent sales to understand how a property has performed over time.

Platforms such as Crexi Intelligence bring this information together in one place. There, it becomes easier to see whether rising expenses could affect long-term performance.

Incorporating Climate Exposure Into Deal Screening

Climate exposure has become an important part of commercial property research. Investors want to understand how environmental risk could affect a property over time.

Global natural catastrophes had an insured “price tag” of more than 53 billion dollars in Q1 2025, significantly higher than the 21st‑century Q1 average of 17 billion and the second‑highest Q1 on record. Those losses flow directly into insurance pricing and lender behavior, which means climate exposure affects financing terms and exit liquidity, not just the cost of coverage.

Today, climate risk in real estate underwriting can directly affect insurance costs, loan terms, and exit assumptions. Properties with higher environmental exposure may face higher premiums, stricter financing, or reduced lender appetite. Because of this, many investors now review climate exposure for commercial property early when screening potential deals.

Common risks include:

• Flood exposure in coastal or low-lying areas
• Wildfire risk in dry or drought-prone regions
• Long-term climate trends that may affect insurance coverage

These risks can directly affect flood and fire risk real estate valuation. Properties in higher-risk areas may require larger reserves or more conservative financing.

Tools like Crexi Climate Factors help bring this information into everyday property research. Investors can view flood and wildfire overlays directly on the map while reviewing listings comps. Climate risk cards on each property page also highlight current conditions and potential future risk.

Providing climate exposure alongside market data and ownership insights makes it possible to evaluate environmental risk within the same workflow used to screen potential deals.

Using Climate and Operating Data to Refine Market Selection

Investors focused on long-term returns are adding a parallel layer: asking whether a market's operating cost environment and climate exposure will support durable performance over the hold period.

For example, two markets with similar rent growth trajectories can carry very different long-term profiles. One might face structural insurance headwinds, climate exposure that's starting to affect lender appetite, or infrastructure that adds operating cost risk.

The other might be in a lower-exposure region where expenses are more predictable and exit liquidity is stronger. Identifying that divergence before committing capital is the advantage that better data provides.

Many investors now treat environmental risk as part of market selection, not just property-level due diligence. Map overlays and demographic data make it easier to compare nearby areas early in the research process.

Platforms like Crexi Intelligence bring these insights together within the same research workflow. This makes it easier to identify markets where operating risks may remain manageable over time.

Reframing Cap Rates in an Operating-Pressure Environment

Cap rates remain a common way to compare commercial properties, but they do not always capture the full operating risk behind an investment.

Two properties at a 6.5% cap rate can represent genuinely different risks. One carries predictable expenses in a stable insurance market with low climate exposure. The other has a rising expense ratio, a deductible structure that effectively self-insures a large portion of its risk, and flood exposure that's already starting to affect nearby transaction activity. The headline return is identical, but not the risk-adjusted return.

In these situations, the insurance impact on cap rate becomes clearer. When premiums rise or deductibles increase, NOI declines, and the quoted cap rate becomes a less complete measure of return quality.

Cap rates still offer a useful starting point. But in a higher-pressure operating environment, future expense exposure often provides a clearer picture of long-term value.

Investment Discipline in a Higher-Pressure Operating Environment

Experienced buyers have already started adjusting. Larger operating reserves are now standard in high-exposure markets. Expense projections are more conservative by default. Downside scenarios that once seemed unlikely are being modeled explicitly because the cost of ignoring them has become too clear.

In an environment where rents are stable but expenses are volatile, margin for error has narrowed. The deals that hold up over a full hold period are the ones underwritten with honest assumptions, where more aggressively penciled buys are more likely to face shrinking leverage and creeping distress.

The investment goal is resilience. Centralized, verified data is what makes that disciplined decision-making practical at scale. Investors who can benchmark insurance costs against comparable properties, review five years of actual expense history before making an offer, and assess climate exposure within the same platform they use to pull comps are operating with a meaningful informational advantage.

Crexi Intelligence brings climate risk data, lease records, ownership history, comparable sales, and tax information into one research environment — making it practical to apply layered operating risk analysis on every deal.

Explore climate overlays, expense history, and ownership insights on Crexi Intelligence.​

FAQ

What is insurance and climate risk in commercial real estate?

Insurance and climate risk describe how environmental factors and rising insurance costs can affect property income and value. 

How does insurance affect commercial real estate valuation?

Insurance costs affect a property’s net operating income. When premiums rise or coverage changes, cash flow becomes less predictable. This can lower property values or cause buyers to adjust pricing during underwriting.

Why are insurance costs increasing for commercial property owners?

Insurance costs are rising due to climate risk, major natural disasters, and stricter insurer rules. In many markets, insurers are also increasing deductibles or limiting coverage. This shifts more financial risk to property owners.

How does climate exposure affect real estate investments?

Climate exposure can affect insurance costs, financing terms, and long-term buyer demand. Investors often review key environmental factors before investing.

What operating risks do commercial real estate investors analyze today?

Investors review several operating risks when underwriting deals. These often include insurance trends, property tax increases, and deferred maintenance. Each of these costs can affect property income and long-term returns.

Why is expense growth important in real estate underwriting?

Rising expenses can reduce returns even when rents increase. If operating costs grow too quickly, property income becomes less stable. This is why investors carefully model expense growth before buying a property.