Fitch Says Coastal Commercial Real Estate Values May Suffer

Despite the light 2006 hurricane season U.S. commercial real estate values in coastal areas still may suffer as insurance companies continue to minimize their exposure windstorm insurance coverage, according to a special report by Fitch Ratings.

Fitch noted that as the 2006 Atlantic hurricane season approached coastal areas saw increases of between 25 percent and 400 percent in windstorm insurance premiums for commercial property. Though only nine Atlantic storms developed this year (with most remaining at sea), there is still potential for serious cash flow stress for commercial real estate properties in coastal areas if this increase extends into next year, according to Fitch Senior Director Joe Kelly.

“If premiums and coverage do not return to more normal market levels, cash flow stress may be severe enough that a property can no longer support its full debt service, thus increasing the likelihood of payment default,” Kelly said.

Fitch said it has also observed policy deductible increases of up to 10 percent to 15 percent of replacement value for new policies, compared with the more traditional 2 percent to 5 percent increases, prompting some lenders and servicers to require borrowers to provide guarantees to cover the difference between the two deductibles to mitigate the additional risk

Issuer U.S. CMBS: Windstorm Insurance — Gone With the Wind? is available on the Fitch Ratings Web site at www.fitchratings.com.

Source: Fitch Ratings