Climate Risk Opens 17% Valuation Gap in Commercial Property

Insurance now consumes 4.1% of net operating income across U.S. commercial real estate, up from 1.9% in 2017, as carriers price disaster exposure into premiums at the building level.

By the Family Office Real Estate Daily Desk·Monday, October 26, 2026·3 min read

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How much of a valuation discount are climate-exposed commercial properties trading at compared to lower-risk markets?

First Street's analysis of 120 U.S. metro areas finds properties in high-disaster-risk markets trading at a 16.9% discount to comparable lower-risk assets, driven by insurance premiums that consumed 4.1% of average commercial real estate net operating income in 2024, up from 1.9% in 2017. Premiums across multifamily, office, industrial, and retail grew 154% between 2017 and 2024. MSCI acquired First Street for $120 million in the third quarter of 2026 to embed asset-level climate risk scores into institutional investment workflows.

Key facts

First Street's analysis of 120 U.S. metro areas found properties in high-natural-disaster-risk markets trading at a 16.9% discount to otherwise comparable assets in lower-risk areas, according to First Street.
Insurance premiums across multifamily, office, industrial, and retail commercial real estate grew 154% between 2017 and 2024, at a compound annual growth rate of 14.3%, according to First Street.
Insurance consumed 4.1% of average U.S. commercial real estate net operating income in 2024, up from 1.9% in 2017, according to First Street.
Average insurance costs per apartment unit rose from $285.83 in 2017 to $878.91 in 2024, a 207.5% increase, and multifamily properties in high-risk markets carry premiums roughly 69% above those in safer metros, according to First Street.
MSCI acquired First Street for $120 million in the third quarter of 2026, with the stated ambition of turning climate risk from a disclosure exercise into a daily input for how capital is priced and allocated, according to First Street founder and CEO Matthew Eby.
Commercial property rate growth decelerated from 5.6% in the fourth quarter of 2024 to 2.9% by the fourth quarter of 2025, according to Stephen Pantano, senior vice president of market transformation at the Urban Land Institute.

Climate Risk Opens 17% Valuation Gap in Commercial Property — Image: editorial illustration · Story sourced from realtytoday.com

Commercial properties in markets with elevated natural disaster risk are trading at a 16.9% discount to otherwise comparable assets in lower-risk areas, according to research by First Street, now part of MSCI following a $120 million acquisition that closed in the third quarter of 2026. The finding, drawn from 25 years of commercial performance data from the National Council of Real Estate Investment Fiduciaries across 120 U.S. metro areas, represents the first systematic attempt to quantify how diverging insurance costs are translating into actual transaction-level pricing differences between markets.

Property values are tied to net operating income, and insurance premiums have grown large enough to move that math where risk is concentrated. Across multifamily, office, industrial, and retail assets, premiums grew 154% between 2017 and 2024, at a compound annual growth rate of 14.3%, according to First Street. That pace outran the prior 17-year average by more than three to one. By 2024, insurance consumed 4.1% of average commercial real estate net operating income, up from 1.9% in 2017.

The pressure is most visible in multifamily. Average insurance costs per apartment unit rose from $285.83 in 2017 to $878.91 in 2024, a 207.5% increase, according to First Street. Multifamily properties in high-risk markets carry premiums roughly 69% above those in safer metros and trade at a 25% discount as a result. Insurance consumed 6.6% of multifamily net operating income nationally in 2024, a share that compresses margins without a clear path to passing the full cost through to renters in most markets without raising vacancy risk.

Industrial is seeing a different but equally sharp divergence. Premiums in high-risk industrial markets rose at roughly three times the pace of those in lower-risk regions over the same period. By 2024, insurance absorbed 5.9% of industrial net operating income in high-risk markets versus 2.4% in lower-risk ones, a spread that quietly changes the math on deals in coastal and flood-prone logistics corridors in ways that were not visible on pro formas even five years ago.

The structural driver runs through reinsurance. Commercial property insurance operates with lighter regulatory constraints than homeowners coverage, allowing carriers to reset pricing relatively quickly after catastrophic-loss cycles. The hard market that started in 2017, a year when global disaster losses exceeded $300 billion, permanently raised the effective premium baseline. Hurricane Ian's roughly $112 billion in Florida damage in 2022 pushed it further. Jeremy Porter, First Street's chief economist, has described the pattern as a ratchet. Every time the market hardens, the baseline rises and does not go down, he said.

Some softening has followed a relatively quiet 2025 hurricane season. Commercial property rate growth decelerated from 5.6% in the fourth quarter of 2024 to 2.9% by the fourth quarter of 2025, according to Stephen Pantano, senior vice president of market transformation at the Urban Land Institute. Pantano cautioned that market cycles in commercial insurance are short-lived, and that the structural premium reset means even a soft period is unlikely to return to the prior floor.

For lenders and investment committees, that persistent cost pressure has altered how insurance fits into a deal. Insurance has moved from a closing-checklist item to an active credit-committee topic, James Stuart, corporate chief sales officer and practice leader for global insurance brokerage Hub International's North American real estate specialty, said in a Commercial Property Executive analysis published in August 2026. Lenders are now requiring minimum carrier financial-strength ratings, commissioning insurance-to-value studies, and in some cases mandating full excess coverage as a loan condition. The concern is not only the premium. Reduced limits, higher deductibles, gaps in building-ordinance coverage, and carrier-rating questions can each affect refinancing assumptions and cap-rate expectations at exit. A few years ago, two similar buildings a mile apart got similar terms, Stuart said. Today, one with hardening documentation can get materially better terms than an untouched twin.

The Deployment Angle

Family Office Real Estate Daily Desk · our analysis, not the source's

The 16.9% valuation discount and the 4.1% net operating income drag create an opening for direct ownership at compressed cap rates, but only if the insurance line is underwritten building by building rather than assumed as a metro-area average. The First Street data show that multifamily properties in high-risk markets trade at a 25% discount while carrying premiums 69% above safer metros. That spread means a co-investment or separate account can buy yield if it can lock certainty around the insurance line for the hold period and prove to an exit buyer that the coverage structure will not reprice at refinancing.

The arithmetic favors assets where resilience work has already been documented. If insurance consumed 5.9% of industrial net operating income in high-risk markets versus 2.4% in lower-risk ones in 2024, a warehouse with flood elevation certificates and a recent roof replacement can command terms closer to the lower figure even in a coastal corridor. That 3.5 percentage point spread translates directly into acquisition pricing power if the underwriting can verify the building-level work and the lender will accept it as a credit input. The risk is that the documentation does not exist or that the carrier does not recognize it at renewal.

Platform capital alongside a sponsor with in-house engineering capability is the cleaner route in markets where the premium baseline has reset but individual properties have not yet been re-rated. The industrial divergence that First Street measured grew at three times the pace in high-risk markets over the 2017-to-2024 period, which means the sponsors who moved earliest on hardening have the widest gap between their actual cost and the market assumption. A programmatic joint venture that underwrites to verified building performance rather than ZIP-code averages can capture that gap as spread, but it requires access to the engineering reports and the carrier relationships that non-specialist buyers do not have.

Avoid LP commitments to blind pools that do not require insurance-to-value studies before close or that treat the expense as a fixed percentage of replacement cost. The deceleration in commercial property rate growth from 5.6% in the fourth quarter of 2024 to 2.9% in the fourth quarter of 2025 does not mean the structural reset has reversed. The next hard cycle will reprice again from the new baseline, and a fund that did not lock coverage structure and carrier ratings at acquisition will reprice the portfolio at the worst moment in the hold.

Questions this story answers

01How large is the valuation gap between climate-exposed and lower-risk commercial properties?

First Street's analysis of 120 U.S. metro areas, drawing on 25 years of commercial performance data from the National Council of Real Estate Investment Fiduciaries, found that properties in high-natural-disaster-risk markets trade at a 16.9% discount to otherwise comparable assets in lower-risk areas. For multifamily specifically, the discount reaches 25%, according to First Street.

02How much has commercial real estate insurance costs increased since 2017?

Premiums across multifamily, office, industrial, and retail assets grew 154% between 2017 and 2024, at a compound annual growth rate of 14.3%, according to First Street. That pace outran the prior 17-year average by more than three to one. Insurance consumed 4.1% of average CRE net operating income in 2024, up from 1.9% in 2017.

03Are commercial real estate insurance rates coming down in 2025 and 2026?

Commercial property rate growth decelerated from 5.6% in the fourth quarter of 2024 to 2.9% by the fourth quarter of 2025 following a relatively quiet 2025 hurricane season, according to Stephen Pantano, senior vice president of market transformation at the Urban Land Institute. Pantano cautioned that commercial insurance market cycles are short-lived and that the structural premium reset means even a soft period is unlikely to return to the prior floor.

04How are lenders changing their underwriting because of climate-related insurance risk?

James Stuart, corporate chief sales officer and practice leader for Hub International's North American real estate specialty, said lenders are now requiring minimum carrier financial-strength ratings, commissioning insurance-to-value studies, and in some cases mandating full excess coverage as a loan condition. Stuart said insurance has moved from a closing-checklist item to an active credit-committee topic.

05What is the climate risk situation for Miami and Fort Lauderdale office markets specifically?

Miami and Fort Lauderdale are the two most insurance-burdened office markets in First Street's data, with premiums consuming roughly 5% of office net operating income in each, versus 1.4% in Nashville. Fort Lauderdale office values fell 17% between 2020 and 2024 as insurance costs doubled, according to First Street. Miami office buildings traded at a 2025 average of $360 per square foot, nearly double the national average of $190 per square foot, according to Yardi Matrix.

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