Rising inflation slows some builders’ reach for the sky [South Florida Sun-Sentinel]

Inflation is draining some of the air out of South Florida’s building boom as high costs of borrowing, construction materials, labor and potentially, insurance rates, are contributing to delays in some projects, according to industry professionals.

Skyrocketing insurance costs have caused a “chill” among developers in Florida, some of whom have delayed their projects in Broward, Palm Beach and Miami-Dade counties, the Wall Street Journal reported last week.

“I do feel that’s a concern,” said J.C. de Ona, division president for Southeast Florida at Centennial Bank, which is a major lender to developers in the region. ”It’s almost something that has been pushed aside. But it is going to become more in the forefront.”

However, de Ona and others involved in the development business say the costs of borrowing and construction are the main factors responsible for slowing the pace of new projects.

“We are seeing some delays, but not because of insurance,” said Peggy Marker, president of Marker Construction in Fort Lauderdale. “It’s hard to get money right now. Insurance is definitely on people’s minds, but it is taking the back seat to the more immediate concerns of construction costs and the costs of borrowing money.”

She said her company’s out-of-state and out-of-country clients are “watching it to see how it is all going to shake out.”

Daniel Gropper, dean and professor at the College of Business at Florida Atlantic University, said he expects the aftermath of Hurricane Ian to draw construction industry talent and resources to the Gulf Coast as its hardest hit areas rebuild.

Gropper, who served as a panelist in a Tower Forum discussion on inflation last week in Fort Lauderdale, said in an interview that developers are taking care to finish the projects that are now under way before starting new ones.

Ken Johnson, a real estate economist at FAU, said he “wouldn’t be surprised” if delays are happening. But insurance costs aren’t driving builders out of the marketplace.

“I have yet to hear a single developer say, ‘I’m out of Florida,’” he said. “They know [new residents] are coming in pretty significant numbers. Developers want to come here. The problem is they can’t bring products online fast enough.”

Sky-high building, army of insurers

Still, it is taking more effort — and money — from developers to secure the insurance they need to start and complete their projects.

The 1,049-foot high Waldorf Astoria Hotel & Residences in downtown Miami now under construction took 25 insurance companies to agree to cover it. When complete, the building will have 360 condos and 205 hotel rooms and suites.

“Insurance rates in the condo space have gone up three-, four-, five-fold,” said Ryan Shear, managing partner at PMG, which is developing the tower with Greybrook Realty of Toronto and others.

“It just made it a lot more expensive. You have to have your insurance in place long before you go vertical.”

Shear said his company has never had as many layers of coverage “as the Waldorf has had.”

“It’s complex and complicated to just acquire [coverage] at the level lenders want today,” he said.

Despite the elaborate and expensive coverage process, construction started on the building earlier this year and is targeted for completion in 2026.

Multi-faceted coverages

Regardless of a building’s size, developers are on the hook for a matrix of coverages, said Mark Friedlander, director of corporate communications for the New York-based Insurance Information Institute.

Construction insurance includes builders risk coverage, liability and construction defects. It covers the property when it’s damaged or destroyed by natural disasters, fires, vandalism, and even vehicle collisions. It also covers materials on site and cleanup costs such as debris removal.

Another big component is comprehensive general liability protection, including claims of bodily injury suffered by non-employees on the construction site. Typically, the coverage is bought by the building owner, developers, architects, engineers and contractors and subcontractors hired by the developer.

The costs have accelerated nationally and in Florida, Friedlander said.

“We’ve seen national increases ranging from 5% to 20% across the country,” he said. “In Florida we have seen increases of 30% or more this year.”

Another big change: deductibles. The minimums are rising from the $100,000 to $250,000 range.

Overall, insurance constitutes anywhere from 1% to 5% of a developer’s total construction costs, Friedlander said. “In South Florida we’re seeing up to 10%.”

Analysts point to the Surfside condo collapse disaster, which generated $1 billion in claims, as well as major storms as the principal drivers of insurance cost increases.

“We are seeing condo associations’ master condo policies covering common areas and the grounds are running on an average of over 100%,” Friedlander said.

Then there’s the policy costs for individual condo units, which are up 50% or more.

“This is clearly fallout from the Surfside tragedy,” he said.

Buyers undeterred

But developers facing higher costs are far from facing lower demand.

After Hurricane Ian struck the Fort Myers area, Friedlander noted, real estate investors “were literally swooping in to buy properties with homes that were completely obliterated.”

“Prices for properties are not dropping,” he said. “They are still selling at record levels. We’re not seeing any slowdown at all in interest in Florida real estate.”

“We talk to developers, we talk to real estate experts.” he added. “There is no indication of any slowdown. I have not heard of any projects being put on hold because of insurance costs.”

Besides domestic investors, foreign investors are eagerly returning to Florida to escape political and economic uncertainties in Latin America and elsewhere, said de Ona of Centennial Bank.

Legislative action?

Nonetheless, there is widespread agreement that government action will be required to abate the spikes in insurance costs before they join the ranks of high borrowing and materials costs as a serious factor in slowing growth.

Johnson of FAU said state lawmakers at some point will have to address the situation.

“Long term, this is going to be an issue we need to solve,” he said. “How did California deal with their earthquake insurance crisis 40 years ago? Here, hurricanes can damage homes, putting insurers at risk. You need to get reinsurance. Maybe the long-term solution is that the state becomes the reinsurer of the reinsurer. I don’t know where we’ll go. That’s one solution.”

The Legislature is scheduled to meet starting Dec. 12, but no one is reported to have mentioned anything about controlling the costs of commercial construction insurance.

“It’s definitely a problem to be addressed now sooner than later,” said de Ona. “It is affecting some clients. What they had in their budget for their insurance costs goes up drastically. It does make a change with the profitability of the property.”

Staff writer David Lyons can be reached at [email protected]

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