2024 Real Estate Development Industry Trends

The real estate sector can be divided into two main categories: habitational and commercial. Habitational real estate pertains to residential properties (e.g., houses, condominiums and apartments), whereas commercial real estate refers to properties utilized for business activities (e.g., office buildings, warehouses, production plants, shopping centers and restaurants). Altogether, the real estate industry plays a valuable role in the overall economy, providing individuals with comfortable places to live and equipping businesses with adequate spaces to conduct their operations.

Recent years have seen substantial growth across the real estate sector, largely stemming from fluctuating consumer demandand ongoing shifts in the property landscape brought on by the COVID-19 pandemic. Going forward, market intelligence firm Grand View Research projects that the industry will continue growing at an annual rate of 5.2% through 2030. Yet, some sector developments could still pose challenges for real estate businesses in the year ahead, including insurance market difficulties, worsening natural disaster exposures, prolonged labor shortages, and social inflation issues. This article provides more information on real estate industry trends to watch in 2024 and outlines best practices to help businesses navigate such developments.

Insurance Market Difficulties

Having sufficient insurance policies in place can help real estate businesses maintain much-needed financial protection against various property- and liability-related losses. However, increasing loss frequency and severity have prompted challenging insurance market conditions over the last few years. In the property insurance space, large-scale natural disasters(e.g., hurricanes, tornadoes, wildfires, flooding and hailstorms) across many locations have spurred a surge in catastrophe(CAT) exposures and related losses. Compounding concerns, rising inflation has exacerbated construction material and laborcosts, making it increasingly expensive to repair and replace damaged properties when these losses occur. Such inflation has also caused the vast majority of properties to increase in overall value. As a result, real estate businesses that neglect to update their policies to reflect current property valuations could be more vulnerable to coverage gaps and major out-of-pocket losses.

Amid these tough conditions, most property insurers have issued consistent rate increases and restricted capacity. According to the Council of Insurance Agents & Brokers (CIAB), double-digit premium jumps have become the norm in this space, with average rate increases sitting at 17% in 2023. Looking ahead, real estate businesses with properties located in CAT-exposed regions and poor risk management measures may face continued premium hikes and coverage limitations. Additionally, industry experts reported that those operating in habitational real estate could encounter greater property insurance difficulties than their commercial counterparts, potentially seeing rate increases of up to 35%. This is likely because habitational properties tend to be built with frame construction, which is a riskier class to insure.

In the liability insurance space, current litigation trends have fueled a rise in lawsuits against businesses being held responsible for injuring others or damaging their personal belongings. As it pertains to the real estate sector, these lawsuits may result from contractual disputes with tenants and contractors, incidents that arise during construction and renovation projects, and third-party losses that occur due to poor property maintenance or security measures. Similar to the property insurance environment, these difficult conditions have motivated most liability insurers to increase policyholders’ premiums and reduce capacity, albeit at a less alarming pace. According to the CIAB, the majority of insureds have experienced single-digit rate increases for several years, with average premium jumps hovering around 5% in 2023. Those in the real estate sector have also encountered stricter underwriting standards for liability coverage; insurers are asking for further documentation regarding factors such as policyholders’ property maintenance protocols, building occupancy levels and regional crime exposures. In 2024, real estate businesses that don’t meet these stringent underwriting standards or have heightened overall liability risks could be more susceptible to ongoing rate increases and coverage restrictions.

Natural Disaster Exposures

As previously mentioned, natural disasters have been on the rise in recent years, causing widespread devastation. According to international reinsurance company Munich Re, total global losses stemming from such disasters reached $250 billion in 2023, exceeding the 10-year average of $223 billion. Stateside, the National Oceanic and Atmospheric Administration reported that 2023 produced a record-high 28 separate billion-dollar weather and climate disasters in the United States, generating nearly $93 billion in overall losses and causing 492 fatalities. This number represents a considerable jump from the previous record of 22 distinct billion-dollar disasters in 2020 and far exceeds the five-year average of 20 events. Convective storms (e.g., thunderstorms, tornadoes and hailstorms) also skyrocketed across the country this past year. In fact, Munich Refound that convective storms contributed to 54% of all U.S. weather-related losses in 2023, costing $50 billion and almost doubling the past decade’s average.

These worsening natural disaster trends have left some real estate businesses with considerable property damage and associated CAT losses. What’s worse is that these major losses have caused many property insurers to limit coverage for CATexposures. In certain disaster-prone regions, some property insurers have completely eliminated such coverage for real estate businesses, thus posing significant insurance gaps and increasing the risk of financial ruin when extreme weather strikes. Natural disaster trends aren’t projected to slow down anytime soon, according to climate experts; these disasters will likely only become more frequent and severe in the years to come. As such, it’s all the more important for real estate businesses to understand and take steps to mitigate their unique CAT exposures.

Labor Shortages

The past few years have been met with labor shortages across industry lines. The pandemic also motivated many employees to reevaluate their job expectations, therefore prompting additional workforce adjustments and prolonging such shortages. The real estate sector has not been immune to these labor challenges. According to a recent survey conducted by real estate technology platform Crexi, more than two-thirds of businesses in the industry are currently struggling to find qualified employees. Furthermore, the Counselors of Real Estate included labor shortages in their latest list of the top 10 issues impacting the sector.

The biggest problems stemming from these shortages within the real estate industry pertain to property management and maintenance. Specifically, the National Apartment Association revealed that the staff turnover rate in the property management space reached 33% in 2023, up more than 10% from the all-industry average. Without enough employees to uphold routine building operations and stick to regular maintenance schedules, real estate businesses are having a harder time keeping their properties in good condition. Consequently, these properties are more likely to pose cleanliness and safetyconcerns, thus elevating real estate companies’ potential liability exposures and paving the way for increased litigation. Key reasons for heightened staff turnover issues in the property management space include the expansion of remote work and rising demand for higher compensation. In particular, a growing number of employees have sought remote or hybrid positions following the pandemic; however, property management jobs generally aren’t compatible with such positions, as these roles center around in-person tasks and on-site projects. Also, even though some real estate businesses have tried to reduce staff turnover by offering higher wages, it has proven difficult to provide competitive salaries as the general inflation rate remains elevated. With this in mind, real estate businesses may need to consider alternative employee attraction and retention strategies to ensure their operations can keep up with overall industry growth.

Social Inflation Issues

Social inflation refers to societal trends that influence the ever-rising costs of insurance claims and lawsuits above the general inflation rate. According to the National Association of Insurance Commissioners, the “social” aspect of this term represents shifting social and cultural attitudes regarding who is responsible for absorbing risk (i.e., the insurer or the plaintiff). Current drivers of social inflation include a surge in third-party litigation funding, ongoing alterations of tort reforms and the rise of anti-corporate culture. Altogether, these factors have resulted in stakeholders feeling more empowered to hold businesses of all sizes and sectors to higher standards and demand accountability for their perceived wrongdoings, prompting additional litigation and associated insurance claims.

Making matters worse, there’s an increasing public perception that businesses, especially large ones, can afford the cost of any damages. In this environment, nuclear verdicts (jury awards of $10 million or more) have become more common. Nuclear verdicts are particularly concerning, with litigation issues already on the rise in the real estate sector. For example, if real estate businesses face large-scale lawsuits from disgruntled third parties—whether it’s due to contractual disputes or property management incidents—they may be more likely to encounter nuclear verdicts. These verdicts could carry underinsurance concerns for such businesses in some cases, leaving them with coverage gaps and substantial out-of-pocket expenses amid associated claims. In light of ongoing nuclear verdict trends, it’s vital for real estate businesses to do what they can to limit their liability exposures and keep litigation to a minimum.

Tips for Real Estate Businesses

• There are several risk management measures that real estate businesses can implement to effectively navigate current industry trends, reduce related risks and prevent major losses. Here are some best practices for these businesses to consider:
• Conduct routine risk assessments to determine specific property and liability exposures. Introduce and revise mitigation strategies as needed.
• Review CAT risks and utilize adequate weatherproofing safeguards to better protect properties in disaster-prone areas(e.g., installing storm shutters on windows to protect against hurricane damage or utilizing fire-resistant roofing materials to protect against wildfire damage).
• Ensure property valuations are accurate and reflect the current inflation trends.
• Consider adjusting employee attraction and retention initiatives to minimize staff turnover and limit labor shortages. Possible initiatives may include providing more competitive benefits packages (e.g., tuition reimbursement, child care stipends, flexible scheduling and additional paid time off), implementing employee assistance programs and other staff well-being efforts, and offering professional development opportunities.
• Make property management a top priority. Be sure to keep buildings in good condition by upholding regular maintenance schedules and addressing any cleanliness or safety concerns as quickly as possible.
• Establish business continuity and emergency response plans to promote swift recovery processes following property- and liability-related incidents.
• Have prompt reporting protocols in place to ensure proper claims management when losses occur.
• Document all loss control measures for insurers and be prepared to comply with more stringent underwriting requirements.
• Consult trusted insurance professionals to stay up to date on the latest market conditions, understand key industry exposures, and secure sufficient coverage or alternative risk financing solutions.

Conclusion

Overall, there are several trends currently impacting the real estate sector. By staying on top of these developments and taking steps to mitigate their associated exposures, real estate businesses can effectively position themselves to maintain long-term growth and operational success.