CHICAGO-Commercial real estate values in coastal areas may suffer as insurance companies reduce exposure to hurricane-prone areas, according to Fitch Ratings. Smaller multifamily assets are especially vulnerable, according to a report from Fitch's local office.

As hurricane season begins, insurance companies are increasing premiums, raising deductibles, dropping coverage amounts, and in some cases even dropping coverage altogether at coastal locations. Joseph Kelly, senior director at Fitch, says that commercial mortgage-backed securities servicers "have noticed a sharp increase of anywhere between 25% and 400% in windstorm and flood insurance premiums," since June 1, the official start of hurricane season. "This may present a problem for commercial real estate properties where premium increases cannot be passed through to tenants." The resulting value decline, he adds, "may be severe enough so a property can no longer support its full debt services, increasing the likelihood of payment default."

Deductibles are rising, too. Fitch cites increases of 10% and 15% of replacement value for renewals, compared to between 2% and 5% a year ago. Some CMBS servicers are requiring borrowers to provide guarantees to cover the difference between the two deductibles in order to mitigate the additional risk.

With insurers placing caps on, or dropping windstorm coverage, Patty Bach, Fitch senior director, expresses a concern that "windstorm insurance along coastal areas may become commercially unavailable." She cites a possible echo of the severe terrorism insurance issues that occurred in late 2001 and early 2002.

Mortgages secured in CMBS typically carry property and casualty insurance coverage equal to the replacement cost of the property, and the majority include wind as a covered peril, except for properties located close to coasts. The determination of "close proximity" to a coast differs by insurance companies' risk appetite, Fitch warns. Some insurers exclude wind for properties within 20 miles of the coast, while others exclude those within 100 miles. When wind is excluded, a separate wind policy or rider should be purchased, the Fitch directors say.