Real estate on the rebound

Specialty programs drive growth in niche markets

By Elisabeth Boone, CPCU

Five years ago, when residential real estate prices were going through the roof and getting a mortgage was as easy as buying a candy bar, few people seemed to remember the ancient wisdom that "what goes up must come down."

The long, wild party ended, of course, as prices tumbled, borrowers defaulted, and the 2008 financial meltdown revealed the seamy underbelly of subprime loans and arcane derivatives cooked up by faceless Wall Street wunderkinder.

Now, as the economy slowly begins to climb out of the steepest recession since the Great Depression, the market for single-family houses is still swamped by a tidal wave of foreclosures, and the purveyors of easy money have long since vanished into the night.

Challenges likewise abound on the commercial side, where both prices and demand plummeted and the construction boom of the early 2000s virtually went bust.

That said, it's possible today to see some bright spots in the real estate market, according to Robert E. Mackoul, CLU, chief executive officer of New Empire Group, Ltd., a leading program manager that specializes in select segments of the real estate industry.

Located in Island Park, New York, New Empire operates nationwide and provides programs for condominium associations and community associations, senior and student housing, apartments, property managers, commercial and office buildings, and hotels and motels. Property, liability, high-limit umbrella, E&O, D&O, and environmental coverages are placed with highly rated carriers including ACE, Chubb, MiddleOak, Navigators, and Zurich.

The market niches served by New Empire, Mackoul says, generally were spared the devastation wrought by the collapse in single-family house prices. "In the Northeast, condos and co-ops have held up surprisingly well. Many of them in the New York metropolitan area were expected to take a severe hit after September 11, and that did not happen," he remarks. "If anything, the reverse happened, and property values continued to escalate. We were living in a bubble, and when the bubble burst, property risks in the Northeast took hits of about 20% across the board, compared with Florida and the Sun Belt states, which were devastated."

Declines in the 20% to 25% range, Mackoul observes, "probably brought values in the Northeast down to realistic levels."

Another factor that contributed to the decline in property values in the New York metro area, Mackoul says, was the collapse of Wall Street that began in early 2008. "Those multi-million-dollar bonuses were no longer being paid, and the people who were accustomed to getting them didn't have the money to buy properties either in the city or the country. That's starting to turn around now, but it had a major impact on the real estate market for a couple of years."

As the overall economy has begun to improve, so have conditions in the market for property risks in the Northeast, Mackoul says. "The market, which had been slow, has been gaining strength over the last couple of years. We have numerous carriers and risk purchasing groups competing for the same business."

Capacity and challenges

Although there is abundant capacity, Mackoul observes, New York City and New York State remain problematic for insurers. "In New York City, carriers struggle to make money. For one thing, the law imposes absolute liability on the landlord. For example, the sidewalks are not the city's responsibility; they're the responsibility of the property owner. I can't begin to count the number of claims we've gotten from slips and falls on sidewalks because of all the snow and ice we had this past winter," Mackoul says.

Because of New York's extremely strict labor laws, he continues, "When a contractor's employee is injured while working on a property, he can collect under workers compensation, and he can also sue the property owner for loss that is not covered by workers comp."

Mackoul offers an example. "A day laborer was using a ladder while cleaning and pointing the brickwork on an apartment building. He fell off the ladder and broke his ankle and suffered other injuries. The case wound its way through the courts, and five years later it was settled for $2 million at the 11th hour, while the case was with the jury but before the jury had reached a verdict," Mackoul explains. "The next morning, when the jurors were polled as to what they would have awarded, the minimum they said they would have awarded was $9.6 million."

In New York, he says, "Hold harmless agreements and other risk transfer devices are used to shift liability away from the landlord and toward the contractor. Apartment landlords, property managers, and the managers of condo and co-op associations cannot let a contractor onto the premises without requiring them to provide certificates of insurance proving that the contractor has coverage and naming the landlord or association as an additional insured."

In any jurisdiction, Mackoul points out, urban real estate risks have different exposures than suburban risks. "Urban areas have good fire departments that get to the scene quickly, and a high degree of training in life safety procedures is mandatory," he explains. "Urban exposures tend to be greater on the liability side than on the property side."

The opposite is true in suburban areas, Mackoul notes. "Suburban dwell­ings tend to be frame construction, whereas in the city we see mostly brick and other kinds of fire-resistive construction. As a result, the property exposure generally is higher in the suburbs, while the liability exposure is lower."

A friendlier climate

More favorable conditions prevail in the market for real estate risks in the mid-Atlantic states. Here, Mackoul comments, "The market is competitive, but it's not cutthroat. We have more carriers that are willing to compete in this region than in the Northeast because of liability issues in the Northeast that don't exist elsewhere."

Likewise, Mackoul remarks, the Midwestern and Southeastern states are more hospitable for insurers that underwrite real estate risks. "The climate outside the Northeast is less litigious, and the liability laws tend to be less onerous," he says. On the property side, however, it's a different story. "Depending on where you are in the Southeast, writing property business can be very difficult," he says. "Parts of the region have been devastated by Katrina and other major hurricanes and in some cases are still struggling to recover.

"Florida is a completely different animal," he continues. "We have an office there, and we write a lot of business in the state. Anything in the Panhandle or on the Gulf Coast is problematic from a property standpoint because of the number and intensity of the hurricanes that come through there. I've heard that after Hurricane Andrew in 1992, insurers lost all of their profits going back to 1945. Since Andrew, we've seen an exodus of carriers out of Florida. Insurance regulation is weak and unethical practices are common," Mackoul says. "It's extremely difficult to get anything insured, especially for a structure that's older than 15 years or located anywhere near either of the coasts."

Students and seniors

Another specialty niche for the New Empire Group is housing for students and seniors.

"A number of carriers have appetites for student housing, but their interest depends on the particular type of housing," Mackoul explains. "The pristine risks that many of the carriers will consider, or want to write, are apartment house-type dormitories, whether on or off campus. There will be some kind of on-site supervision; a managing agent will be visiting the property regularly. A few years ago we wrote a risk like this at a major Midwestern university. There was on-site management and a live-in resident adviser, and there were no balconies for students to fall off if they got drunk. Life safety technology was in place with emergency lighting and hard-wired smoke detectors. It was the perfect risk, and we were lucky enough to insure it," Mackoul says.

"The problem risks in student housing are the individually owned two-family buildings with three bedrooms in each unit, and six college kids are living there with no supervision," he continues. "A lot of the kids are underage and are having a ball drinking and partying. We have one carrier that is comfortable writing these buildings," Mackoul says. "They know this market, and they underwrite very tightly; that's essential in this class of business. Of course, companies that write these risks are going to charge for the exposure. The coverage will be priced appropriately so the carrier can make a reasonable profit."

On the senior housing side, New Empire writes both assisted living facilities and nursing homes. Mackoul describes a trend he has observed in this market.

"This seems to be increasingly a niche for program managers," he comments. "I know of at least two or three programs that specialize in nursing homes. Others are designed for assisted living facilities. Most of these are good property risks; the carriers are more concerned about the liability exposure because elderly people are so vulnerable to slipping and falling.

"Over the last five to seven years, I've seen program divisions springing up within a number of large carriers," Mackoul remarks. "Carriers are finding that they can outsource the expertise in a particular class of business to one or more program managers in different parts of the country. This is less expensive than having multiple offices around the country or having their home office people become highly skilled in a particular class of business and try to focus on that. We've seen the growth of programs in almost every niche industry, and definitely in the real estate sector," Mackoul says.

That's good news for niche program managers like the New Empire Group—and for the retailers and MGAs who benefit from the firm's expertise in its targeted segments of the real estate industry.

For more information:

New Empire Group, Ltd.

Web site: www.newempiregroup.com