Climate risk is changing the economics of retail property

Two retail stores with similar sales, rents and formats can have very different financial risks. Increasingly, climate exposure is one reason why.

Insurance is one of the clearest signals.

Commercial property insurance has become more expensive in many markets, while the cost and availability of cover can vary significantly between locations. JLL reports that commercial real estate insurance premiums across the US increased by 88% over five years. MSCI found that insurance costs for properties in its US Quarterly Property Index reached 2.4% of income receivable in the 12 months to the third quarter of 2024, twice their share five years earlier.

For retailers, however, the bigger issue is not simply the insurance bill.

Insurance is increasingly revealing differences in the underlying risk of individual properties. A store’s location, construction, condition, contents and exposure to particular hazards can all affect its risk profile.

That creates a wider question for retail property strategy. A location that looks attractive because of its rent, footfall and sales potential may look different once insurance, climate exposure, resilience investment and the potential cost of disruption are taken into account.

Climate risk is therefore moving beyond the sustainability agenda. For property teams, risk managers and finance leaders, it is becoming an operating-cost and estate-planning issue.

Insurance is revealing the changing cost of property risk

Commercial property insurance pricing reflects many factors, including an asset’s location and value, its vulnerability, construction and repair costs, regulation, reinsurance conditions and an insurer’s assessment of future losses.

Climate change adds another layer of uncertainty. The Grantham Research Institute at the London School of Economics notes that climate change can make insured hazards more severe, less predictable and non-linear.

Historical claims may therefore be a less reliable guide to future losses. Insurers increasingly need to combine past experience with catastrophe models, information about individual properties and assessments of changing hazards.

The pressure is not confined to major hurricanes and other headline disasters. Wildfires, floods and severe convective storms, including hail and damaging winds, are also important sources of insured losses.

Swiss Re Institute found that these secondary perils accounted for 92% of global insured natural catastrophe losses in 2025, with severe convective storms alone generating about $51bn in insured losses.

Climate change is not the only reason losses are increasing. Swiss Re estimates that growth in exposure, including expanding development and rising asset values, explains more than 80% of the long-term increase in global weather-related insured losses between 1970 and 2025. Construction costs and changes in building vulnerability also contribute.

For retailers, that distinction matters.

A higher insurance premium should not be treated as a simple measure of climate change. It can instead be viewed as one indicator that the cost and risk associated with a particular property are changing.

Location matters

MSCI’s US property data illustrates how widely insurance costs can vary. In the 12 months to the third quarter of 2024, insurance costs represented 4.6% of income receivable for properties in Orlando and 4.1% in Tampa, compared with 1.3% in Chicago.

MSCI cautions that climate exposure is not the only explanation, with regulation and rebuilding costs also contributing to regional differences.

The lesson is not that one city is necessarily a better retail market than another. It is that stores with similar commercial characteristics can have very different physical and financial risks.

For a retailer with hundreds or thousands of locations, those differences can become significant at portfolio level. Climate exposure may therefore need to sit alongside rent, sales, footfall and other measures used to assess the long-term economics of a store.

The real cost extends beyond insurance

Insurance represents only part of the potential cost of extreme weather.

Floods, storms and wildfires can damage buildings, stock, equipment and fixtures. They can also prevent customers and employees from reaching stores, interrupt deliveries and cause power, water or communications failures.

A store does not need to suffer severe structural damage for trading to stop. A damaged roof, flooded access road, power outage or disruption to surrounding infrastructure may be enough to close a location temporarily.

The financial impact can continue after the immediate damage has been repaired.

Following a widespread event, businesses may compete for builders, materials, replacement equipment and specialist contractors. Recovery times can lengthen, increasing the importance of business interruption cover and the assumptions retailers make about how quickly a location could reopen.

The same risk extends beyond the store itself.

A retail property may escape physical damage but still be unable to trade normally if a distribution centre, supplier, transport route or utility network is disrupted.

Climate exposure therefore needs to be considered across the operating model, rather than confined to the property insurance policy.

The structure of insurance also affects how much risk remains with the retailer. Deductibles, exclusions, stock limits and business interruption periods all determine how much financial protection a policy provides.

The lowest premium is not necessarily the lowest-cost option.

A cheaper policy may leave a retailer carrying a larger share of a loss through higher deductibles, narrower cover or insufficient limits.

This becomes particularly important where stores hold substantial or seasonal inventories. The value exposed at a location can change significantly during the year, while the financial consequences of losing trading days can also vary by season.

For retail decision-makers, the relevant calculation is therefore broader than the annual insurance premium. It includes potential physical damage, lost trading, recovery costs, resilience investment and the risk that insurance will not cover the full financial impact of an event.

When insurance affects property decisions

The strategic implications become greater when suitable insurance is difficult or expensive to obtain.

Where physical risks rise, insurers may change pricing, deductibles, limits or the amount of cover they are willing to provide. At some locations, this can make risk increasingly expensive to transfer through insurance.

That can create a feedback loop.

Higher physical risk can increase insurance costs. Higher insurance costs increase the cost of occupying or owning a property.

Investment in resilience may then be needed to reduce exposure. If suitable cover becomes difficult to obtain on commercially acceptable terms, insurance can become a factor in investment and property decisions rather than simply an annual operating expense.

For retailers, this raises practical questions.

Should an exposed but commercially successful store receive more capital for resilience? At what point does the cost of adaptation alter the economics of a location? How should expected insurance and resilience costs influence a lease renewal, refurbishment or new-store decision?

The answers will vary by property.

Lease arrangements add another consideration. Landlords may insure buildings and recover some or all of those costs from tenants, depending on the terms of the lease.

Retailers therefore need to understand both their own insurance arrangements and how building insurance costs are allocated across their estates.

This matters because conventional measures of site attractiveness may not capture the full cost of physical climate exposure.

Rent, sales and footfall can make two properties look comparable. Once expected insurance costs, resilience expenditure, potential downtime and the financial consequences of a major event are considered, their long-term economics may be very different.

Climate risk can therefore influence not only how a retailer protects an existing store, but also where it chooses to commit capital.

Assess risk store by store

For large retail estates, climate risk requires a more granular view.

Regional assessments provide a useful starting point, but exposure can differ between neighbouring properties. Flood risk can vary with elevation, drainage and surrounding development. Wildfire exposure can depend on vegetation and nearby land use. Storm damage can be influenced by roof construction, building condition and other property characteristics.

Retailers can use this information to identify where physical risk could have the greatest financial and operational consequences.

The objective is not necessarily to create a single climate-risk score for an entire estate. It is to establish which properties need attention first and where intervention could have the greatest commercial value.

Invest where resilience matters most

Resilience investment can then follow the risk.

Depending on the property and hazard, measures could include improved drainage, flood protection, more resilient roofing, protection for critical equipment and steps to reduce water ingress.

Evidence suggests that adaptation can reduce losses. Swiss Re’s analysis of European natural catastrophe losses found that flood-loss growth has been more contained in parts of western and central Europe where adaptation measures have helped limit increases in insured losses associated with economic growth and greater insurance penetration.

The commercial question is therefore not simply whether to spend more on resilience.

It is where that spending produces the greatest benefit.

Better property data can support those decisions. Accurate records of building characteristics, improvements, stock values and risk-reduction measures can give brokers and insurers a fuller picture of a property and support more informed discussions.

The same information can help retailers prioritise capital expenditure and identify concentrations of exposure across an estate.

Plan for disruption, not just damage

Physical resilience is only part of the response.

Retailers also need to plan for what happens if a store, supplier, distribution route or utility becomes unavailable.

Alternative suppliers, stock redistribution, emergency contacts and procedures for redirecting online orders can all form part of business continuity planning.

Those plans should be tested against insurance arrangements. Retailers need to understand their deductibles, exclusions, stock limits, business interruption periods and the circumstances that trigger cover.

This is particularly important because natural catastrophe losses remain substantial. Swiss Re Institute estimates that global insured losses reached $107bn in 2025, while its research points to a long-term real growth rate of 5–7% a year in insured natural catastrophe losses.

For retailers, however, the global number matters less than the risk attached to each location.

A new calculation for retail property

The question is shifting from:

How much will it cost to insure this store?

to:

What is the total cost of the risk associated with this store?

That calculation is broader.

A location that looks attractive because of its rent, footfall and sales potential may look different once insurance, physical climate exposure, resilience requirements and potential disruption are included.

Equally, a property with manageable physical risks and strong resilience may become more attractive than a superficially similar location with greater exposure.

Climate risk is therefore becoming part of the economics of retail property.

For retailers, the challenge is not simply to find cheaper insurance or spend more on resilience. It is to understand the risk attached to each location, identify where intervention has the greatest commercial value and factor those costs into decisions about the physical estate.

Retailers that do so will be better placed to decide where to invest, where to strengthen resilience and, ultimately, where the long-term economics of a physical location continue to make sense.