Commercial property vacancies or partial occupancies can cause problems for today’s commercial real estate (CRE) owner. According to Deloitte, the CRE industry “was in a strong position before the onset of COVID-19.” When surveyed in the summer of 2019, almost three-fourths of respondents predicted increased investment availability for 2020. However, the CRE industry promptly felt the impact of COVID-19. Retailers, already on shaky ground, began to fold. Investment income in real estate declined due to “increased uncertainty and valuation concerns,” according to Deloitte. For stores and businesses staying open, operational costs increased with new challenges in cleaning, sanitation and security.
Today’s CRE owners and managers face serious challenges. Responding to vacancies by rethinking use and ensuring the proper management and continued proper insuring of vacant properties can help CRE owners protect their financial investments.
Consider Hiring Real Estate Maintenance Professionals for Commercial Property Vacancies
Especially when you manage CRE exposures regionally or nationwide, it’s easy for building maintenance or issues like vandalism to go unnoticed. For example, continuing backflow preventer inspections and ensuring fire suppression systems remain operable are critically important to code adherence and insurance coverage policy conditions. Contracting with a vendor can help. Quality vendors can ensure your properties stay in good condition and can prevent losses like vandalism or a costly water damage claim.
Here’s what you may consider when looking for a property preservation vendor.
- Does the vendor handle inspections and repair or simply oversee and let you know, leaving you to manage repairs? This kind of arrangement can be difficult if you’re out of state. Make sure you understand the scope of a vendor’s services before signing any contract.
- Does the vendor manage code issues like backflow inspections and repair?
- Can the vendor work directly with your insurance carrier if you must file a property claim? Not all vendors work well with adjusters. Many do not understand the nuances of insurance coverage and can create insurance coverage problems.
- Does the vendor specialize only in occupied properties or also understand the issues affecting vacant properties well enough to properly protect your interest in your asset?
- Does the vendor “de-image” a property after a tenant vacates? To protect the CRE brands, “de-imaging” is essential. This can include changing locks, boarding up to prevent theft and vandalism, removing exterior signage and promotional imaging and stopping utilities. Can the vendor supply these services in a professional manner?
If you decide to hire a vendor, be sure you get adequate proof of insurance. This includes general liability coverage, professional liability coverage and workers compensation coverage, at a minimum. Request additional insured status, as well, which can be invaluable if a loss occurs. The vendor may refuse, but the broader the protection you get from vendors, the better off you are in the event a loss occurs due to their negligence.
How Commercial Property Vacancies Impact Your Insurance Coverage
Once your commercial property loses tenants, it’s important to track how much of your space stays occupied. We’ve covered the most important commercial property vacancy provisions in this article. However, the Big I, the voice of America’s independent insurance agents, offers another look at these critical vacancy policy provisions given rising concerns post-COVID-19.
Chris Boggs’ article on the Big I cites the vacancy provisions typically found in Insurance Services Office (ISO) commercial policy forms. Your form may vary. According to Boggs, ISO forms contain two “key qualifiers” to determine vacancy.
Such building is vacant unless 31% of its total square footage is:
- Under a tenant’s commercial property policy, insurers consider the building vacant when it does not contain enough business personal property to conduct customary operations.
- Under a building owner or lessees of whole buildings, insurers consider the building vacant when at least 31% of its square footage is:
- Rented to a lessee or sublessee and used by the lessee or sublessee to conduct its primary operations ; and/or
- Used by the building owner to conduct customary operations.
Remember, too, that when a property has been vacant for more than 60 days in a row, the carrier excludes certain important coverages such as vandalism, water damage, and more.
When the commercial property insurance market began to harden, many CRE investors turned to non-ISO property policies. These non-ISO forms are proprietary forms or from other insurance advisory services, so vacancy clauses may vary slightly. Boggs cautions that proprietary forms – non-ISO forms – define vacancy differently.
If you have questions about vacancies and your insurance forms, contact your broker to discuss and review your property policy language.
Preparing for the New Normal in Commercial Real Estate
The Deloitte report offers good insights into the path forward for CRE owners and managers. Here are a few tips that can help CRE owners better manage their assets.
- Reduce fixed costs such as dividend payments for stock companies and reduce or suspend employee bonuses. Hitting employees in their pockets may be problematic, however. Employees now considered “essential workers,” faced greater stress and illness exposure as they continued to work through the pandemic. Cutting bonuses can hurt morale unless properly managed.
- Re-purpose properties. Can you retrofit empty anchor tenancies to offer hurricane shelters, or use them to house medical personnel?
- Can you cancel non-essential activities on properties you manage? For example, many homeowners associations in retirement centers closed all recreational facilities. However, they did not rebate rec fees, citing the need for ongoing maintenance.
- Can you temporarily cancel or delay rent payments? Many cash-strapped retailers and restaurant owners cannot pay their rent or lease obligations. Some landlords, according to Deloitte, offered temporary abatement of parking costs or rent reductions or suspensions. This may be the only way for your tenants’ businesses to remain viable. Considering asking your tenant to extend the lease in lieu of demanding immediate rent payment.
CRE Owners Face a New Normal
The new normal CRE owners face means they’re going to have to refocus and continue to innovate. Preparing buildings for re-entry once the pandemic lessens is just one challenge. Keeping employees motivated as they face their own economic and medical concerns is another.
One area where you can get help is in managing your insurance and risk. Your insurance broker can help you manage the area of your business that is still stable – your insurance coverage. The vacancy provisions in your commercial property coverage won’t change without notice. This means you can safely manage your properties when you understand your commercial property policy language.
If you’re interested in learning more about your property insurance options, contact us here.