A global recession, which has led to layoffs and a sharp drop in consumer spending, has also created a glut of commercial real estate space around the world. Vacated properties are a significant concern because they are especially vulnerable to property damage as well as liability risks.
The extent of the vacancy problem varies from region to region, but in many of the world’s markets, commercial real estate vacancy rates are rising, putting more properties at risk. With vacancy rates moving higher, agents and brokers are likely to have clients, including multinationals, who have vacant properties of their own. With this in mind, agents and brokers should address the issue with their clients, asking whether they have any vacant properties and helping them to mitigate the risks to maintain the value of the properties. They also should be sure to review the terms and conditions of insurance policies, paying particular attention to policies for multinational clients with properties outside the United States.
The Vacancy Problem and Risk Exposures
In the United States, the commercial real estate sector has gone through some difficult times over the last year and the problems are not over yet.
Vacancy rates in the U.S. office, industrial and retail property markets continued to rise in the second quarter of 2009, according to a report by real estate services company CB Richard Ellis. Office vacancy rates are estimated to reach 17 percent by year-end, according to CB Richard Ellis and could rise about 20 percent in the first half of 2011, compared with a mid-2009 level of 16.6 percent, according to commercial real estate advisory firm Grubb & Ellis.
The retail vacancy rates are also up and are expected to continue to move higher, according to another Grubb & Ellis report. The U.S. retail vacancy rate ended 2008 at 9.1 percent, up 7.5 percent and it is expected to climb to 9.9 percent at the end of 2009. U.S. industrial vacancies stand at just below 10 percent.
Outside the United States, the vacancy rates for commercial real estate are sometimes lower than they are in the United States, but most are up over the past year and some are still rising. According to Jones Lang LaSalle’s Q2 2009 European Office Clock Report, the average vacancy rate in central Europe increased significantly to 14.6 percent, the highest level since 1999, while the Western Europe average rate reached 8.8 percent.
Vacant properties are a concern because they can be such a lightning rod for problems. With no one around checking in on a property, small problems that could be easily corrected can go unnoticed and escalate into much bigger problems. Meanwhile, owners who are receiving little or no income from a vacant property are also more likely to cut back on items like maintenance and security, putting the building at even greater risk.
Multinational clients share many of the same concerns as domestic clients. But for multinationals, the risks are even higher because properties outside the United States may not be as well equipped with fire and security protection systems. In addition, the property owners may be based in the United States, forcing them to have to manage the vacant property remotely.
Vacated properties are known to be at a higher risk of theft, fires, and vandalism. Although office buildings are usually not completely vacant, big-box retailers and industrial sites often can be, making them magnets for young people in search of a place to hang out or vagrants looking for shelter.
Theft has been a big risk for vacant properties. In the last year or two, for instance, with the rise in the price of copper, there has been an increase in the theft of copper pipes from vacant properties.
In addition to theft, fires are also a problem because property owners will sometimes turn off sprinkler systems when a property is empty and will also fail to conduct regular tests of a property’s sprinkler systems. Studies by the National Fire Protection Association show that in the United States an average of 14,900 fires a year occur in vacant buildings, causing upwards of $118 million annually in direct property damage.
Vacant properties also can become liability hazards to the public, municipalities and the environment. Poorly lit areas, for instance, can present a danger to those entering the building. Abandoned containers of chemicals may be a hazard to firefighters and could also contaminate nearby groundwater or streams.
Risk Management and Mitigation
Although vacant properties are so vulnerable to damage and losses, there are a number of things a property owner can do to reduce those risks and maintain the value of their property. The key points are to take steps to keep the property from falling into a state of obvious neglect and disrepair.
Litter, overgrown shrubbery and the absence of any regular presence are all red flags signaling that a property is neglected. Property owners need to make regular checks on their properties and invest a little in routine maintenance to keep the grounds neat and interior systems working properly. When it comes to properties located outside the United States, property owners may have to hire local maintenance and security firms to handle these responsibilities for them.
To reduce the risk of damage or a liability claim, property owners with real estate outside the United States should consider these recommendations.
- Conduct weekly walk through inspections to ensure the facility is safe and sound. If necessary, hire a local company that can take care of these inspections.
- Remove all excess materials and combustibles from around the building.
- Trim vegetation that could provide hiding places or indicate lack of maintenance.
- Remove any containers that might be used for trash or hazardous waste dumping.
- Restrict access to parking lot entrances to prevent vehicles from entering the property.
- Provide exterior lighting to help deter crime and vandalism.
- Hire a guard service to conduct building observations especially at night.
- Notify the police and fire departments when a building becomes vacant.
- Maintain heat to prevent pipes from bursting.
- Take precautions to avoid hazards that could injure people who access the building, such as firefighters, police and even trespassers.
- Maintain power for emerging exit sights and emergency lighting.
- Maintain pest control services.
- Shut off water in areas where it is not needed.
- Properly shut down any non-building related equipment or systems and disconnect gas and electrical services, except for alarm and heating purposes.
- For areas protected by a wet pipe sprinkler system, maintain heat (minimum 40 degrees F) to prevent freezing of sprinkler pipes.
- For non-sprinklered buildings, maintain fire detection systems, ensuring they protect the entire building and are linked to a UL-listed central station monitoring service.
Property owners also need to contact their insurer immediately once a property becomes vacant. Failure to do so can lead to the cancellation of the policy. Agents and brokers also should check their customers’ insurance policies and review the terms and conditions. Insurance carriers may handle vacant buildings and properties differently. Some carriers will put restrictions on covered perils; for instance, others may not cover certain types of damage.
With vacancy rates rising worldwide, the problems associated with vacant commercial real estate will begin to affect more and more insureds. Agents and brokers should explore this issue with their clients, asking them whether they have any vacant properties and also checking the terms and conditions of policies. Where multinationals are concerned, this is especially important as the terms and conditions in policies for properties outside the United States may be substantially different than those for domestic properties.
By following these few steps, property owners can help reduce the risk of a loss and improve their chances of maintaining the value of their properties and, at the same time, keeping them insured as well.
Ellis is a senior vice president of Chubb & Son and manager of Multinational Risk Group – Global Accounts. Tim Ehrhart, vice president and worldwide real estate segment manager, Chubb Commercial Insurance, also contributed to this story.