Insurance Issues Arise for Offices With Growing Vacancies

Some office landlords are finding that as vacancies increase in their buildings, insurance is harder to secure as they are now exposed to greater losses from fire, theft, and vandalism, according to the publication Business Insurance.

The U.S. office vacancy rate rose to a record 19.6% in Q4 2023, up from 19.2% in Q3, and 18.7% in Q4 2022, according to a report by Moody’s Analytics.

Denver, Los Angeles, Philadelphia, San Francisco, and Seattle had more than 1 million square feet of office space vacated last year.

Building owners are advised to review their property insurance policies to better understand how “vacancy” is defined and what steps they may need to take to maintain coverage, according to Jeff Buyze, national property practice leader, at USI Insurance Services LLC.

Individual insurers define and treat vacancy differently, and the time periods for how long locations can be vacant before restrictions kick in may vary from 30 to 60 days, he told Business Insurance.

“After 60 days, restrictions typically start coming into play for certain perils,” Buyze said. “For theft, water damage, malicious mischief, vandalism,” exclusions may then apply.

Insurers generally consider a building to be vacant if it is less than 31% occupied, he said.

Proper care is a key factor. Insurers look to see if owners are making appropriate capital expenditures to protect and maintain them, and insurers will be more selective about those assets, Paul Cicerchia, real estate and hospitality practice leader at McGriff Insurance Services, the retail commercial insurance subsidiary of Truist Insurance Holdings Inc. said.

Joseph Rubin, Senior Advisor at EisnerAmper, tells GlobeSt.com that real estate owner-operators have become increasingly focused on the availability and cost of insurance as vulnerability to severe weather across geographies pushes up premiums.

“We’ve heard a lot about multifamily, but struggling office owners with significant vacancies are also paying more for insurance, and for general maintenance and the security needed to protect empty spaces,” Rubin said.

“So even though rental revenue is way down in many buildings, operating costs keep increasing and owners are getting further squeezed.”

Tasha Gould, EMD, Institutional Sector Lead, Value and Risk Advisory, JLL, tells GlobeSt.com that when considering operating budgets for 2024, clients expressed insurance underwriting was the number one concern.

“In most cases, insurance costs have gone up 20 to 40% over the last three years,” Gould said.

“Outside of net leased properties, insurance is not a pass-through expense to tenants; for example, in multifamily properties or full-service office buildings, rising insurance costs are a direct hit to the bottom line.”