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Insurance challenges rise with surge in empty offices

vacant office

Office building owners, faced with a record level of vacancies driven by the continuing shift to hybrid work, may experience pushback from insurers that previously were eager to provide coverage for the risks.

Policyholders with low-occupancy buildings should review their property insurance policies to better understand how vacancies could affect their coverage, experts say.

Securing coverage can be more difficult and costly because vacant properties are viewed as more exposed to potential losses, such as from fire, theft and vandalism, they say.

The U.S. office vacancy rate rose to a record 19.6% in the fourth quarter of 2023, up from 19.2% in the third quarter, and 18.7% in the fourth quarter of 2022, according to a report by Moody’s Analytics, a unit of Moody’s Corp., issued Jan. 8. The previous record of 19.3% was set in 1991 during the savings and loan crisis, Moody’s said.

The Denver, Los Angeles, Philadelphia, San Francisco and Seattle metro areas are among those that saw more than 1 million square feet in office space vacated last year.

Building owners should review their property insurance policies to better understand how “vacancy” is defined and what steps they may need to take to maintain coverage, said Jeff Buyze, Fort Lauderdale, Florida-based vice president, national property practice leader, at USI Insurance Services LLC.

Typically, “there’s a vacancy clause that specifies if, how and when coverage would be restricted if a property is vacant,” Mr. Buyze said. 

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 said.

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

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

Office buildings remain a “very desirable” real estate asset class for insurers and have always been the simplest and least expensive to insure, said Paul Cicerchia, New York-based real estate and hospitality practice leader at McGriff Insurance Services LLC, the retail commercial insurance subsidiary of Truist Insurance Holdings Inc.

Office buildings don’t have 24-hour exposures like hotels or multifamily buildings, for example, and generally are better constructed with concrete and steel rather than wood frame, making them a more desirable risk, he said.

Unoccupied buildings, though, can raise concerns over whether they are well-managed and whether owners are making appropriate capital expenditures to protect and maintain them, and insurers will be more selective about those assets, he said.

“Does the building owner have the resources to continue to do everything right, to keep security up, to keep the sprinklers on, to keep the heat going?” said Rick Miller, Boston-based U.S. property leader for Aon PLC’s commercial risk solutions business.

“It’s not to say it’s an automatic. It’s not to say a vacant building isn’t properly taken care of, but it increases the potential for that increased hazard or that unforeseen component of a loss happening,” Mr. Miller said.

Demand for coverage for vacant commercial buildings, office buildings in particular, is increasing, said Ralph Blust, president and chief revenue officer of Pathpoint Inc., a San Francisco-based digital excess and surplus brokerage.

Many admitted insurers are reluctant to provide coverage for partially occupied structures with less than 50% occupancy, he said. “It’s not just 100% vacant, it’s also where the majority of the structure is vacant and you have limited occupancy. Those are higher risk,” he said.

Pathpoint places coverage for smaller unoccupied properties with total insured values of $5 million or less.

Vacant properties can create hazards, especially in urban environments where homeless communities may inhabit vacant buildings, Mr. Blust said.

When services are terminated in a vacant structure “you run into issues where, especially in colder environments, they’re creating artificial heat sources, which can create large property and liability loss exposures in the event of fire,” he said.

Sometimes insurers will add provisions or conditions to a policy, such as requiring owners to maintain heat or fire alarms or burglar alarms inside a building while it’s vacant, Mr. Buyze said.

Security is another concern, he said. “We’ve had that happen where carriers want to see a watch service, whether it’s a nightly watch service or 24/7, hiring a third-party security firm to look after the location while it’s vacant,” he said.