Vacant property takes on a new look in 2011's battered commercial real estate (CRE) market. Forget your old notions of vacant property – weedy overgrown lots, hazardous tumbledown buildings, polluted brownfields, even underperforming “grayfields” with a few remaining tenants fending off the vandals. Instead, picture high-quality structures equipped with state-of-the-art fire control systems and supervised daily by security patrols – even brand-new buildings built on spec whose developers find it difficult to attract buyers.

Today, vacant property increasingly means valuable, even prime real estate assets that need protection until new or replacement tenants are found.

Softer Market, Harder Challenges
Consider that commercial office and industrial vacancy rates still exceed 20% in some metropolitan areas, according to the National Association of Realtors' May 2011 “Commercial Real Estate Outlook.” (And more than 14 million homes remain vacant in the U.S. as of March 2011, according to the U.S. Census Bureau.) True, the CRE market has shown signs of life this year – sales rose 30% in Q1 2011 vs. Q1 2010, as historically low interest rates and minimal construction starts presented good buys for investors with cash. But despite some bright spots, overall CRE market fundamentals remain discouraging – and are expected to remain so for some time to come. High unemployment and modest economic growth persist, while businesses continue to consolidate office space and hold investment dollars close the vest.

In the meantime, developers, property managers, and CRE risk managers must focus on protecting the full value of their assets through a lengthened real estate sales cycle. And they must protect these assets against an array of traditional and emerging threats – not just the environmental damage, arson, and vandalism that are commonplace with dilapidated properties.

With increasing sophistication and audacity, criminals often target vacant properties for their valuable metals, industrial and electronic equipment, HVAC systems, and other physical assets, according to Christopher Zoidis, CPCU, who is vice president of the Special Risk Division at Burns & Wilcox. Citing examples such as a $275,000 claim resulting from thieves who disguised themselves as maintenance personnel and in two days stripped an entire building of its copper pipe and wiring, Zoidis recently joined Jeffrey L. Shearman, CSP, CFPS, Senior Risk Engineering Consultant, Zurich in North America, for a July 12 PropertyCasualty360 webinar on the latest practices for vacant property risk management.

'Vacant' vs. 'Idle' and Other Risk Management Considerations
Just as vacant property often sports a newer, shinier edifice, so have approaches to vacant property risk management evolved.

For instance, the specific status of vacant property has become an important distinction, Shearman said, given that many properties today have “merely stopped in time” and are “expected to be used for the same use in the near term.” Because building contents and systems remain in place, these are more accurately defined as “idle” or “mothballed” properties. Truly vacant buildings, on the other hand, are properly buttoned down for the long haul, Shearman explained. Climate and alarm systems often are shut off, contents are removed, the building is infrequently serviced, and it may be secured in a more permanent manner with, for example, its windows and doors covered.

The differences between idle and vacant buildings dictate different approaches to risk management. When preparing to idle a property, Shearman recommended conducting a vulnerability analysis that takes into account key factors, including the length of time the facility is expected to be idle, natural and human threats, and the balance between cost, security and curb appeal (the last one very important if the facility is for sale). On the other hand, other considerations apply if you anticipate a long vacancy – in this case, Shearman says, consider removing copper pipes, external HVAC systems, and other assets that make the facility attractive to thieves. And there are best practices that apply to all vacant properties – for instance, fencing the entire facility can be highly beneficial, while chemicals, flammable materials, outside storage units, and other high-risk elements should be removed whenever possible.

A New Attitude for Insurance Companies
Insurers' attitudes towards vacant property have undergone a major shift. Historically, Zoides noted in his presentation, those seeking insurance cover for vacant buildings typically turned to excess and surplus companies; standard carriers avoided vacant buildings, fearing opportunistic moral hazard claims and penalizing vacancy through rate and coverage restrictions. With proliferating vacancy and a soft insurance market, many standard insurers now enthusiastically underwrite vacant property coverage, sometimes at a discount.

That said, the more effectively you manage your vacant property risk, the more options you have for coverage. For example, do you want a Protective Safeguards Endorsement? Maintain your automatic fire suppression and a private fire department contract, keep the burglar alarms on, and in winter run the heat while turning off the water supply (thereby avoiding freezing of pipes peril). These days, you can even get a Secured Vacant Building Warranty.

Various factors impact underwriting of vacant property coverage – including length of vacancy, ownership status (is this a foreclosed property?), and property valuation. Zoides also said that, for insureds and underwriters, it is “imperative to get a loss control inspection” that takes into account factors such as unsecured entry points, poor building maintenance and monitoring, pre-existing damage, deterioration of mechanical systems, and trespassers.

Unfortunately, Zoides adds, building owners often place a low priority on implementing the recommendations of a loss control inspection. Cost is a critical constraint for building owners and property managers holding valuable but currently a non-productive real estate assets.

However, Zoides and Shearman both emphasized, every step taken to manage vacant property risk should be considered an investment towards eventual turnaround in the CRE market – by protecting valuable assets from avoidable risks, and by securing sufficient insurance cover for unavoidable losses.

View the web seminar.

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John DeWitt, a contributing editor to PropertyCasualty360 and National Underwriter Property & Casualty, is principal and senior consultant for JW DeWitt Business Communications in New Salem, Mass.

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The New Edifice of Vacant Property

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