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Commercial Real Estate

7 Critical Issues Facing the Commercial Real Estate Industry

Fire, flood and hail are among the risks that threaten commercial real estate.
By: | June 12, 2018 • 3 min read

Mall vacancies are a top critical issue facing commercial property owners.

Watch footage of the raging flood waters that so badly damaged Ellicott City, Md., in May and you have some indication of the climate change-induced threats that await commercial real estate investors and their properties. What follows is a list of seven critical issues facing the commercial real estate industry, which includes flood and rising seas.

 

1) Environmental

One of the most gratifying trends for urban dwellers and developers in recent decades has been the conversion of former industrial sites to mixed-use retail. The highly successful SouthSide Works built on the site of a former steel mill in Homestead, Pa., is one such example. But these types of projects can come with looming environmental risks.

Soil, sediment and groundwater contamination can be difficult risks to mediate and problems can surface years after the ink has dried on the real estate contract.

2) Tenants

A commercial property owner ended up in a dispute with its insurer after tenants took liberties with their space. An illegal marijuana-growing operation resulted in removed walls, holes cut in the roof, added HVAC work and gas lines. There was also extensive damage to walls, ceilings and floors due to prolonged exposure to moisture in the farming operation.

Other tenant hazards in commercial property ownership include additional illegal drug manufacturing operations for say, methamphetamine production, and fires or environmental pollution caused by tenant activity.

3) Vacant Buildings

With brick-and-mortar retail under horrendous pressure from online selling operations, there are entire swaths of formerly thriving malls that are lying vacant, hopefully awaiting reuse, but presenting major liability exposures in the meantime.

Empty properties invite vandalism, theft and can serve as backdrops for other criminal activities, from illegal dumping to robberies, assaults and drug dealing. Vacant malls aren’t the only hazard, the trend of young urbanites exploring abandoned buildings and taking photographs or painting murals in them leads to liability concerns for the property owner should those explorers die or be injured.

4) Flood/Sea Surge

Residents of Miami and Norfolk, Va., know it well. Rising seas are increasing the risk of flooding in some of our major cities.

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Owners of commercial buildings are hurrying to purchase defenses, such as inflatable flood barriers, or relocating expensive heating and cooling equipment from the basement to higher floors.

But what we have seen so far, even with the devastation of Super Storm Sandy, is sure to pale in significance to what we can expect in future years. The warming planet will push sea levels higher and higher and result in more intense storms, causing even more run off, such as that which severely damaged Ellicott City, Md. in May, 2018.

5) Hail

Far from being an event that just damages crops or pounds unprotected cars in port city parking lots, hail also exacts a toll on commercial buildings, particularly their roofs. Hail results in total property damage of more than $1 billion per year.

6) Fire

Fires in commercial properties cost property owners billions annually, and there are new fire threats emerging for commercial property owners all of the time.

The risks of fire from lithium ion batteries and from overheating data centers are two new risks related to technological advancements that commercial property owners need to worry about.

7) M&A

The contingent liabilities in commercial property transactions are a risk that carry a high premium cost but may be candidates for prudent risk transfer. Contractor’s liens and legal actions from prior or current tenants are among the liabilities that may need to be vetted to determine if a commercial property transaction is worth undertaking. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Black Swans

Black Swans: Yes, It Can Happen Here

In this year's Black Swan coverage, we focus on two events: An Atlantic mega-tsunami which would wipe out the East Coast and a killer global pandemic.
By: | July 30, 2018 • 2 min read

One of the most difficult phrases to digest without becoming frustrated or judgmental is the oft-repeated, “I never thought that could happen here.”

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Most painfully, we hear it time and time again in the aftermath of the mass school shootings that terrorize this country. Shocked parents and neighbors, viewing the carnage, voice that they can’t believe this happened in their neighborhood.

Not to be mean, but why couldn’t it happen in your neighborhood?

So it is with Black Swans, a phrase describing unforeseen events, made famous by the former trader and acerbic critic of academia Nassim Nicholas Taleb.

We at Risk & Insurance® define these events in insurance terms by saying that they are highly infrequent, yet could cause massive damages. This year, for our annual Black Swan issue, we present two very different scenarios, both of which would leave mass devastation in their wake.

A Mega-Tsunami Is Coming; Can the East Coast Even Prepare?, written by staff writer Autumn Heisler, profiles an Atlantic mega-tsunami, which would wipe out lives and commerce along the East Coast.

On the topic of whether the volcanic island of La Palma, the most northwestern of the Canary Islands, could erupt, split and trigger an Atlantic mega-tsunami, scientists are divided.

Researchers Steven Ward, a geophysicist at UC Santa Cruz, and Simon Day of University College London, say such a thing could happen. Other scientists say Day and Ward are dead wrong; it’s an impossibility.

One of the counter-arguments is backed up by the statement that there has never been an Atlantic mega-tsunami. It’s never happened before and thus, could never happen here. See exhibit “A” above, re: mass school shootings.

Viral Fear: How a Global Pandemic Kills an Economy, written by associate editor Katie Dwyer, depicts a killer global pandemic the likes of which hasn’t been seen in a century.

Tens of millions of people died during the Spanish Flu outbreak of 1918.

Why it could happen again includes the fact that it’s happened before. The science on influenzas, which are constantly mutating, also supports just how dangerous a threat they pose to millions of people beyond the reach of antibiotics.

Should a mutating avian flu, for example, spread widely, we could see a 10 percent drop in GDP, mostly from non-physical business interruption.

As always here, the purpose is to do exactly what insurance modelers and underwriters do; no matter how massive the event, we create scenarios, quantify possible losses and discuss risk mitigation strategies. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]