CREJ

Page 20 — Office Properties Quarterly — September 2020 www.crej.com Management W here do office property management companies and office asset own- ers stand regarding the future of office space use and leasing in the aftermath of the COVID-19 pandemic? Even well past the initial round of government stay-at-home orders that closed most office buildings and many business operations and retail establishments, it’s still a lot like asking the proverbial question of whether the glass is half empty or half full. The answers seem to depend on who you ask. Opinions still differ among experts, from real estate manage- ment firms to economists to com- mercial developers. Will less office space be needed because so many employees have relocated to their homes in remote-work situations? Or will more office space than ever be required as employers seek to provide added distance between workstations as an added safety precautions for their workers? As a licensed real estate broker and developer in Colorado since 1975, and also a property insurance loss claims public adjuster for the past 30 years, there’s one thing I do know for sure: Managers and own- ers of office complexes still need to check on, care for and maintain their office properties routinely, just as if those spaces were functioning “as normal.” Even if office workers aren’t fill- ing your building as usual, property damage – and the subsequent loss in your office space investment – still can occur from a range of weather-related and human-caused disasters. In the world of insurance and policy coverage, unoccupied build- ings – particularly those that sit for longer periods – have a tendency for increased loss potentials because of their increased risk to loss expo- sures. Even the length of time an office structure is unoccupied can lead insurers to reduce the per- centages of loss coverage they offer in certain circumstances. Having questions over the status of office space in today’s occupancy definitions is not a situation build- ing owners and managers want to find themselves in without some answers, at least where insurance policies are concerned. n Commercial complexities. Cer- tainly, damage to your personal property or home is devastating. However, when property damage occurs within a commercial claim environment, the interests of own- ers/mangers and occupants are intertwined. Not only can structural damages occur due to perils like fire or water from leaking or burst pipes, there also can be secondary damages that often are harder to discern. These include mold resulting from water seepage and the presence of toxic chemicals from fire and smoke. In addition, roof collapse, windstorms and hailstorms also can lead to damages to interiors of leased spac- es as well as their exteriors. Even vandalism, theft and other types of criminal activity – like civil unrest – can leave office properties with phys- ical damage both inside and outside. If undetected for some time, second- ary damages potentially can increase the amount of overall building dam- age exponentially. n Vacant or unoccupied? In an article that appeared in our Adjusters International Adjusting Today pub- lication, Robert Prahl, CPCU, laid out the difference these vacant vs. unoc- cupied terms may mean. Most homeowner and com- mercial insurance policies carry a vacancy or occupancy provision, and it’s important to understand the distinctions. The terms may have similar everyday meanings, but their differences are important for an insured property loss when a premise is determined to be of one status or the other. One example of how the vacancy/ occupancy clause comes into play is that of an adaptive reuse property under construction in Topeka, Kan- sas, where a 250,000-square-foot church administration building was being converted to a for-lease office building. It was heavily vandalized over the Christmas/New Year’s holi- day. Our firm concluded that over $2 million in damages occurred, yet the insurance carrier claimed that because the facility was under con- struction, the building was vacant. The carrier offered a $1 million set- tlement, with the vacancy clause pro- viding a 50% penalty if the occupancy wasn’t more than 75% at the time of the loss. We were able to prove that because construction was ongoing, the building was of an “unoccupied” status, not “vacant.”The client pre- vailed and the insured was indemni- fied for a $2 million loss. n What comprises the space? Vacancy provisions in policies can pertain to a vacancy limitation, typically defining the building and laying out what comprises a deter- mination of vacancy. When a tenant is the policyholder, the term “build- ing” typically refers to the space the tenant rents or leases. As Prahl notes, when an owner is the policy- holder, the term “building” refers to the entire building. There often are percentages of occupancy assigned to determine the issue of vacancy. Managers and owners should strive to understand their poli- cies’ provisions relating to property safeguards, such as fire and theft alarms, too. Some policies require that the devices are operating prop- erly to obtain coverage, or endure the consequences if they are not, Prahl said. In the spring, after the pandemic emerged, about half of all U.S. employees worked from home dur- ing shutdowns, according to the Brookings Institution. Through the summer months, many companies returned a share of their workforce to the office, while others main- tained at least a share of remote office workers. While the question of who, how many and what shape office work takes in the future plays out amid concerns over a potential second wave of COVID-19 this fall or win- ter, you still need to protect against the usual kinds of damages that can occur and you need to make sure your insurance coverage is thorough. s Policy provisions for vacant & unoccupied spaces R. Scott deLuise, CCIM President and CEO, Adjusters International/ Matrix Business Consulting I f you’re a new investor in commercial real estate, or are thinking of purchasing a property as a way to turn a profit, there are some basic – and also complex matters – that should be considered and imple- mented in order to elevate value. Unless improvements are made in a thoughtful and prudent manner, the things you do that were intend- ed to attract tenants, raise lease rates and lower costs could wind up becoming a huge expense that will put the property and you in-the-red. Following is a real estate 101 on elevating a property’s value. n Get to know your tenants . As the new landlord, take the time to speak to your tenants and find out what are their complaints and con- cerns about the property. Too often, new owners look at a property, make their own determinations of what needs to be done and miss the target entirely. If you and your prop- erty management team want to get off on the right foot, meet with your existing tenants or send a survey asking them to identify their top three concerns. In doing this, your team can show tenants that you’re listening, while also addressing some of the issues that will impact your ability to raise your occupancy. Remember, the best “new tenant” is the one you already have. n Jump on deferred maintenance issues. Sometimes new owners con- tinue on the trajectory of procrasti- nation when it comes to fixing and addressing main- tenance issues in their newly acquired building. Don’t let things such as parking lot potholes, heating, ventilation and air-conditioning inconsistencies, poor lighting, old carpet and dingy paint continue to work against the property as a desirable place for a company to locate its business. Immediate repairs and improvements will gar- ner credibility as an engaged and fair landlord. n Dig into building efficiencies. As a way to improve your property’s performance (which will make ten- ants happy) and lower operating expenses (which will make you happy) have qualified engineers and technicians examine the places where a building may be failing you. For example, more efficient lighting in hallways and stairwells, updated HVAC controls, roof damage or inef- ficient roofing materials, cost-effec- tive green roof solutions and win- dow systems are some of the places to turnaround your building’s effi- ciencies and build better profit in the future. The cost of these items may be reduced with Xcel rebates and Commercial Property Assessed Clean Energy program loans. n Review operating and accounting systems. There are many options available to building owners and managers to improve operating and accounting efficiencies. Your team should research all that’s available and make sure that the software systems and operating procedures will meet the specific needs of your building and your tenants. For example, you might decide to install bank scanners in your accounting office, offer automated clearing house or set up a lock box at the bank for faster deposits and improved cash flow. Be sure to work with your accountant to optimize your structure and accounting to identify opportunities and efficien- cies. Also, ask your certified public accountant to review the feasibility of a cost-segregation study, which might accelerate depreciation of building components and give you near-term operating funds to make improvements. n Set a routine maintenance sched- ule. If you want to save on mainte- nance costs in the long run, estab- lish a routine maintenance sched- ule at the outset of your ownership. Some of the steps you should take include reviewing your equipment contracts to make sure you are fol- lowing warranty guidelines; hiring professional consultants and main- tenance companies to ensure your HVAC system is running optimally; and plan on current and future capital expenditures so you can anticipate costs. n Think about health and well- ness. At the top of the list for many potential tenants is knowing that the building is safe. This require- ment goes beyond physical security to include the health and hygiene of a building, especially in light of COVID-19. With this in mind, con- sider installing a modern surveil- lance system and hiring building security. Also do things that will address invisible threats such as viruses, which could include evalu- ating air quality and more sophis- ticated HVAC systems with higher- quality filters. n Go beyond the call of duty. There always is more you can do to go the extra-mile to make your property as profitable as possible. For example, considering taking a class in asset management (Building Owners and Managers Association offers a course); add creative design ele- ments and spaces (for example, cre- ate murals to dress up stairwells, or add kitchenettes and game rooms where tenants can relax). It’s imper- ative to find ways to differentiate your property if you want it to be the place companies move into. Obviously, all of these items come with costs, so setting a budget and establishing priorities is key. Work- ing with a professional who can provide an honest assessment of what the best steps are to increase occupancy and lease rates (that won’t price you out-of-the-market) is your first step toward success. s Considerations to help elevate a property’s value Dan Meitus President and CEO, Elevate Real Estate Services