Rising commercial vacancies may cause
problems for retail brokers inexperienced in commercial real
Scott Royle knows a disturbing trend when he sees one, and
he doesn’t need numbers from the trade press or the
burgeoning stack of submissions for clarity. The view from his
Irvine, Calif., office window says enough.
“I look out and see three seven- to 12-story buildings
completed and totally unoccupied,” he says. As vice
president of American E&S Insurance Brokers, Royle is no
novice to vacant-property insurance, a perennial excess and
surplus lines product. But what he’s been seeing lately
is different. “What’s happening now—buildings
completed with no tenants ready—is very different.
It’s not normal.”
“Dismal” is the most popular adjective used by
those reporting on today’s commercial real estate
marketplace. And it’s getting worse. The numbers could
inspire a Bruce Springsteen song.
Office vacancies ended 2009 at 17.6%, up from 14.8% at
year’s end in 2008, according to commercial real estate
firm Grubb & Ellis’ 2010
U.S. Forecast Report. Industrial vacancies rose to
10.7%, and retail vacancies are expected to hit 11.7% by the
end of 2010. The marketplace continues to absorb hundreds of
millions of vacant square footage. Commercial vacancies are
likely to set a modern-day record by the end of this year,
warns Grubb & Ellis.
Ed Magliaro, executive vice president and national practice
leader for property at Swett & Crawford, has sifted through
vacant-property submissions for years. He admits that the
current marketplace is the first time he’s seen the
demand for vacant-building insurance so high,
“particularly for large properties.” He says
it’s shocking to be getting calls from retailers trying
to find vacancy coverage for a $500 million to $700 million
property. “In the past, vacancies were one-offs or local
situations, not tied to any general economic event. Now
it’s pretty much a national issue with certain areas of
the country being affected more severely than others and every
segment of the economy feeling some impact.”
As a growing contingent of financial institutions takes
possession of properties, identifying who will manage the
property and who is ultimately the named insured becomes
“So many of the properties we see today are in
bankruptcy or some other adverse financial situation,”
Magliaro says. “When this happens a determination has to
be made as to who is in control of the property. Is it a bank?
The developer? The original owner? This information is every
bit as important to underwriters as specific construction data
on the real property.”
Also imperative are the circumstances in which the building
became vacant. Many risks are “normal
vacant”—Magliaro’s term for properties that
are in preparation for sale or between leases.
“Traditionally with vacant property, the property and
owner were not necessarily under financial pressure—just
in transition,” he says. A growing number of risks are
what he calls “economy vacant.” These properties
are of greater concern for underwriters because their future is
uncertain. In more and more cases, they are abandoned because
the insured ran out of money.
Royle says another disturbing part of this trend is that
investors are buying properties from banks for pennies on the
dollar without the necessary infrastructure to manage them.
Insurance folks are typically kept in the dark regarding these
transactions until the 11th hour, and limited underwriting
information makes it difficult to price and to underwrite the
With evidence that the risk in this property is increasing,
insureds often receive policies containing protective safeguard
restrictions, warranties and other unfamiliar conditions that
must be highlighted at the time of binding. Failure at this
stage of the process by an inexperienced retailer could prove
Further, Royle says inexperienced retailers may be
sympathetic to an insured’s insistence that the situation
is short-term. Insureds tend to be “overly
optimistic” about occupancy, he says. Vacancy policies
typically have many policy-period options, and it’s
tempting to lowball expectancy to keep the premium down. But
Royle warns that philosophy can easily backfire. “As
vacancy stalls, this usually means a greater moral hazard and
subsequent higher premium at renewal. A longer policy term
helps ensure rate consistency over a greater time
While coverage for vacant properties is not exclusive to the
E&S markets, both Royle and Magliaro agree that an
experienced wholesaler is in a better position to manage the
new dynamics of the marketplace and to help inexperienced
retailers educate insureds about their new policies.
“E&S folks are used to the risk. Our experience
helps us make quicker decisions and acquire higher limits. For
larger programs, we bring proper structure to the
placement,” Magliaro says.
Experts don’t expect signs of improvement anytime
soon. Some reports cite the third quarter of 2011 as a possible
turning point, but the prediction’s lack of supporting
evidence is unnerving. Until then, a wholesale broker’s
risk experience and market access may be the tools retailers
need to sustain insureds through recovery.
Amrhein is wholesale editor.