As the COVID-19 pandemic slowly fades and businesses start reopening en masse, it’s clear that things won’t be the same as before.
Retail vacancy rates remain high. Many of the 110,000 plus restaurants that shut down aren’t returning. Corporate offices are still experiencing low occupancy as workers have grown accustomed to remote work and expect safety upgrades to shared spaces.
To cope with the enormous fall in occupancy during 2020, many real estate owners and operators repurposed property to attract tenants. For instance, empty retail space was converted to warehousing or vacant restaurants were converted to cannabis storefronts. And as the economy rebounds, the real estate industry is still looking for ways to repurpose commerical property.
Not always a simple makeover
However, repurposing real estate is a lot more difficult than changing the sign on the building. There’s a good chance a repurposed building will need redesign, both in terms of layout and its system’s infrastructure inclusive of fire and life safety, mechanical, electrical and plumbing systems.
It’s crucial to evaluate each of the building’s systems to determine if they can adequately serve the space’s new purpose.
It’s also likely that repurposed property can run afoul of local codes and zoning laws. Changing a building’s zoning designation takes time — and it can be costly to bring a facility up to code or change its specific occupancy type. Both often require renovations, which means additional costs.
The risk and insurance side of repurposing
When property is repurposed, its risk profile and coverage requirements will change.
However, assessing risk and coverage is difficult. The pandemic resulted in increased vacancies, often triggering a policy’s vacancy clause that either nullified coverage or altered terms and conditions. Uncleared vacancies can still make it difficult to obtain new coverage for a repurposed property.
And there are several other factors outside of the owner’s control involved in securing coverage for repurposed property:
Insurance capacity depends on industry. Carriers will not necessarily write a policy for every type of property. For instance, many underwriters won’t sell policies in the cannabis industry due to its perceived higher risk. Changing a space’s purpose can make it harder to get coverage even if potential tenants are readily available.
The “hard” commercial insurance market. Real estate insurance underwriters have become more selective in what they chose to insure — and premiums have risen across the board. No matter how long you’ve been with a carrier, a repurposed asset may not qualify as a risk they’re willing to take.
The reinsurance market. Even a willing underwriter is subject to the risk appetite of their reinsurers. Without reinsurance, underwriters are heavily restricted on the policies they’re willing to write.
That doesn’t make real estate owners powerless to obtain coverage. When repurposing property, keep in mind the following things in order to reduce risk:
- Know your new responsibilities. A repurposed property changes the owner’s legal liabilities. For instance, a newly minted warehouse owner assumes responsibility for products and materials housed in their space. A legal liability policy can help protect the owner from the financial consequences of a fire, theft or negligence.
- Understand your new risk profile. Repurposing property also changes its risk profile. A change in risk profile may not require a new coverage policy but could require additional limits and extensions.
- Consider building ordinance coverage. Building ordinance coverage, an extension to a property policy, covers a facility for upgrades required by ordinances passed after the building was constructed.
Repurposing property can help many real estate owners and managers weather the spike in vacancies and unpaid rents due to the pandemic. It’s essential to keep an eye on how repurposing changes the risk profile of the property and ultimately affects insurance coverage.
Contact your HUB broker to discuss the coverage needs for your repurposed facility.
