Increased Insurance Costs and Decreased Administrative Costs

Sept. 1, 2004
Faced with the constant drumbeat of warnings about the potential for terrorist attacks, real estate has responded with vigor in providing protection - physically for its tenants and buildings, and financially for its companies.

In fact, building managers are taking all the measures they can to make their buildings safe and are still paying more in insurance costs. You might not be aware of it, but U.S. private-sector commercial real estate spent 21-percent more on building insurance in 2003 compared to 2002. However, these are not the only areas in which real estate professionals are seeing costs change, sometimes for the better.

The intriguing information related here is drawn from BOMA's 2004 Experience Exchange Report (EER). The 2003 private-sector results are the weighted average responses of 3,426 buildings representing approximately 700 million square feet of office space. Overall, the 2004 EER represents data from more than 5,000 buildings across North America and almost 1 billion square feet of office space.

As expected, the market has settled considerably with respect to insurance cost issues stemming from the World Trade Center attack. Much of this is due to the backing provided by the federal government via its Terrorism Risk Insurance Act. However, owners were forced to absorb higher costs for most properties (according to Emerging Trends in Real Estate®, a report produced by PricewaterhouseCoopers and the Urban Land Institute). The rise in insurance expenditures seems to be an industry-wide phenomenon, with almost all sectors of commercial real estate reporting higher insurance premiums.

Corporate facilities (which typically comprise high-profile, Class-A buildings), located both in downtown and suburban locations, reported spending significantly more on insurance costs in 2003 compared with 2002. Those corporate facilities located in downtown areas reported a 61-percent increase in insurance costs over last year (20 cents/rentable square foot [rsf] in 2003 compared to 18 cents/rsf in 2002). Similarly, corporate facilities located in suburban areas typically saw an 11-percent rise in insurance premiums (20 cents compared to 18 cents in 2002).

The government sector reported an astounding 76-percent increase in insurance spending (30 cents/rsf compared to 17 cents in 2002). Likewise, the government sector's expenditures on security rose by 11 percent ($1.26/rsf compared to $1.12 in 2002). This change can clearly be attributed to its addressing concerns resulting from 9/11 and continued fear of further terrorist attacks.

With concerns about security still high, building security remained a high priority for management in 2003. For the U.S. private sector, the average dollar cost for security per rentable square foot remained almost constant with last year. The industry reportedly spent 55 cents on security in 2003 vs. 56 cents in 2002. Most buildings, especially Class-A buildings and corporate facilities, are maintaining greater vigilance, employing not only additional guards, but also investing more in screening and expensive optical badge-reading turnstiles or metal detectors.

There seems to be only a marginal lowering of concern about terrorism directed toward real estate in 2004. Even though the U.S. private sector spent slightly less on security when compared to 2002, overall security expenditures in 2003 are 17-percent higher than 1999. Costs related to security have trended upward since 9/11 and are near their highest levels in the last five years.

Other nominal expense areas show that some operating expense categories increased from 2002, while some categories, including utilities, cleaning, and administrative expenses, showed a decrease in the amount of dollars spent this year. The most noticeable decline was a decrease of 9 percent ($1.25 vs. $1.35 in 2002) in the dollar amount spent on administration per square foot in 2003. This confirms that increasing efficiency, while lowering overall administrative costs, is on management's list of top concerns. Companies have learned to achieve productivity gains through less spending on overhead and hiring fewer employees.

The commercial real estate industry is doing its part to address concerns about its operations and heightened fears about security. Unfortunately, the upward trend in security and insurance costs is likely to continue next year. Working to reduce administrative expenses and to carefully spend more on security and insurance demonstrates that real estate professionals continue to move aggressively on behalf of their tenants and owners.

The operational statistics and percentages in this article are derived from BOMA International's annual Experience Exchange Report (EER). For a detailed description of the report, visit (

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