The issues impacting commercial building owners and facilities management professionals during the past year will continue into 2024. This includes weather-related disasters, crime—both on-site and virtually—labor issues, and interest rates, to name a few. The result: tighter profit margins and increased insurance—as well as other business-related costs. Contending with office space and retail vacancies will also persist, while the market for more warehouses and housing will continue to trend up.
Managing these risks in a proactive manner can help organizations ride through 2024 ahead of the game. Here’s how.
Contend with the Unknown
Weather-related catastrophes can arise swiftly, causing major damage in their wake. In the first six months of 2023 alone, severe thunderstorms caused $34 billion in insured losses. Yet only 59% of real estate executives reported being prepared for climate change and weather disasters, according to HUB’s 2024 Executive Outlook.
Nuclear verdicts are also impacting the real estate industry due to the rise in premises liability cases over the last 10 years. Of the $10 million-plus verdicts, 15.4% were attributed to premise liability cases that awarded on average $31.7 million.
Insurance premiums have increased significantly over the last few years due to these types of events. Because of this, commercial building owners and facilities managers will need to shore up their risk management practices in 2024 to obtain the best insurance rates possible and secure the future of their operations.
Maintaining properties and improving their security are two effective ways to do this—especially for owners who are attempting to save on insurance by increasing their deductibles or opting to self-insure.
Building improvements such as adding smart technology and making improvements to contend with the weather in your region is also a must. Implementing multi-factor authentication protocols and endpoint detection and recovery systems to mitigate cybercrime can also help reduce risk.
Increasing security on all properties and providing additional training to employees to ensure safer buildings also can help prevent incidents from occurring on-site.
Tackle the Labor Issue
The issue of hiring and training employees to maintain and manage properties will persist in 2024. While the labor market improved in 2023, turnover in property management positions is at 33%, compared with the 22% for businesses in the United States overall.
The inability to properly staff property maintenance jobs can impact properties that are not maintained and increase the risk of more claims and litigation. Employees play a central role in protecting profits, controlling insurance costs and establishing a safe environment.
To attract, recruit and retain employees, building owners and operators should offer more personalized benefits aimed at improving employee well-being. Yet only 41% of the real estate owners/operators in HUB’s recent Outlook Executive Survey note they offer personalized benefits, and only 31% offer lifestyle and alternative insurance options to staff. Using data and analytic technology to establish personalized benefits plans can help provide quality employee experiences, resulting in more engaged and productive employees.
Harness Risk Transfer
Having the right risk transfer plans and insurance coverage can help building owners stay resilient in 2024 and beyond, as commercial real estate insurance costs are expected to increase again this year.
This is attributed to higher replacement costs, litigation expenses and the increase in weather-related events. The real estate industry needs to anticipate the increase across coverage lines. Property rates are expected to increase up to 15%; for geographical areas with more risk, it could be more. Catastrophic coverage could rise more than 30%, and habitational property insurance could spike 35%.
Some real estate owners and investors may find it difficult or cost-prohibitive to unload their risk since these increases are in addition to the rate hikes that real estate owners have seen in the last five to seven years. To make matters worse, property insurance capacity is lacking in certain areas of the U.S. as well.
CAT modeling—which simulates possible catastrophic events in your region and their financial impact—is becoming essential to stay resilient. Analyzing how weather-related events could impact your properties can help ensure owners are obtaining the right insurance and help identify other risk exposures.
Real estate owners should look into tenant default captives, spot captives, contingent capital arrangements, aggregate deductibles and self-insurance. These risk transfer vehicles could help owners contend with increased insurance costs. Increasing deductibles can also reduce premium costs.
Discussing these options with a broker will help real estate owners determine and establish an insurance strategy that addresses risks and helps budget more appropriately.
Anticipate that some state governments will also step up this year to help address insurance capacity challenges. In addition, stricter building codes to help properties withstand weather-related events will likely be established.
In Conclusion
Some circumstances are out of one’s control: high inflation and interest rates, and weather-related impacts, to name a few. These will impact profit margins and investor confidence when it comes to lending for the purchase and building of properties in 2024.
Some regions of the U.S. will fare much better than others. For example, office space vacancy rates reached 13.1% by the middle of 2023, certain areas have seen a slowdown in the retail growth, and there’s a noticeable difference in booming markets such as Florida and Dallas compared to declining markets as seen in San Francisco. Those with industrial properties did fare better in 2023 because of the growth in manufacturing and e-commerce. Rents in the industrial sector increased 8.9% compared to the previous year.
Regardless of your location, real estate owners, developers and operators throughout the U.S. can attain profitability across their portfolio with improved risk management practices and oversight of appropriate risk transfer.
