How are Vacancy Insurance Issues Affecting the Real Estate Market?

In previous real estate years, we really never had to worry about vacancy issues, especially in Silicon Valley.  Everyone wanted to work here and therefore, move here.  Businesses, families, recent grads, start-up enthusiasts and Southern California transplants were itching to get their own piece of the Silicon Valley success pie. Now, whether you're buying and selling or buying and holding real estate for your own portfolio or the portfolio of the company you work for, vacancy issues scattered amongst the real estate world is creating quite an insurance nightmare for some property owners. 


I used to work in a building on Gateway Place near the San Jose Airport.  That area is mainly business parks and retail to serve those hungry, dedicated employees of various industries.  But while working in one of the Gateway Place's buildings, I noticed throughout my stay there, nearly every single one of our tenants had moved out or were in the process of moving out of our building.  I knew it wasn't a direct reflection on the management company that controlled the building.  They were always friendly and fast to repair any issues we had within our office.  The market was shifting drastically.  Some companies went under.  Others moved to another building with lower lease rates and better amenities. Whatever the reasons were, our building was nearly vacant.

Insurance industry standard states that commercial buildings are considered vacant when occupancy is 30% or less for more then 60 consecutive days.  And when a building is declared "vacant" by insurance industry standards, there are some major insurance carve backs to go with it.

Here is an example of an ordinary Vacancy Loss Provision within an insurance policy:

The insurance carve backs listed above are harsh, no doubt.  Many real estate owners are having to come out of pocket for a percentage of the loss and re-invest into their properties that are not circulating any income.  In defense of the insurance companies, when a property is vacant, claims dramatically rise (no rocket science needed here).  Claims of wire and plumbing being ripped out of walls and windows being smashed are ever so common.  However, who would have ever thought there would be so many commercial buildings considered vacant in Silicon Valley?  Many real estate investors took the approach of "not in Silicon Valley".  But, like many who were somewhat stunned by the market dip, they were wrong.

I've advised all of my clients that hold real estate portfolios that we need to review their vacancy clauses within their insurance programs.  And, by educating my clients, they're more aware and pro-active from a risk management perspective towards all their properties.  Most of my clients have security companies they have hired to monitor their properties on top of the alarms that are already installed on the premise.  By actively monitoring the properties they own, insurance companies are more likely to fully pay out on any claims that occur while the property is vacant.

If you hold real estate and it's considered vacant, are you doing enough to protect your assets?  Take some time to re-evaluate your risk management style.  Your bank account and insurance company will thank you.