Risk and Reward: The Fight to Fill Vacant Commercial Real Estate Space in Recent Years Has Forced Real Estate Owners and Managers to Consider New Uses for Their Properties-Even Fib They Require Taking Additional Risks

By Hunt, Kristin Gunderson | Journal of Property Management, January-February 2012 | Go to article overview

Risk and Reward: The Fight to Fill Vacant Commercial Real Estate Space in Recent Years Has Forced Real Estate Owners and Managers to Consider New Uses for Their Properties-Even Fib They Require Taking Additional Risks


Hunt, Kristin Gunderson, Journal of Property Management


"the tough economy has resulted in a lot of challenges--especially vacancies," said Janice Ochenkowski, managing director for Jones Lang LaSalle and the commercial real estate firm's director of global risk management in Chicago. "But property owners and managers have been very creative in how to use their existing facilities."

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Traditional retail stores have been transformed into everything from medical office space and churches to fitness centers and breweries. In addition, special events and popup stores are more commonplace; traditional office spaces have been converted to daycare centers; industrial warehouses are being used as practice facilities for youth baseball teams; and the list goes on.

"From a risk management perspective, these new uses can bring new challenges," Ochenkowski said. "However, it is the primary goal of the risk manager to support the business, which means we need to be more creative in the way we deal with these risks."

DUE DILIGENCE

The risks associated with new-use tenants are as varied as the tenants themselves.

First and foremost, certain tenants could present additional life safety risks, said Jeffrey Shearman, a Pittsburgh-based senior risk engineering consultant and real estate industry practice leader for commercial insurance provider, Zurich.

For example, restaurant tenants create increased exposure to fire; church and/or educational institutions might spur egress concerns because they encourage large gatherings in spaces formerly used for different occupancy; and hazardous waste can be a risk with some medical tenants.

"You have to recognize that certain types of work are going to create certain types ok hazards," Shearman said.

Beyond life safety risks, certain tenants might be more susceptible than previous tenants to codes and regulations imposed by state or federal laws, such as licensing regulations for daycares or American Disabilities Act requirements for medical tenants, said Pat Pollan, CPM, principal at Polka Hausman Real Fstate Services in Houston.

New-use tenant risks dont stop there: financial risks also exist. Replacing a unique tenant with a similar occupant after the lease expires can be difficult--a particular concern if a lot of money was spent customizing the space for an alternative use.

"Its not just the risk of liability, its the risk of the tenant going out of business and losing any money you put into the tenant, or its space, and not being able to recoup that," Pollan said.

Flight of other tenants from the property--disgruntled either by the type of new-use tenant or the adverse effects on their business because of the new tenant--can also cause financial strain if landlords struggle to renew leases, said Beau Beery, CPM, CFO of Coldwell Banker M.M. Parrish and president of its commercial division in Gainesville, Fla.

"If you bring in one tenant that doesn't play nice or isn't what [the tenant] promised to be, you could lose other tenants" Beery said.

To realize a potential tenant's risks, owners and managers must firmly grasp the tenant's business, its operations and its customer base, said Bob Smith, global property risk consulting practice leader for Marsh Risk Consulting, a unit of Marsh Inc.

"As the owner [or manager] of a building, it is prudent to understand the business you're moving in and whether it increases or reduces the risk to your assets and other tenants already in the space" Smith said. "If owners don't do their due diligence, they could be held accountable in the event something goes wrong."

Due diligence involves acquiring information about the equipment and materials tenants use, understanding operations needs, like water usage or ventilation requirements, noting storage needs, obtaining references from other landlords and observing tenants' operations at other locations--even if its just to find the simplest snafus that could disrupt a property. …

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