When mixing residential, office and retail in the same location, understanding the risk profile of each occupant and maintaining control of activities inside and outside of the building is critical.
By Gerald Chiddick, Head of Real Estate, Retail and Hospitality, U.S. Middle Market, Zurich North America
Being a good neighbor has never been more important than now. But for real estate owners and managers, harmonious cohabitation is more than just a friendly “hello” in the lobby.
The risks for multi-tenant locations are exacerbated by the fact that multiple tenants coexisting within a single building create a risk management scenario naturally through the intermixing of the hazards of their occupancy. That’s a perfectly reasonable expectation, until the bathtub in the fifth-floor apartment overflows, sending a steady stream of soapy bathwater to the occupants of the fourth, third, second floors as well as the retail operation on the first floor. Or when a grease fire from the first-floor restaurant emits a thick, black plume of smoke to the upper floors, forcing the residents to evacuate.
The impact of COVID-19 on businesses has made things more complicated. During the pandemic, many businesses shut down their in-person experiences, and some have closed shop for good, leaving once-vibrant commercial spaces unoccupied. Others have simply reduced their commercial footprint and sought to sublet the unused space, adding more tenants to a multi-tenant property. In the wake of these changes, there are mounting pressures on property management firms and authorities to ease up on use of property restrictions. Also, many annual building inspections have been delayed during the pandemic lockdowns, which can allow safety violations to go unchecked.
All of this leads to increased risk for owners and managers of multi-tenanted properties.
Take control of multi-tenant properties
To address the risks of multi-tenant properties, owners and managers should focus on understanding the hazards of the tenanted exposures and maintaining control of activities in and around their properties. In short, they need to know what’s going on inside of their buildings and how those activities might impact the adjacent risks. Only then can property owners and managers exert control and mitigate risks. There are three areas that need to be addressed:
- Occupancy: Who is in the building and what are they doing? Leasing space to a bakery or an accounting firm both present risks. But not knowing who is in the building makes it difficult to evaluate those risks.
- Management: How often do you meet with the property management company or the individual tenants? How often are inspections conducted? Are your contracts up to date? Is there adequate insurance to address exposures?
- Subleases: Any subleases should be approved by the property owner in advance. But desperate business owners are looking to recoup costs during the pandemic, and subletting may be the answer. Contractual language should make it clear what tenants can and cannot do.
The perils that can make multi-tenancy a riskier proposition run the gamut. Water damage and fire are the big two, but toxic odors, insect infestation, crumbling infrastructure and slip, trip and fall accidents can also come into play.
Water flows downhill
Water damage is one of the costliest losses in multi-tenant buildings.
One common truism is that water always flows downhill. This is important to understand if you own a building with tenants stacked atop each other, like a condo high-rise or an office building with first-floor retail. A plumbing leak in one of the upper floors that goes undetected for a long time will eventually lead to water damage in the floors below. Accountability for proper maintenance and adequate recordkeeping are important with water-related systems such as plumbing or sprinklers. At times, issues such as expiration of the useful life of a value or erosion of seal on a particular pipe fixture is all it may take to start what could be next water damage claim of significance in a building.
Water leaks often begin where new plumbing has been installed, usually for a small office kitchenette or a drinking fountain. If a leak is initiated during the weekend, water can flow through the walls of a building for 24 to 48 hours before any damage is detected. That’s why it is important to install leak-detection devices with automatic shut-off valves or emergency response notifications.
Sprinkler systems are a reliable way to suppress building fires until firefighters can arrive. But if the sprinkler system is activated and no emergency personnel are called, the sprinklers can run for hours and cause extensive water damage to a building and all its tenants.
Fire and smoke losses can be devastating
Fire losses in multi-tenant buildings can be devastating and even deadly if part of the exposure includes residential units. Fire can reduce a building to rubble and ashes in a matter of hours. But even a small fire that is quickly controlled can result in costly smoke and water damage.
While open flame exposures from tenants such as restaurants or residents can contribute to fire losses, electrical and power systems are also sources of fire or explosion risk in these structures.
Again, sprinkler systems can play a big part in controlling the spread of fire, but only if they are properly maintained. Too often, building occupants will paint over sprinkler heads during renovations. Many times, the sprinkler heads are covered by interior building modifications or hidden behind a tall stack of boxes in a storage room. Regular inspections should identify these obstructions.
Real estate owners and managers should understand if new occupants in a multi-tenant building will increase the fire risk for all tenants. How will the addition of a first-floor restaurant or drycleaners affect the risk profile of a high-rise building? How about a 3-D printing operation or a nail salon?
Harmonious cohabitation can help to mitigate losses
Owners and managers of multi-tenant buildings face several challenges in a post-COVID world. Commercial occupancy is transforming for some enterprises as many companies seek to reduce their real estate footprint or engage in a hybrid environment where a balance of in office and work from home may become a staple, Meanwhile, residential exposure is growing in areas where condo developments and new housing starts have blossomed during the pandemic, creating a need for new commercial or mixed-use buildings — providing spaces for new startups to emerge and take advantage of the economic recovery.
What remains constant is that water and fire continue to be the top property risks for property owners, and multi-tenant locations may also face liability risks from slip, trip and fall accidents. Understanding the hazards of the multiple occupancies, controlling the assessing the risks of the tenants, including subleases, will be critical for owners to manage and maintain appropriately if they want to mitigate losses.
Read more on Zurich’s solutions and insights for the real estate industry.
- Leading cause of property loss for real estate owners and managers is water damage
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- Avoid pitfalls when restarting facilities after coronavirus closure (article)
- Key strategies to help prevent costly water damage to your property (webinar)
- For real estate owners, maintaining building infrastructure is a top concern