We often hear the concerns about how many homes are underinsured but do not always hear enough about commercial property underinsurance. When a commercial building suffers a total loss, it impacts the owners, employees, building tenants, even the surrounding community. Tenants go elsewhere so the income that the building generated for its owners stops.
In the past, commercial replacement cost estimates were less rigorously determined. Market value or for recently built structures’ the construction costs were used as the replacement cost. In some cases, property owners specified how much they wanted the replacement cost to be. (This was often tied to how much premium they wanted to be charged versus the actual cost to rebuild.) As disasters and reinsurance concerns affected commercial buildings, just as they affected residential structures, there has been a tightening around providing an accurate rebuilding cost. Rather than market value or the RC that the building owner requests, formal reports have become requested more often.
Market value for many commercial properties is down, especially for offices, but also for retail stores, malls and other types of commercial buildings. For office buildings, this is due to lower demand, staff working from home some or all week, smaller numbers of employees, etc. Any commercial property owner who relies on market value to determine the replacement cost may find themselves underinsured. Some office buildings have been converted into residential properties as a result of a shift in demand away from office space and an increase in demand for housing. This decreased demand for office buildings has impacted the market value of these buildings. At the same time, replacement costs have risen for labor and materials.
We recently read about a 450,000 sq ft office building in Cambridge, MA that sold for less than the recent cost to build it. Recently built at around $380 million, the market value is estimated to be, perhaps, half that. Replacement costs—unlike market value—have risen. So the replacement cost is expected to be higher than the original cost to build, not half. Building owners who assume they can safely insure at market value may be surprised at claim time.
e2Value® offers an easy-to-use estimator that can accurately calculate replacement costs and actual cash value for virtually any commercial structure from smaller retail shops to larger, more complex facilities such as hospitals, warehouses, schools and manufacturing centers. As the leading provider of web-based property valuation solutions, e2Value can assist you with all of your Insurance-to-Value (ITV) and collateral value monitoring needs. Contact us for more information.