Tighten Your Grip on Operating Expenses

a tightened fist gripping money

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As a long-time resident of southern Louisiana, Matt Ritchie has seen extreme hurricane damage up close. But he never expected the financial wallop he took from a hurricane in 2020. A hotel he owned lost electricity for a day—not a huge deal, he says. But when the electricity and sump pump were restored, sewage backed up into 10 of the hotel’s first-floor rooms. He immediately contacted his insurance company and was stunned to learn his policy didn’t cover the damage. In another incident later that same year, at a multifamily complex Ritchie manages, a resident’s pet bit another resident. The incident ended in a lawsuit against the complex. He contacted his insurer, who told him his policy didn’t cover animal-related claims.

“I wouldn’t have anticipated the two incidents that happened to me,” says Ritchie, CCIM, president and broker at Ritchie Real Estate in Alexandria, La. “I couldn’t have made it up.”

The consequences mounted as his insurance costs rose 100% between 2021 and 2022 and 100% between 2022 and 2023, he says. His insurer changed his coverage from replacement value to actual cash value, and his deductible from $5,000 to $25,000. Those expenses took a toll on his operating costs, which spiked by 30%.

Today, stories like Ritchie’s are not rare. On top of insurance increases, property managers are facing escalating property taxes, utilities and labor costs. As a result managers are closely monitoring costs, bidding out contract work and negotiating where possible to find savings.

Insurance Changes Are Off the Charts

Commercial property premiums in the first quarter of 2023 jumped an average of 20.4%, the first time an increase exceeded 20% since 2001, according to the Council of Insurance Agents & Brokers. That period also marked the 22nd straight quarter of overall premium increases, at 8.8%, according to Insurance Journal.

Ritchie’s insurance brokers told him natural disasters are driving the increases, which are widespread. “Every part of the country has its own natural disaster—whether it’s tornadoes or fires or something else,” he says.

Sometimes a disaster can even affect insurance rates in a different location. “We’re really feeling the pain from the spillover from the California wildfires and the fires in the Northwest,” says O. Randall Woodbury, cpm, vice chairman of Woodbury Corp. in Salt Lake City. “To some extent, you get a surcharge if you’re in a loss-heavy area. But even if you’re not, you’re paying part of the freight for losses wherever the trauma has been.”

Commercial property managers are coping with broad insurance changes, including:

  • Exclusions:
    “Read your exclusions in the policy,” Ritchie says. “They’re in fine print, usually on about the fourth or fifth page. I’ve learned you can try to negotiate those. If you say, ‘I want coverage for this particular issue,’ [the insurer] may create a premium that you pay for.”
  • Declining competition:
    Insurers are pulling out of some states, including Louisiana, limiting competition and enabling those that stay to hike their rates, Ritchie says. In a tough insurance market like this one, options that might not have been on the table now include catastrophic coverage with a very high deductible or, if a mortgage isn’t involved, self-insurance, he adds.
  • Higher premiums, deductibles and risk:
    “It’s not just that the coverages are being watered down, but we’re finding the only way to keep premiums in check is to absorb more of the risk,” says Woodbury. “Some negotiations have been, ‘Oh, my gosh. You’re asking for this increase? How much would you trim that if we agree to pay a higher deductible?’”
  • Lender requirements:
    “Lenders are paying a lot more attention to the coverage you have and the types of coverages that are on their shopping list of coverage you have to carry,” Woodbury says.

Scrutinize Property Tax Assessments

Property tax is another rising cost, says Woodbury, whose company operates in 16 states.

“You have to be vigilant about how your property is being assessed compared to comparable properties. We’re going to be looking really hard at assessments on any office buildings this next year. We know there’s going to be a huge drop in values, so we’ve got to stay on top of whether the counties are acknowledging that.”

Ritchie suggests filing a tax appeal based on new net operating income. Explain that revenues are down, operating expenses are up, and the building doesn’t generate the net operating income it used to. Therefore, the property is really actually worth a new, lower amount.

Our labor costs have increased 25% to 30% in the last two years. The only way to cut costs is to cut services.”

-Matt Richie

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