Industry Trends: Cities Revitalizing Downtown Areas by Converting Offices to Residential

Cities Revitalizing Downtown Areas by Converting Offices to Residential

Sky-high real estate prices, high interest rates, and low inventory have led to a shortage of available, affordable housing. Though the average mortgage rate has dipped down to around 7% from its 13-year high of 8% in October 2023, prices remain high due to a historically low inventory of homes for sale. Meanwhile, within the commercial real estate market, the office sector continues to face record-high vacancy rates across the country amid a widespread change of work patterns.

The emerging solution to this problem—with recent support from the federal government—is repurposing properties. As owners and investors remain desperate to regain capital, many are opting to convert their high-vacancy buildings into much-needed residential space. In October 2023, the Biden-Harris administration announced new actions to support these conversions through new financing and technical assistance options. Similarly, many cities are offering their own tax-breaks to incentivize the repurposing of office buildings into housing and revitalizing downtown areas.

A recent study from RentCafe found that office conversions now represent 38% of the 147,000 apartments in future adaptive reuse projects—more than quadruple the amount four years ago. Key metros such as Washington D.C., New York, Chicago, Dallas and Los Angeles are leading the trend of urban redevelopment in an effort to revitalize downtown areas.

Hidden Environmental Risks

With repurposing projects expected to take off in 2024, it is important to be aware of the potential environmental risks linked to these conversions. Though the risks associated with office conversions may not initially seem as threatening as those that arise from the redevelopment of industrial sites, many of the same exposures exist. From discovering unknown pollution conditions or storage tanks that went undetected during due diligence to managing an active construction site, a variety of possible exposures could result in bodily injury, property damage, legal expenses and clean-up costs. In addition, changing the use of a property from commercial or industrial to residential may increase regulatory scrutiny of pre-existing pollution conditions or further evaluation of potential environmental hazards.

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Aside from redevelopment and construction risks, there are additional hazards associated with working on previously unoccupied buildings. If buildings and tenant spaces have not been properly maintained, there is an increased risk for water intrusion and subsequent development of mold. Warm temperatures, increased humidity and unknown leaks provide ideal conditions for mold growth. In addition, stagnant water systems can serve as incubators for legionella to grow to dangerously high concentrations. If not properly addressed, the presence of mold or legionella can lead to claims of bodily injury, business interruption, and cleanup.

Claims Scenarios

Mold

During a building conversion project, the windows and the building façade were upgraded to accommodate future residential use. However, the windows were not properly installed, resulting in water damage and mold growth on the interior drywall during subsequent rain events after the building was occupied by new residential tenants. Claims for faulty workmanship, improper design, and cleanup of the mold- and water-damaged building materials were made by the tenants against the property owner, general contractor and the window installer.

Inadvertent Disturbance of ACM

During a partial office-to-apartment conversion project, the demolition subcontractor failed to property identify and remove asbestos containing materials (ACM) prior to starting removal. Dust potentially containing ACM entered the HVAC system and was dispersed through occupied tenant suites in the same building. Claims of bodily injury, business interruption and cleanup were made by the tenants against the general contractor, developer and demolition subcontractor.

How can Great American Environmental help?

Our underwriters can assist in navigating considerations for environmental insurance to help mitigate these risks for your clients. Great American Environmental is proud to offer comprehensive insurance solutions, helping keep your client’s businesses strong during a changing landscape. We provide control services through our in-house risk engineering team alongside a network of specialty vendors, representing diverse capabilities and experience in a variety of environmental areas.

We offer a complete portfolio of environmental insurance products, including contractor’s and fixed premises pollution liability insurance products. Our core products and services help enable businesses to effectively and efficiently manage risks that can threaten their financial security.

Looking for more information on how environmental insurance can help combat the complexities of redevelopment coverage? Check out the following resources or contact our team today!

Gregory Kelder, Divisional Senior Vice President & Head of Claims
Great American Environmental Division

Greg Kelder is a Divisional Senior Vice President with Great American Environmental and serves as head of claims. He has more than 30 years of environmental claim experience. Greg brings specialized environmental claim support and training to our division and is based out of the Exton, Pennsylvania main office.

Sara Brothers, Divisional Vice President & Consultant of Claims
Great American Environmental Division

Sara Brothers is a Divisional Vice President and Consultant of Claims with Great American Insurance Group’s Environmental Division. She brings over 36 years of environmental consulting and construction management experience to Great American. Sara’s background is as a senior geologist with extensive consulting and industry experience in the petroleum, industrial, commercial, and government sectors. She is based out of San Diego.

References:

https://www.cnet.com/personal-finance/mortgages/todays-rates/mortgage-interest-rates-today-for-feb-21-2024-rates-move-up-for-homeseekers/
https://www.rentcafe.com/blog/rental-market/adaptive-reuse-office-to-apartments-2024/
https://www.whitehouse.gov/briefing-room/statements-releases/2023/10/27/fact-sheet-biden-harris-administration-takes-action-to-create-more-affordable-housing-by-converting-commercial-properties-to-residential-use/