Risks rising from commercial building conversions

19%
Average vacancy rate for office buildings in the US

Driven by widescale increases in remote and hybrid work during the past five years, the average vacancy rate for office buildings in the United States is about 19%, according to a CBRE analysis. Even though unused office space is expected to peak at that rate in 2025, building owners and developers continue to seek ways to attract tenants. One trend in many cities is conversion of commercial real estate into habitational space. Adaptive reuse of office buildings is an attractive strategy financially — costs typically are far less than new construction — but it does raise risks for the construction industry. In a recent report, Deloitte estimates that up to 90% of future development will focus on renovation of existing buildings.

Pros and cons in reuse
Among the factors favoring adaptive reuse are tax incentives, eased permitting and entitlement processes, easier LEED certification, and a generally lower carbon footprint. Disadvantages in reuse include the costs and challenges of retrofitting or upgrading commercial building systems to meet current residential codes, load changes that may require structural reinforcement, and completing construction while maintaining access for existing tenants. Another significant challenge in many adaptive reuse projects is a lack of original documentation that can inform construction processes.

For example, a multistory office building converting to a multifamily apartment complex with a rooftop pool could add tens of thousands of pounds of load to the building’s foundation and supports. Conversely, a much lighter load on aging buildings constructed in expansive soils could cause the entire structure to rise or tip.

Commercial conversions to residential use frequently involve layout issues, such as column placement changes and entrance overhangs, which may require additional engineering and architectural work and civic approval. When such changes are contemplated for historic buildings, the approval process can be complex and time-consuming.

Other risks in the picture
Several other risks may become apparent in adaptive reuse projects, and these include issues with existing conditions in building systems, the building envelope and, in older construction, the possible presence of asbestos and lead. Owners and developers tend to engage in “value engineering” to lower costs by reusing as many of the existing elements as possible. This is a risk for contractors. By working with aged building systems with unknown maintenance histories, contractors may run the risk of taking on warranties and defect liability.

Construction businesses working on such projects should be aware of the risks they may incur in each of these areas:

• Building systems: Items that are commonly reused in commercial conversions are plumbing risers, water pumps, and PRVs; fire protection systems, including pumps, controllers, risers, and piping mains; electrical transformers, switchgear and distribution panels; and heating, ventilation, and air conditioning plenums and ducts, air handlers, chillers, and cooling towers.
• Building envelope: Water intrusion through openings in the building envelope, such as the roof or windows, can cause significant damage. Water-resistive barriers (WRB) and air/vapor barriers may have outlived their effectiveness in older office buildings. Insulation values also may differ greatly in office and residential space in temperate climates.
• Sanitary systems: Converting an office building to apartments will require adapting existing sanitary systems and penetrations of floor slabs, which can introduce plumbing defects. Office plumbing and sanitary system densities are much lower than habitational, with services generally limited to the central building core. Additional drain, waste, and vent (DWV) piping will be required, resulting in additional slab penetrations or use of single-stack DWV systems, which are more complex and vulnerable to defects and resulting leaks.
• Other conditions: Asbestos and lead remediation may be necessary in the conversion of older buildings. Historical buildings often have features that owners are required to preserve, which can require specialized expertise; and inadvertent damage can result in significant costs and difficult and lengthy procurement challenges. In addition, accommodating occupancy during construction can be difficult but necessary for a thriving commercial tenant on the ground floor. Maintaining access for the tenant’s patrons throughout the construction process can raise additional risks.

Mitigating reuse risks
Effective planning from the outset is essential for achieving a successful retrofit project. Ways that construction businesses may mitigate the risks in commercial conversions include:

• Conduct structural and geotechnical investigations of the building, within and outside the existing building’s footprint.
• Limit involvement to projects where adequate original construction documentation, including renovations and subsequent changes, is available.
• Obtain detailed property condition assessments from building science and construction forensics professionals. These should exceed the assessment reports required to obtain financing.
• Seek a letter of foundation reliance from a structural engineer. This is particularly important where the planned reuse will result in load changes.
• Analyze long-term settlement monitoring prior to construction. Understanding any gradual sinking or subsidence of soil at the property location is essential to prevent structural damage resulting from loading changes and maintain safety.
• Restrict value engineering in areas where fixes or updates are likely and costly — namely, the building envelope, building systems, and foundation.
• Limit contractual liability and warranties for existing building elements and any systems to be reused.

An experienced construction risk management partner can provide solutions for unique insurance coverage needs. Depending on the situation, project-specific insurance coverage or owner’s interest insurance coverage can provide peace of mind to forge ahead with adaptive reuse projects that keep assets producing value for their communities.

Matt Klemmensen is a Casualty Loss Control Expert at Munich Re Specialty — North America. Before joining Munich Re Specialty, he held numerous risk engineering leadership roles at global insurance organizations. He holds the Construction Risk and Insurance Specialist (CRIS) designation from the International Risk Management Institute and a LEED Green Associate from the U.S. Green Building Council.

Munich Re Specialty – North America offers custom coverage for challenging large and middle-market construction risks, with specialized underwriters who go the extra mile and a solid balance sheet that ensures long-term claims stability. View our casualty solutions.