RECESSION
Risk management has been the area of focus for every real estate as any financial turmoil is very painful in the commercial real estate.
Liquidity and market risk will tend to have a greater effect on funds that are more growth-oriented as the valuation of appreciated properties depends upon market data.
The challenge becomes even more complicated to tackle and risk management is a crucial part of the business strategy.
Unfortunately, many realtors do not know the importance of risk management in the recession.
Keeping the scenarios of the recession in mind, companies in the commercial real estate market must be aware of the following points.
1
Add risk management into the organization's operations
Over recent years, the risk management processes of real estate companies have come under increased private and regulatory scrutiny.
With this trend, there is the need to establish a range of mechanisms and processes to manage risk across all aspects of a company.
These mechanisms are collectively known as Enterprise Risk Management (ERM) and the recession highlighted the need for ERM.
2
Ensure sufficient insurance coverage
Businesses must assure they have a comprehensive program that fully addresses their needs.
A huge settlement spells nightmare for a commercial property and companies need to have adequate insurance coverage to cover the loss.
Buyers should take into consideration the interplay of a number of factors such as the limits available in the marketplace, the types of cases that may be filed and the practices of peers.
3
Review coverage for vacant properties
Owners of vacant buildings must look carefully at the risks involved in owning such property and should examine the conditions, terms and restrictions that apply to their insurance policy.
To avoid a greater risk when insuring a vacant building, a vacancy clause with terms and conditions is inserted in the policy.
Such a clause reduces the amount normally paid for loss or damage caused by fire or wind.
4
Compare your business against peers
The process of comparing one’s business processes and performance metrics to best practices of peers has become an important exercise across all industries over the past decade.
To find out if the coverage purchased is adequate relative to best practices, property owners can use benchmarking to compare their risk management programs with the competitors.
Common insurance benchmarks include types of coverage purchased, limits purchasing patterns, levels of retention selected, loss amounts and competitiveness of insurance premiums.
In the end
Recessions amplify many risks faced by the commercial real estate market.
As the economy sees gradual improvement, business activities in the commercial real estate are expected to pick up.
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