Commercial Real Estate Investors, Are You Making This Massive Mistake in Your Capital Expenditure Strategy?
Why Your Commercial Insurance Renewal Plans Must Include a Capital Expenditure Strategy
If you’re a commercial real estate investor, you need to know that the commercial insurance landscape has changed dramatically. It is not business as usual.
Especially with commercial insurance renewals coming up, anyone who doesn’t adjust their capital expenditure strategy could find themselves financially unprepared for skyrocketing premiums, less favorable insurance terms, and increased commercial insurances rates. If you don’t start approaching capital expenditure with a big-picture, long-term mindset, you could even find your considerable asset portfolio uninsurable down the line.
Here’s what you need to know to avoid that from happening.
What Is Capital Expenditure (CapEx)?
Capital expenditure, or CapEx, is the total sum of money spent on buying, maintaining, or improving fixed physical assets. This can include:
In commercial real estate, CapEx applies to the funds used to purchase, repair, or otherwise upgrade new or existing properties within your portfolio. This can be applied to the building itself, improvements within the building, or the land.
Why Does a CapEx Strategy Matter in Commercial Real Estate?
Having a CapEx strategy as a commercial real estate investor does two important things. One, it ensures you’re financially planning for both expected and unexpected expenses related to your asset portfolio. Two, it minimizes the long-term financial risk of that portfolio.
- Plan ahead for large financial expenditures.
Properties periodically require large, costly improvements. This includes anything from a new roof to a replaced HVAC system. Account for the sizable financial investment required for improvements and upkeep on your commercial buildings. Strategically set aside a portion of money every year to cover these expenses.
- Doing so ensures you’re never financially blindsided by any one upgrade or repair—planned or otherwise.
- Improve the value of the property.
Capital improvements to a property increase the value of that asset. This can be by extending the useful life of the property, upgrading essential aspects of that asset, or even reducing current and future operating costs.
- Think about something like installing energy-efficient windows. Yes, it’s an initial expense, but having those windows can save you in energy bills over the life of the product.
- When considering your CapEx strategy, think long-term. How much will the value add of that improvement offset (or even surpass) the initial investment?
- Safeguard your assets against costly natural disasters.
Depending on the locations of your real estate assets, you could be vulnerable to costly damage caused by natural disasters.
- Heat waves
- Severe storms
Strategic capital improvements safeguard your asset portfolio against this kind of damage. Improvements can both minimize the initial damage and lessen the resulting out-of-pocket costs you’d have to shoulder.
As natural disasters become more frequent, severe, and costly, incorporating these preventative improvements into your investment strategy becomes increasingly important.
How Your CapEx Strategy Affects Your Commercial Insurance Renewals
We get it. No commercial real estate investors want to hear they have to increase their CapEx budget. But failing to do so puts you at the mercy of a difficult commercial insurance market.
Whether investors acknowledge it or not, the commercial insurance landscape has changed. Just because you secured coverage last year, that’s no longer a guarantee you’ll get that same coverage again.
Making strategic improvements to the resiliency of your buildings increases the chance insurance companies will offer your asset portfolio adequate, favorable, cost-effective commercial insurance—now and many years down the line.
Are these improvements costly? They can be.
But you can no longer think exclusively about the cost today. You have to think about the bigger financial picture.
Ultimately, you’re protecting your sizable financial asset by making improvements that help ensure you’re continually eligible for favorable commercial insurance rates and terms.
Failing to future-proof your buildings leaves you vulnerable to:
- Increasingly steep commercial insurance premiums
- Less favorable insurance terms
- Inability to secure adequate coverage, leaving you with costly gaps
With the rising cost of natural disasters, commercial insurance is suffering from a dramatic decline in capacity. That means insurance companies must be increasingly selective about which properties they choose to insure.
Making your commercial real estate portfolio as attractive as possible to these insurance companies is imperative to getting the best renewal terms. To do that, you must plan now how to protect your buildings against future damage or loss due to increasingly costly, frequent storms and natural disasters.
Examples of Strategic, Effective CapEx Improvements
Whether dealing with new construction or improvements to an existing building, certain CapEx efforts make sense in light of these increasingly severe and costly natural disasters.
- Moving mechanicals to the second floor instead of the first floor in anticipation of flooding
- Installing hail-resistant roofs
- Opting for a NFPA 13 sprinkler system instead of a NFPA 13R
- Making buildings more wind and storm resistant, including securing gables
- Promoting earthquake resistance, including using steel-reinforced concrete
- Accommodating for rising water levels in the building and foundation, if applicable
Don’t Leave the Future of Your Asset Portfolio to Chance: Partner with a Commercial Real Estate Insurance Consultant
Every commercial real estate investor needs to hear two things. One, not having a sound, forward-thinking CapEx strategy can have devastating financial ramifications. And, in today’s market, adequate, affordable commercial insurance is no longer the guarantee it once was.
To ensure you’re not saddled with costly gaps in coverage or wildly unaffordable premiums or rates, partner with an experienced, reputable team of commercial insurance consultants.
With more than a hundred years of combined experience, the consultants at MB Davis Group routinely help their clients devise forward-thinking, big-picture strategies for protecting their real estate portfolios—now and even decades down the line.
If you’re ready to rethink your strategy, schedule a free consultation today.