Lessors Risk Insurance for Office Property in San Diego, California

Vacancy here is usually a whole building, not a floor

The default picture behind an office placement has one floor go quiet inside a tower that stays lit — a single suite unlet, a lobby still staffed, an elevator still running. A great deal of the San Diego inventory is not that building. The core is compact and the working office stock is spread out along the mesas: Kearny Mesa, Sorrento Mesa and Sorrento Valley, the campuses around University City and Torrey Pines, the newer runs at Carmel Valley and Del Mar Heights, the older low-rise through Mission Valley. Much of it is one or two floor plates standing on its own parcel with its own surface lot. When the tenant of a building like that hands back the keys, the vacant unit is not part of the asset. It is the asset, and nothing about the property is partly in use.

That single structural fact moves the whole underwriting conversation. Inside a multi-tenant tower an unlet floor really is a monitoring problem: somebody is on site every morning whatever the leasing position, the alarm gets tested, a leak on nine is noticed by the people on eight. A standalone building between tenants starts with none of that. The fire alarm circuit, the sprinkler riser, the roof, the security arrangement and the grounds all stay the owner’s responsibility, and there is nobody arriving each day who would see an open door, a failed panel or water where it should not be. Markets ask about the attendance arrangement on this kind of building before they ask about almost anything else, precisely because it is the thing that most often has not been set up yet.

San Diego also removes a prompt that colder cities hand an owner for nothing. Across much of the country the weather itself forces somebody into an empty building — pipes to drain, heat to keep on, a freeze that makes the visit non-negotiable — and the inspection interval gets set by the season rather than by anyone’s intention. No season here does that. An office building on a mesa can stand unoccupied through an entire leasing cycle with nothing about the climate insisting that a single person walk it, so how often the building is attended, and by whom, becomes purely a question of what somebody wrote into a management agreement. That is a good thing to be able to produce on request and an awkward thing to invent afterwards.

Downtown is the counter-case and is worth separating rather than blending in. In the core — the Columbia District, the towers along Broadway, the blocks running back off the waterfront — the building carries services whatever its schedule says, and from the sidewalk it never looks unused. What is harder there is stating the position accurately: a floor still under lease to a tenant who quietly stopped using it, a sublet nobody has told you has gone dark, a suite held for an option that will not be exercised. The mesa building looks empty the day it is empty. The tower can be well short of full and give no outward sign of it at all. Both end at the same requirement — an occupancy position written down and kept current — and they arrive there from opposite directions.

Rooftop plant, and a fit-out that is not office at all

The improvement question on a San Diego office building is often not a question about offices. The northern mesas hold this region’s research inventory, and space originally delivered as ordinary suites has been taken over steadily for laboratory and research use — around Sorrento Valley and Sorrento Mesa, up through Torrey Pines and the University City campuses. That conversion is written in the lease as a tenant fit-out and it behaves like an alteration of the building: exhaust and make-up air, additional handling units on the roof, dedicated and standby power, floor loading for equipment that was never contemplated, chemical and gas storage, new penetrations through the deck and the roof membrane. A landlord can end up with a materially different building described on file by the same three words it carried before.

Ownership of that work is settled by the improvements-and-betterments clause, and it routinely does not follow whoever paid for it. The clause may vest the whole installation in the landlord as it goes in, which lands a value on the owner’s books that no valuation predating the work has ever taken account of. At the other end of the term a restoration clause may oblige the tenant to strip it back out and return an office shell, which means an owner can spend a term insuring equipment the lease has already promised will be removed. Neither clause is difficult to read. The difficulty is that they are read separately, years apart, by different people, and never once against the schedule of values.

The systems themselves are the other half of what an office landlord actually owns. Elevators, switchgear, chillers, air handlers, pumps and any standby generator belong to the building rather than to a tenant, and when one of them simply stops the failure is mechanical or electrical in nature, which is not the kind of event ordinary property coverage is there for — equipment breakdown coverage is the line built for that, and the income extension sitting under it is what reaches the rent. In a building carrying converted research space the point sharpens in both directions at once: the plant is working harder than the specification it was sized against, and the tenants depending on it are running processes that tolerate an outage badly. The landlord’s exposure is still the building and its income. The load on the plant is somebody else’s decision.

On an office property all of that plant lives outdoors. San Diego puts its mechanical equipment on the roof, and out along the coastal edge — the Torrey Pines bluffs, the University City side, the older buildings sitting nearest the water — marine air works on coils, fasteners, anchorage and panel enclosures without ever stopping. What that produces at underwriting is an evidence question rather than an argument about a claim: a market wants an age band for each major system and a note of what has been serviced or swapped, not an opinion about condition. Anchorage draws the same question, in a region where equipment standing on a roof is expected to be braced for ground movement. Neither is a hard question to answer. Both are hard to answer late, on a building whose service history was never assembled.

The building the City reads from the street

San Diego’s abandoned-property regime addresses itself to commercial premises that have gone out of use, and on this side of the market that is very often the entire asset rather than one part of it — a low building alone on its parcel, with its own lot and its own frontage, reading from the arterial exactly as the regime describes it on the morning after the last tenant moves out. What starts the process is not a date an owner can count down to and not a failure anyone has to commit. It is a finding the City arrives at concerning the premises, which means an active leasing campaign, a sign on the frontage and a broker working the market are all entirely invisible to it, and an owner’s first knowledge of the matter can arrive as a notice, with no warning stage standing in front of it. None of that touches the wording that decides whether a claim on the same building would be argued as a vacancy question, and the two will never move in step: California legislates that wording itself, so it is one text applied to a downtown tower and to an empty mesa campus alike, and it is not composed by whoever happens to be underwriting your portfolio this year.

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The lines that answer this exposure

Office space in San Diego sits out on the low mesa campuses at least as often as it sits in the downtown core, and it is the mesa building that leans hardest on the following:

• Business Income & Loss of Rents
• Commercial Property
• General Liability
• Commercial Umbrella
• Tenant Discrimination