You may have more options to manage costs than you think.
a tightened fist gripping money

© Roc Canals / Moment / Getty Images

As a long-time resident of southern Louisiana, Matt Ritchie has seen extreme hurricane damage up close. But he never expected the financial wallop he took from a hurricane in 2020. A hotel he owned lost electricity for a day—not a huge deal, he says. But when the electricity and sump pump were restored, sewage backed up into 10 of the hotel’s first-floor rooms. He immediately contacted his insurance company and was stunned to learn his policy didn’t cover the damage. In another incident later that same year, at a multifamily complex Ritchie manages, a resident’s pet bit another resident. The incident ended in a lawsuit against the complex. He contacted his insurer, who told him his policy didn’t cover animal-related claims.

“I wouldn’t have anticipated the two incidents that happened to me,” says Ritchie, CCIM, president and broker at Ritchie Real Estate in Alexandria, La. “I couldn’t have made it up.”

The consequences mounted as his insurance costs rose 100% between 2021 and 2022 and 100% between 2022 and 2023, he says. His insurer changed his coverage from replacement value to actual cash value, and his deductible from $5,000 to $25,000. Those expenses took a toll on his operating costs, which spiked by 30%.

Today, stories like Ritchie’s are not rare. On top of insurance increases, property managers are facing escalating property taxes, utilities and labor costs. As a result managers are closely monitoring costs, bidding out contract work and negotiating where possible to find savings.

Insurance Changes Are Off the Charts

Commercial property premiums in the first quarter of 2023 jumped an average of 20.4%, the first time an increase exceeded 20% since 2001, according to the Council of Insurance Agents & Brokers. That period also marked the 22nd straight quarter of overall premium increases, at 8.8%, according to Insurance Journal.

Ritchie’s insurance brokers told him natural disasters are driving the increases, which are widespread. “Every part of the country has its own natural disaster—whether it’s tornadoes or fires or something else,” he says.

Sometimes a disaster can even affect insurance rates in a different location. “We’re really feeling the pain from the spillover from the California wildfires and the fires in the Northwest,” says O. Randall Woodbury, cpm, vice chairman of Woodbury Corp. in Salt Lake City. “To some extent, you get a surcharge if you’re in a loss-heavy area. But even if you’re not, you’re paying part of the freight for losses wherever the trauma has been.”

Commercial property managers are coping with broad insurance changes, including:

  • Exclusions:
    “Read your exclusions in the policy,” Ritchie says. “They’re in fine print, usually on about the fourth or fifth page. I’ve learned you can try to negotiate those. If you say, ‘I want coverage for this particular issue,’ [the insurer] may create a premium that you pay for.”
  • Declining competition:
    Insurers are pulling out of some states, including Louisiana, limiting competition and enabling those that stay to hike their rates, Ritchie says. In a tough insurance market like this one, options that might not have been on the table now include catastrophic coverage with a very high deductible or, if a mortgage isn’t involved, self-insurance, he adds.
  • Higher premiums, deductibles and risk:
    “It’s not just that the coverages are being watered down, but we’re finding the only way to keep premiums in check is to absorb more of the risk,” says Woodbury. “Some negotiations have been, ‘Oh, my gosh. You’re asking for this increase? How much would you trim that if we agree to pay a higher deductible?’”
  • Lender requirements:
    “Lenders are paying a lot more attention to the coverage you have and the types of coverages that are on their shopping list of coverage you have to carry,” Woodbury says.

Scrutinize Property Tax Assessments

Property tax is another rising cost, says Woodbury, whose company operates in 16 states.

“You have to be vigilant about how your property is being assessed compared to comparable properties. We’re going to be looking really hard at assessments on any office buildings this next year. We know there’s going to be a huge drop in values, so we’ve got to stay on top of whether the counties are acknowledging that.”

Ritchie suggests filing a tax appeal based on new net operating income. Explain that revenues are down, operating expenses are up, and the building doesn’t generate the net operating income it used to. Therefore, the property is really actually worth a new, lower amount.

Our labor costs have increased 25% to 30% in the last two years. The only way to cut costs is to cut services.”

-Matt Richie

Utilities Power Up Increases

“Utilities absolutely are a pain point,” Ritchie says. He suggests making changes on the properties to help over the long term, such as converting lighting fixtures to LEDs, using more energy-efficient HVAC systems and conserving water. “Consume less and you’ll pay less,” he says. “You can let tenants know you’re going to run the utilities at 70 degrees from 8 a.m. sharp to 5 p.m. sharp. Tell them, ‘If you stay after, we’re going to bill you back.’”

Work to Reduce Labor Costs

Service companies, such as janitorial and landscaping businesses, are fighting to get and keep good people by paying them more, Woodbury says. “And those increases in labor costs trickle through.” 

“Our labor costs have increased 25% to 30% in the last two years,” says Ritchie. “The only way to cut costs is to cut services. For janitorial services, instead of doing five days a week, we may be doing three.”

Will Curtis, CCIM, CPM, commercial managing director at Phyllis Browning Co. in San Antonio, has reduced labor costs by hiring an employee with a specific skill set. “[The employee] was licensed and savvy on HVAC and could do a lot of the work. We brought him in-house, and it saved us a significant amount of work on HVAC repairs because we didn’t have to go out to that third-party contractor.”

More Solutions to Manage Operating Costs

Property managers can use options like these on an ongoing basis:

  • Rebid services regularly:
    “Nobody wants to re-shop every service and rebid it every year,” Woodbury says. “And there’s value in long-term relationships with your service providers. At the same time, you can be asleep at the switch about a contract price being too high. One area to watch for is trash removal.”
  • Focus on sustainability and upgrades:
    Curtis advocates sustainability. “You can add it with initial repairs and maintenance that are coming through or invest in something that will pay off over time. You could have a leaky flush valve on a toilet, and instead of going back to what you had, choose something that uses less water.”
  • Survey tenants about amenities:
    Ritchie recommends surveying tenants to find out which amenities they value. “The property manager can tell the tenant, ‘I can either pass the cost for this through to you, or we can cut it out. What’s more important to you?’ If the majority of the building doesn’t care or want to pay for it, why pay for it?”

When managing operating costs, be vigilant. Have discussions with service providers, property insurers and property tax assessors. Woodbury advises, “Look for ways you can streamline or change something about the service to get more value from the dollar.”


About Create

Create is a quarterly publication for commercial practitioners, members of the National Association of REALTORS® and commercial real estate industry leaders. Members can subscribe by updating your member profile information to include commercial interests in the "Field of Business" list.

Update your Field of Business in your member profile.