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The hurricane effect: How extreme weather impacts CRE

Oct 11, 2017

hurricane-harvey-320x252.jpgIt’s been a hurricane season unlike any other, with four major storms hitting U.S. shores within weeks of each other: first Harvey, then Irma, Maria, and Nate. In the calm between the lashing wind and rain, we’re stopping to ask: What exactly does this all mean for CRE?

Today, we’re taking stock of the impact these storms have had on commercial real estate in three affected regions. Here’s where things stand:

Hurricane Harvey

Hurricane Harvey brought devastating winds and floods to Houston, but the CRE industry should note some important trends. Here’s what’s happening on the ground.

Office properties have mostly been spared (and opportunities may have been created).

CBRE has been busy crunching the numbers, recently putting out a report on Hurricane Harvey’s impact on the CRE market nationally and locally. They estimate that only about 40 commercial office buildings (out of 1,200) sustained any damage, which was mostly limited to lobbies and parking decks.

In a GlobeSt.com interview, Jack Russo of JLL reflected on some of the opportunities brought in by the storm: “If you are a landlord with a big block of vacancy, and you can accommodate one of the many large short-term requirements now in the market, this is an opportunity to secure a great tenant, go above and beyond to take care of them in a time of need, and give them the confidence to stay long term."

Industrial real estate occupancy is set to rise.

Most of Houston’s industrial real estate made it through the hurricane with very little major damage, CBRE reports.

In fact, building and construction supply companies, charities, and consumer goods distributors are set to benefit from the $100+ billion initiative to build back storm-damaged parts of Houston. For this, they’ll need extra industrial space to store supplies. Industrial space should also get a boost from a rise in retail activity as consumers begin replacing damaged household belongings and vehicles.

Retail will be in demand, but availability will be tight.

Expect to see rising demand for retail space. While some retail tenants seek out temporary space due to flooding, others will be looking to expand as demand for things like household goods, furniture, and other supplies goes up.

They’re going to need help finding space, however: according to CBRE, Houston’s already high retail occupancy rates (97%) will mean there’s very little room for movement. On the other hand, occupancy could slide if owners are ultimately unable to return to storm-damaged businesses.

Multifamily is primed for opportunity.

As CBRE reports, the multifamily sector sustained the most damage in the storm, with one in six multifamily units sustaining flood damage. This means that unscathed residences will be in hot demand as displaced renters and homeowners seek out new accommodations.

Camden Property Trust, for example, has already reported a “total transformation” in its multifamily business following Harvey. As CBRE predicted, it’s seeing an influx of renters whose homes have been damaged in the storm, and in the span of two and a half weeks, the company has rented a total of 500 new apartments (compared to 170 new apartments between January and August).

Hotel demand is increasing.

Four other major storms—Katrina, Sandy, Ike, and Andrew—increased hotel demand by 10-40% in their aftermath. We can expect a similar increase with Harvey, as the government fills Houston’s hotels with thousands of emergency workers, displaced residents look for temporary accommodation, and construction companies book rooms for workers coming to help with the rebuilding effort.

However, supply could slow as some hotels close for post-hurricane repairs and the 5,000 rooms planned for construction are put on hold as other priorities, like rebuilding efforts, take precedence.

Hurricane Irma

According to the World Property Journal, Florida’s commercial real estate market (with the exception of the Florida Keys and parts of Jacksonville) has emerged relatively unscathed, with CBRE reporting minimal disruptions like brief power outages, minor leaks, and downed branches as a result of the storm.

Florida benefited partly from luck and partly from smart planning based on previous storm damage. However, there is still a recovery effort to mount. According to CBRE’s Head of Research, Spencer Levy, said, “Florida’s recovery effort will take time, and short-term disruptions are to be expected. But, overall, Florida’s resilient economy and globally renowned tourism industry will help the state recover strongly."

The state lost no time getting back to business after the storm. One week after Irma, only 7% of the state was still experiencing power outages (compared to 59% just a day after the storm). While all major ports were closed a day after the storm, only 1 out of 9 remained closed a week later. And all 13 airports were operational again within three days.

Levy predicts that—much like in Houston—demand for multifamily and industrial space will increase with the recovery effort. Additionally, CBRE foresees a boost in some retail categories (especially fuel, food, and supplies), as well as an uptick in demand for multifamily properties, for many of the same reasons as in Houston.

CBRE also predicts that in the short term, hotel demand may go up by 15% on average as displaced homeowners, construction workers, and aid workers fill available rooms. But this boost may not be long-lasting: in the long term, tourism may suffer if people become hesitant to visit areas vulnerable to hurricanes.

Hurricane Maria

Hurricane Maria ripped through Puerto Rico just as the U.S. was grappling with the aftermath of Harvey and Irma. Unfortunately, this hurricane had a far more devastating impact on Puerto Rico than the previous storms had on the comparatively lucky Florida and Texas.

Today, people on the island still don’t have reliable access to electricity, cell phone signal, or running water. And we still don’t have an assessment of the full extent of the damage—let alone the impact this hurricane will ultimately have on commercial real estate properties on the island.

Puerto Rico’s recovery will take months or even years, and investors who bought up bargain property there during the economic slump are now taking a significant financial hit. Longer-term, more damage may be inflicted by residents who opt to leave if the recovery effort drags on too long—and a declining population would have a negative impact on CRE at every level.

What’s next?

Storms like these could well become more frequent and more intense, which means the CRE industry will have to plan for climate resilience.

But brokers in hurricane-prone regions should take a lesson from these recent storms, paying particular attention to opportunities where their help might be needed should a hurricane hit their market in the future. Whether it’s helping retailers find new space or supporting an expanding industrial sector, brokers can make a valuable contribution to a city's recovery efforts.

How have the recent storms impacted your business, and how are you helping your community recover? We’d love to hear about it in the comments section.

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Topics: Industry News

Irena Ashcraft

Written by Irena Ashcraft

Irena is a freelance writer who works with innovators, educators, explorers, and changemakers. From brave nonprofits to frontier-straddling startups, she helps clients connect with their biggest fans through writing that's fresh, relatable, and fun.

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