With relief efforts under way in areas ravaged by Hurricanes Harvey and Irma, analysts are now beginning to assess the broader questions of how the back-to-back natural disasters could potentially affect U.S. economic growth, the nearterm impact of the thousands of residents and tenants displaced by the storms, and how the threat of future storms may affect investor appetite for coastline property in areas with elevated exposure to destructive tropical cyclones. 

The losses are expected to be staggering. The death toll for Hurricane Irma, which caused historic destruction across Florida, stood at 81 early Thursday, with nearly 7 million Florida residents without power, while the death toll for Harvey rose to over 40 people this week. If there’s a silver lining for the Houston economy and CRE market, it’s the unintended consequence that certain sectors of Houston’s commercial real estate market may see upside as residents, relief and construction personnel, scramble for undamaged spaces to live and work. 

About 38% of the Houston metro’s gross leasable area is located in a flood plain, based on a CoStar analysis of NASA satellite images, FEMA flood plain maps, aerial images from CoStar’s research airplane and information from individual property owners obtained by CoStar research and market analysts. All told, about 200 million square feet of properties were impacted by water as of Aug. 29, the first day of sun following the storm. 

Meanwhile, Houston CRE professionals continue to work with relief and restoration personnel to pick up after the devastating storm that dumped 24 trillion gallons of water on the 700-square-mile Houston metro. There are early signs of the continuing resilience of Houston’s commercial real estate market, hard hit for the last few years by the oil bust and exodus or consolidation of energy companies. 

Lincoln Property Co. and H.I.G. Realty Partners, acquired Greenspoint Plaza, a portfolio of six office buildings and three retail centers from Northwestern Mutual Life Insurance Co., in a deal that closed just a couple of days before Harvey reached hurricane status. Lincoln Property Senior Vice President Kevin Wyatt, who is acting as the leasing agent for the Greenspoint portfolio, which was not damaged by the storm, said he still believes in the upside of the Houston market. 

“I don’t think people have a really good handle on how badly affected this city has been. It’s an open wound here,” Wyatt tells CoStar. 

Despite the extent of the destruction, Wyatt said he has been amazed by the strength and resolve of the people of Houston. 

“The teamwork is unbelievable. We had Lincoln Property engineers launching boats out of monster trucks, driving through the water pulling people out of flooded homes,” Wyatt said. 

Jim Black, SIOR, senior vice president with Houston-based Caldwell Companies, said the hit to overall productivity will be one of the biggest impacts in Houston. 

“Those people who have been displaced were also Houston’s workers. Our company divided into teams and every seventh day, they’re going out and doing cleanup and other volunteer work,” Black said. “There’s a disruption in this city and there will be for quite some time. I don’t know of any business or person who work for a company that doesn’t have some impact.” 

CoStar Aerial Survey of Harvey Damage.
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As for the short-term real estate impact, construction is going to be a booming market in the wake of Harvey for both residents and businesses, and office tenants will likely seek to take space in undamaged buildings. 

“Between government regulations and shortages of labor and materials, we’re likely to see construction costs escalate substantially across all sectors, both residential and commercial,” Black said. “In Houston we may get a double whammy, with some the same materials and labor being needed in Florida. Costs are going to go up.” 

Wyatt said among CRE professionals and other companies, “it’s largely back to business here.” 

“We’ve talked to many tenants who were looking for plug-and-play space. Most of them decided that rather than move for 60 or 90 days to get their building dried out and back online, they’ll find alternative ways to office, probably in some cases out of their homes.” 

Irma Damage Extensive but Less Than First Feared

Although Irma’s storm surge proved incredibly destructive across much of Florida, it could have been much worse if initial projections on the storm’s path had held, Moody’s Analytics reported. 

Jacksonville, FL, and Charleston, SC, were not in the hurricane’s direct path, however, both were caught in Irma’s storm surge, resulting in higher-than-expected property damage there, according to Moody’s. However, overall the level of damage on CRE property wrought by Irma is significantly milder than it was in Houston and southeast Texas, Moody Chief Economist Mark Zandi said. 

“While smaller restaurants and shops suffered severe damage in areas like Key West, their price tag is relatively modest compared with CRE holdings elsewhere in Florida,” Zandi said. “The industrial and office markets emerged largely unscathed, and damage to the large Miami multifamily market was minimal.” 

Meanwhile, analysts are in the process of evaluating how CRE investors may react to the turmoil in Texas and Florida markets. A preliminary estimate by Moody’s projects the economic cost of Hurricane Irma to be between $64 billion and $92 billion. Combined with the $108 billion in estimated damages from Harvey, the $150 billion to $200 billion economic hit from the two storms could eclipse Katrina, the costliest natural disaster in U.S. history to date with $160 billion in damages. 

Economists from Goldman Sachs, Moody’s and other firms cut their estimates for third-quarter GDP growth by up to 0.8% as a result of Harvey and Irma. 

“A temporary slowdown in areas severely impacted by Hurricanes Harvey and Irma, geopolitical tensions abroad and any minor correction in the financial markets could temporarily knock the economy slightly off course in coming months,” noted Lawrence Yun, chief economist with the National Association of Realtors. 

While past natural disasters have tended to produce a short-term bump in capitalization rates, they reverted to the norm over the longer term, suggesting that CRE investors tend to play down national disasters in making investment decisions, said Suzanne Mulvee, CoStar director of U.S. retail research, who along with managing consultant Paul Leonard delivered a recent report on Harvey’s impact on commercial property markets. 

However, Mulvee added, the impact from the consecutive storms could change things. 

“Two storms back to back with potentially record-setting damages could change investor appetites for districts within these markets, depending on their location with a flood plain,” said Mulvee. “We’re reserving analysis until we know more about the Irma impact.” 

According to CoStar estimates, about 610 million square feet of commercial property valued about $75 billion in value is within the observed Houston flood plain and water inundation areas. Retail property makes up the largest amount by value at more than $26 billion, followed by multifamily at nearly $18.5 billion. 

The high percentage of Houston CRE properties located within the flood plains will create a dynamic investment climate as investors determine whether to remediate or sell properties, providing some unique value-add opportunities for buyers, Marcus & Millichap said in a special report on the hurricane. Long term, Houston’s economic growth and strong demographics bode well for investors, M&M said. 

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Apartment properties in Westchase district before Hurricane Harvey. source: Google Maps 

CoStar Research aerial footage of same site on Sept. 8 after flooding from Harvey. 

Nearly all of the Houston metro’s office buildings escaped the worst flooding, with fewer than 40 office buildings totaling 9 million square feet of the market’s 1,200-building, 214 million square feet of inventory sustaining some level of damage, mostly to lobbies and parking garages, according to a report by CBRE. Most of the damaged office buildings are in four areas to the west and northwest of the CBD, including West Houston, Allen Parkway, West Loop/Galleria and FM 1960/Highway 249. The submarkets comprise about 35% of the Houston’s total office stock, with an occupancy rate of 84% occupied at the end of the second quarter. 

Displaced tenants are already actively searching for turn-key temporary space, with many expected to return to their original locations as soon as next month. With more than 11 million square feet of available sublease space in Houston at midyear, displaced tenants will have plenty of options to sign very short-term leases while their buildings are repaired or they seek more permanent quarters elsewhere, resulting in a decline in sublease availability in the third quarter, CBRE said. 

“The flooded buildings aren’t going away, but you’re going to have tenants that are a lot more aware of flood issues and will not be going back to buildings built on or near the bayous that flooded, or had major access issues,” Wyatt said. “They may go back to fulfil their lease, but eventually they’re going to move to a building that’s immune from flooding.” 

Houston Industrial, Retail Requirements Expected to Rise

Relatively few buildings in Houston’s largest industrial hub, Inner Northwest and North/Northeast, sustained major damage. Most of the damaged properties were older warehouse stock near the bayous. At the same time, construction materials companies are negotiating for warehouse to supply the rebuilding effort that is expected to exceed $100 billion over the next year. 

CBRE forecasts a spike in requirements by suppliers, charities and consumer goods distributors for nearly all sizes of industrial properties as a result of the massive reconstruction effort, which includes an estimated 100,000 damaged and destroyed homes. 

Hurricane damage to retail properties was limited mainly to neighborhood and strip centers in the hardest hit areas. In fact, the main barrier to Houston’s higher-quality retail market is limited availability. The Class A retail occupancy rate was a record 97% in the second quarter, and displaced store tenants are having a tough time sourcing temporary space.

Multifamily Bears Brunt of Storm Damage

By far the majority of the flood damage was sustained by single-family homes in suburbs to the northeast, west and southwest of downtown Houston. However, an estimated 105,000 apartments were damaged, as many as one out of every six multifamily units, according to figures supplied by the Houston Apartment Association. 
A few submarkets sustained damage to much as 30% of stock, generating immediate demand for rentals. 

The storm hit some submarkets harder than others. Overall, the amount of potentially damaged space in the CBD district is less than 1% of total inventory. The Galleria, Westchase Plaza and Greenbay markets suffered little if any significant damage. 

However, properties within a quarter mile of the 100-year or 500-year flood plain, particularly the Buffalo and Brays bayous and the Barker and Addick’s reservoirs, including many buildings in the Energy Corridor/Katy Freeway West district, the metro’s second-largest submarket with 20 million square feet, were heavily impacted. 

Flooding was contained largely to properties within a quarter mile of a 100-year or 500-year flood plain, particularly Buffalo and Brays bayous. The Barker and Addick’s reservoirs are located in the heart of where submarkets in the southwest part of the metro like Sugarland and Southwest Beltway were severely impacted. 

Apartment units for rent in properties unscathed by flooding in west, northwest and northeast Houston will see sharp occupancy increases by the end of this month, CBRE said. Concessions and move-in specials common in the apartment market since 2016 are expected to evaporate faster than the flood waters. 

Hotels throughout the metros should see a rise in occupancy, from displaced residents as well as relief agencies and reconstruction personnel. FEMA is already housing 53,000 people in government-funded hotel rooms. 

Relatively few of Houston’s 868 hotels suffered damage. Based on data from four previous disasters, including Hurricanes Katrina, Ike and Andrew and Superstorm Sandy, hotel demand rose by 10% to 40% in the surrounding markets in the month after each event, according to CBRE. 

Growth rates by market will vary, with Texas cities such as Austin, San Antonio and Dallas-Ft. Worth possibly seeing heightened demand meetings and conventions originally booked for Houston are relocated. Based on history, hotels in the five major Texas markets could generate an additional 3.4 million room nights of demand and roughly $430 million in additional revenue. 

Hotel projects under construction or in the pipeline could feel the pinch of the tight market for labor and materials. Houston had more than 5,000 rooms under construction prior to the storm, and many of the projects are expected to be delayed.


By Randyl Drummer

September 14, 2017

Irma Image – Getty