With ever-increasing values for disasters, it’s important to note the effect that will have on commercial real estate market investment and growth. Real estate investment may no longer be just about the next hot neighborhood, it may also now be about the next dry neighborhood.
Investing in Storm Risk Areas
Investors considering making major purchases in markets in the immediate wake of a natural disaster need to make sure they understand the long-term ramifications of potential property damage. As always, careful consideration, due diligence, and the right education will make all the difference – and facilitate your understanding of why commercial sales value might or might not increase following a storm. Not only do people seem to have short-lived memories when it comes to areas with storm damage, but investors know that coastal areas are high return market. And if prices drop before a storm, it might be an opportune time to invest.
Last year was the costliest on record, with 219 weather disasters causing $1.5 trillion in damages, according to the National Centers for Environmental Information. Sixteen weather events exceeded $1B in damages, tying 2011 for the record in billion-dollar disasters and surpassing the previous record year which was 2005. Hurricanes Katrina, Rita and Wilma helped propel that year to a combined total of $215 billion in losses.
Despite these record-breaking numbers, investors continue to invest in risky coastal real estate, because so far property’s profitability has been worth it. But as the damage toll goes up, the safety net of insurance may be pulled back and the risky CRE investments may no longer be worth the gamble.
With storms in recent years causing more damage than ever, we were curious just how easily these markets jump back. The cost of damages will keep going up for sought-after coastal properties. In the next 15 years, higher sea levels, along with storm surge, will increase the cost of coastal storms from $1.5B to $3.5B, according to a Risky Business report. Add this to the increased severity of hurricanes, and the annual price tag for damages is expected to reach $35B each year.
As a CRE professional, it’s important to consider whether mega-disasters are the new normal, and the long-term impact they will have on markets that were once thought to be impervious to the effect of natural disasters. Will markets rebound from natural disasters that are doing two or three times as much damage as they used to?
Are people basing real estate decisions on climate change?
Even though 97% of public REITs identified natural disasters as a business concern in a recent report from accounting and consultant firm BDO, none have left a specific area due to a disaster, according to BDO partner and national leader of real estate and construction practice Stuart Eisenberg.
The long-term benefits of being in popular areas are often worth the deductibles paid out after a disaster. A prime coastal area would have to be completely destroyed and uninhabitable for investors to consider leaving a location. The pull to have a piece of profitable real estate remains strong and many soon forget the destruction storms can cause, or, are aware of the potential damage and carry the risk.
Many people are under the impression that post a major storm, property values plummet, and owners are out of luck if looking to sell. But this isn’t necessarily the case – there are plentiful opportunities for investors to swoop in and increase property values, especially those with knowledge of the area and knowledge of post-disaster investing strategy.
We took a look at past sales data in Reonomy to identify changes in areas significantly impacted by storms. While each market is unique, it does seem to hold that the number of sales and values are rarely changed long term because of storm risk, though the immediate impact of a storm does tend to deter sales growth in the year after damage.
New Orleans, LA
Post-hurricane Katrina (August 2005)
Hurricane Katrina has caused the most damage of any storm in the U.S. to date. When the waves and storm surge hit the coastline, the structures along the coast in Mississippi were completely destroyed and further inland experienced catastrophic flooding. Katrina is the costliest U.S hurricane, with estimated damage over $81 billion and costs over $160 billion. Property damage was estimated at $125 billion, making it roughly 4x the cost of the damage incurred by Hurricane Harvey or Hurricane Andrew.
Average sale amount for commercial properties in New Orleans spiked in 2008, despite a huge general downturn in the market. The downturn in average sales amount was seen only in 2006 – the year following the hurricane. After initial damages, sales rose quickly and to a higher average than in the past.
Key Largo, FL
Hurricane Andrew (August 1992)
Andrew was the strongest in decades and the costliest hurricane to make landfall anywhere in the United States until it was surpassed by Katrina in 2005. In Florida, Andrew killed 44 and left a record $25 billion in damage. The storm damaged or destroyed 82,000 businesses, 32,900 acres of farmland, 31 public schools, 59 health facilities/hospitals, 9,500 traffic signals, 3,300 mi (5,300 km) of power lines, and 3,000 water mains.
Hurricane Andrew’s average sales followed a similar trend to Katrina. There was a large average sales price spike in 1994, 2 years after the storm hit Key Largo. The median sale price also saw a sharp increase in 1994.
Port Charlotte, FL
Hurricane Charley (August 2004)
Hurricane Charley caused major damage to south florida, with over $14.6 billion in property damage on the south-west peninsula of Florida alone.
Peak number of sales and growth after the hurricane in 2005. This differs from Katrina and Andrew in the speed of continued growth. Though the storm caused damage, investors did not cease purchasing property in the area. The number of sales and median sales price both increased dramatically in the few years following the hurricane, though the area was deeply affected by the market crash just a few years later.
Keansburg and Seaside Heights, NJ
Hurricane Sandy (October 2012)
Damage in the state of New Jersey from Hurricane Sandy was estimated at $36.8 billion.
The average sale price in these two coastal areas of New Jersey followed similar trends post Hurricane Sandy. There was an immediate downturn in sales in the year post, and sales rose again in 2014. However, they did not rise as drastically. This could be because of the perceived unlikelihood of another storm hitting. Hurricane Sandy was somewhat of a wild-card storm wise, being in October and hitting land so far North. But what coastal area investors may need to factor into planning is the continued likelihood of outlier storms.
Hurricane Ivan (September 2004)
Though Hurricane Ivan caused over $20.5 billion in damages, there was little seen effect on commercial investments into the Pensacola area, doing so much damage that some roads in the area were not opened for an entire year after the storm hit. While the number of sales and median sale price had a minor plateau, it did not stop the growth and average sales amount and median sale spiked in 2006 – 2 years following the hurricane.
While investors seem to be hopping on opportunities to purchase properties post-storm, average prices have a trend of skyrocketing 2 years after a storm. So while a storm may seem like a good time to invest, there is a lot of risk taken on in areas with high natural disaster areas of development, and there is little effect on the valuation of properties in areas, even after a large amount of damage has occurred. It seems that for many investors, the benefits of seaside properties do greatly outweigh the risk.