Aug 20

What Did Houston CRE Learn From Hurricane Harvey? Industry Leaders Speak One Year Later

Nearly a year ago, Hurricane Harvey devastated Houston-area residents with historic flooding.

Houston Strong, the city’s rallying cry for recovery efforts, held true through the year since Harvey hit Texan land on Aug. 26, 2017. The city quickly returned to normal in a number of ways as government officials, business leaders, landlords and tenants resiliently worked together to answer the community’s needs.

Since the storm, lawmakers have passed new flood plain regulations to reduce flooding and requested public approval for a $2.5B bond to fund flood-control projects.

Bisnow reached out to industry leaders and asked them three questions about Harvey’s impact and lessons learned. Most experts concluded that CRE assets proved their relative safety — bounding back quickly after the storm or staying dry throughout — but residential property is still suffering.

How has Houston rebounded from Hurricane Harvey?

Colliers International President Patrick Duffy: “On the commercial real estate side of the market, Harvey has become just a bad memory. Very few commercial assets (vs. residential) actually experienced significant flood damage and with the exception of the assets that took over two to three feet of water, all are back online. As a percentage of the overall commercial property inventory, less than 3% of the commercial real estate footprint had flooding issues.

The multifamily residential (apartment and condo) market actually benefited from the dislocated families, and occupancy levels moved from below market average back to a stabilized normal. As families are slowly moving back into their repaired or rebuilt houses, population growth seems to be allowing the multifamily market to maintain occupancy. Inventory delivery had slowed substantially in 2016 and 2017 with minor acceleration in 2018 keeping the supply side in check.”

Finial Group President and CEO Keith Bilski: “While the flooding was devastating to many people personally and some commercial properties were impacted, the market returned to normal at an astonishingly quick pace. Now a year later, nearly all affected assets have returned to normal and there is little to no discussion of Harvey any longer.”

Wilson Cribbs + Goren co-founder Abe Goren: “These past two months, I personally have been busier handling purchases and sales of commercial real estate properties than I have been in recent history. Additionally, most of my colleagues at Wilson, Cribbs + Goren have experienced a similar increase in their workload.”

HFF Senior Managing Director Todd Marix: “What I recall from assessments 30 days after the storm was a prevailing idea that the boost in apartment leasing as a result of people displaced out of flooded single-family and multifamily were going to speed up the recovery of depressed apartment rent by six months.

Most of the leasing that occurred after the storm was concession-free, so if a project in lease-up at the time was offering two months free, they could (and did) complete their lease-up without any concession, a difference of 16% higher rent.

Now that we are a year after the storm, the most positively affected submarkets — Katy and Bear Creek/Energy Corridor — are today facing higher turnover as Harvey residents return to their homes and damaged apartment projects are repaired and have to lease-up all over again. The combination of these forces have put downward pressure on rents in those submarkets and concessions have returned.”

Weitzman Senior Vice President Kyle Knight: “We like to say ‘Houston strong,’ and we showed it’s more than a slogan with the really strong rebound from Harvey’s devastating flooding. We know there is more work to be done, but we are up to the task.”

Lee & Associates principal Josh Cheatham: “As someone whose home flooded, I certainly felt the impact of Hurricane Harvey. I have been fortunate enough to get back in my home, but I know neighbors, businesses and commercial real estate owners still dealing with renovations and the overall loss the storm caused. I recently read an article indicating one in five multifamily developments that flooded during the storm are still not fully repaired. Although people continue to struggle with the aftermath, I believe great strides have been made over the past year. Houston is a strong and resilient community that will come out ahead in the long run.”

JLL Senior Vice President and Director of Research Eli Gilbert: “Despite residential property damage on a scale never before seen, much of the Houston commercial real estate market emerged relatively unscathed from Hurricane Harvey. Buildings that sustained damage by-and-large recovered quickly.”

 

What did the storm reveal about Houston’s CRE market?

 

Colliers International President Patrick Duffy: “Despite what feels like more frequent and in Harvey’s case, more intense flooding events in Houston vs. the historical averages, the vast majority of CRE product in Houston is not prone to flooding. Other than disruptions to transportation and employees lives, we return to business as usual very quickly.

The professional management teams and ownership in Houston responded very quickly to bring their properties back online and mitigate the issues for their tenants. There are a few buildings which have been hit by the lesser floods in previous years that Harvey hit very hard. Those buildings have lost tenants and will be faced with redevelopment requirements to make them viable options for tenants going forward.”

HFF Senior Managing Director Todd Marix: “The apartment market will recover naturally, it just may take a little more time in the Harvey-affected submarkets. The return of meaningful job growth (June ’17 to June ’18) of approximately 94,000 coupled with a declining pipeline of new construction will result in positive absorption that will allow owners/operators to pull back on concessions as the market firms.”

Lee & Associates Principal Josh Cheatham: “The extensive amount of [office] sublease space on the market turned out to be a blessing in disguise for many businesses affected by the storm. Several of these spaces were plug-and-play operational and provided tenants with short-term lease options while they dealt with locations being shut down or severely impacted by the storm. The short-term space needs of multiple tenants around town also provided a boost to the growing coworking office space environment. Companies like TechSpace and WeWork experienced a surge in occupancy after the storm.”

 

What are the major lessons the CRE Industry learned as a result of Harvey?

 

Colliers International President Patrick Duffy: “The new flood code for Houston and Harris County requiring elevations of two feet over the 500-year flood plain, which will be reset based on new assumptions, will demand more aggressive detention and retention and significant fill or pedestal designs to new development. The new code makes grade assets like retail and industrial either an engineering impossibility or cost prohibitive. Office and multifamily can design on a pedestal with under-building parking and will not be as affected. This dynamic will have a significant impact on sites in or under the 500-year flood plain.

Industrial and retail product types have the best occupancy levels in the Houston [metropolitan statistical area] and for many sites were the logical use of the land. The office market for most submarkets has a historically high vacancy coming off of the oil crash, so land for office development will be in less demand in the near term.”

Lee & Associates principal Josh Cheatham: “In today’s high-paced global economy, most businesses cannot afford to be down five minutes, much less five days. I believe it is imperative all businesses and property owners in the Houston area have a detailed disaster recovery plan in place to prepare for natural disasters and minimize downtime.”

Finial Group President and CEO Keith Bilski: “Harvey was an extreme example of flooding that isn’t likely to occur again but regardless, buyers and lenders are now much more cautious about properties that are in or are near a flood zone. The traditional thought was that even if a property is in the 500-year flood plain flooding is unlikely with a 0.2% chance of flooding. With Harvey being the third ‘500-year flood’ in the last three years, buyers and lenders have become much more cautious about anything near a flood zone and understand the probability of future issues may be much higher than previously thought. Property in flood-prone areas is going to be tougher to sell [and] finance, and will likely trade at a discount relative to what it would have pre-Harvey.

Separately, drainage and detention requirements along with site elevation requirements are all going to become tighter in the years to come. These new requirements are increasing replacement costs of assets. Properties that were unscathed by flooding in Harvey have proven to remain dry even in an extreme case so with replacement cost going up, they are going to experience a sharper increase in value in the coming years.”

HFF Senior Managing Director Todd Marix: “What I thought then (a year ago) is what I think now: if there is a silver lining in all of what Houston endured during Harvey, it is that the resolve that Houston demonstrated as a community and the ability to rally and support each other in a time of need was a cool thing to witness.”

Baker Katz principal Jason Baker: “Flood insurance! If you hadn’t thought about it before August 2017, you definitely have now. I would love to see the stats to know just how many people have since purchased the relatively inexpensive coverage. Now, most owners are looking more carefully at casualty provisions within their tenant leases.”

 

Tierra Smith

BisNow – Read the Original Article HERE