Sharing personal tales of heartache and heroism, Bruce Rutherford, director of Jones Lang LaSalle's emergency response team, tells GlobeSt.com about his experience in the Gulf region in the days following Katrina's blow. "People cannot imagine the devastation; you can't appreciate how bad it is until you talk to someone and smell the dead animals and human bodies," Rutherford says at the start of the conversation. "One person described it to me as Armageddon."
Rutherford says JLL's response team worked quickly and effectively to support affected employees while monitoring clients' real estate assets. Drawing on the lessons learned from Sept. 11, JLL had disaster-relief systems in place, Rutherford says. And while companies may not be able to return to their damaged--and in some cases destroyed--buildings, many maintain plans to reoccupy the city.
"Ninety percent of our tenants are telling us that they are returning to their space; they have professional responsibility to the impacted areas," Rutherford says. "Government, major institutions like universities and hospitals--they have to return. Law firms, commercial law firms, companies that barge agricultural goods, commodities companies; they all have to return. We think New Orleans will be a smaller city, but still a vibrant commercial hub--it is such an important port to the world."
In a nine-page analysis, Jacques Gordon, global strategist, and Bill Maher, director of JLL's North America Investment Strategy division, report that while the direct impact of real estate markets outside the Gulf Coast states should be modest, the economic impact will indirectly influence all real estate sectors.
The report predicts that most immediate impact will be on consumer spending. Shopping center owners will feel little impact due to strong retailer balance sheets and favorable supply/demand conditions, but, smaller, in-line tenants should be watched carefully for any signs of sales stress. If discretionary spending on tourism and business travel dips, warns the report, hotel-room demand will fall.
Because overall warehouse demand is dependent on the retail sector, the growth in demand will be reduced by slower retail sales, states the analysis. The report goes on to say that higher gas and diesel prices will make rail shipping more attractive at the expense of trucking, which, combined with increased container use, rail-served warehouse locations will see increasing demand.
The report also questions if potential ripple effects will roil the credit markets sufficiently to increase credit spreads and tighten commercial real estate lending. "Given the over-heated real estate debt markets, we would view a modest degree of credit tightening as a healthy thing," the authors say. "But, investors who count on cheap debt or floating-rate debt to fund their purchases will need to watch the credit-market reaction carefully. The Fed's first priority--guarding against inflation--will nearly always trump other pressures, especially if they believe that the risk of recession is low."
The report concludes that because 150,000 properties have been damaged or destroyed and major highways and bridges will need rebuilding, it is safe to assume that the impact on materials costs will be felt throughout the US. The analysts believe that the rebuilding effort may crowd out the supply pipeline in other parts of the country as contractors and engineers are inundated with work. "From an investor's perspective, this could have a positive impact on some of the regional markets where supply has been getting ahead of demand, particularly in the multifamily and warehouse sectors," the report states.
So what's next for the Big Easy? Rutherford wages a fortunate roll of the dice. "We think hospitality and gaming will be a bigger part in future," he says. "I think there will be a lot of shrewd risk takers investing in New Orleans taking chances that institutional investors maybe just can't take anymore. Those investors will come in and restore it, and real estate will be more landlord-favorable than before storm."
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