The storms are going to have huge impacts on CRE in Florida and Houston, but the economy as a whole will get through this and then Q4 will actually be up based on all the rebuilding. Q3 was on track for another 3% GDP growth, so the impact of the storms will not crush it. Katrina, which was the most expensive, was only .86% of GDP. Harvey will hit Q3 GDP by only .3% and Irma maybe .5% so we should still see better than 2% GDP in Q3 and Q4 may be slightly up due to all the expenditure for rebuilding and all the government spend. Houston will very likely come back faster than Florida since it is just flooding and most CRE of substantial size is high rise. So long as power is restored to buildings then office and shopping centers should be able to be back open and operating fairly soon. Florida will be different.
It appears Miami and Ft Lauderdale will not sustain the level of damage first expected, so commercial properties in those locations, which are newer and built to withstand these storms, should be Ok and back in operation quickly. The real damage will be on the west coast where the condos, and single family homes are. The resorts and golf communities will sustain far more damage from the surges, and places like Naples and up the coast will be far more impacted. The hotel businesses in these area up to the panhandle will suffer very badly especially on Marco Island, Anna Marie, Longboat Key and the other barrier island areas.
For some more perspective, here are some numbers courtesy of Moody Analytics:
Property damage as a percent of GDP
Katrina .86
Andrew .41
Ike .26
Sandy .19
Sandy did a lot more damage to infrastructure like subways, PATH Trains, etc., but going forward, large CRE and residential buildings in impact areas have moved critical machinery to higher levels and out of risk of damage for the most part. The cites have taken steps to better protect infrastructure so the impact in the future will be less. In Florida, after Andrew, the codes were substantially upgraded, so buildings after 1994 were built to new codes, as were homes, so the damage this time should be much less, or nil to new buildings and houses. The problem will be in areas where there has not been a lot of new builds, and the buildings are not up to full code.
The big issue for CRE in Florida is that there was no labor to meet demand before the storms. Developments already underway will have a hard time completing on time due to lack of labor and materials now. Most likely labor costs will increase a lot due to the desperate shortage which will cost more in delays than the labor cost increases. Trying to start a new build in Florida for the next year or two may be nearly impossible because there will be no subs or anyone to do the work. I assume Houston will be the same as there are well over 100,000 homes to be rebuilt or completely renovated. It is also likely that both areas will drain all available labor from surrounding states who will be drawn in by higher wages and ease of finding jobs.
So the construction labor shortage we have been experiencing around the country will now be far worse for an extended period. Materials like plywood, etc. will be much more expensive, and delays will be extensive for many projects. All-in returns will be impacted in many markets due to these issues. The good news is the overall economy will not suffer badly and will be back on track by late October as rebuilding expenditures are ramped up by then. Suppliers like Home Depot will benefit greatly, and those related industry stocks will soar even more than they have done the past week.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
