CRE Owners Brace for Rising Costs and Declining Values After Helene

Hurricane Helene is a story that keeps developing. The death toll is more than 130 at the moment, with more potentially to be reported.

Then there is property and other damage, and trying to estimate that, without disregard for loss of life, is ultimately a more complicated and uncertain task for accounting. However, aside from what has recently happened, there’s the question of what will going forward. It’s not a comforting picture.

As Trepp recently noted, there are multiple ways to look at the hurricane’s impact on commercial real estate, including physical damage, insurance expenses, property values, and business interruption. The last, while not directly connected to property owners leasing to tenants, is important because it could affect occupier revenues and their abilities to pay rent.

Physical damage, repair costs, and insurance expenses are the most obvious to start. A high-wind hurricane can cause immense damage over a huge area because of the physical spread of the storm and its movement into new territory Trepp used the Tampa-St. Petersburg-Clearwater, FL MSA to compare basic metrics, averaged over all CRE property types, from 2019 to 2023.

Over that four-year period between the pre-pandemic 2019 and 2023, the average square footage climbed 32.3% from 77,010 to 101,897. Revenue per square foot was $12,178 and grew 23.3% to $15,017. Property insurance per square foot jumped 132.2% from $264 to $613. Average real estate taxes per square foot rose from $571 by 18.9% to $679. Utilities? Up 21.3% from $531 to $644. Expenses per square foot rose by 9.6% from $9.029 to $9,897. And average net operating income was $5315 and rose 4.9% to $5,577.

Per-square-foot capital expenses have risen, often because they represent added investment over time to make buildings safer from hurricanes, Trepp explained. However, the growth from $302 to $323 was only 6.9%. Compared to other expenses, that increase doesn’t seem so outrageous.

But Trepp pointed to real estate taxes and property insurance as “being particularly affected by the growing threat of hurricanes,” even though the area hasn’t been directly hit by a hurricane since 1921.

The best way to see the growth of these two expenses is by year-over-year comparisons. Real estate taxes went up 3.5% in 2020, 1.7% in 2021, 4.0% in 2022, and 8.6% in 2023. A big jump in 2023, but nothing compared to the climb of insurance rates and the end-to-end 132.2% increase. The more sobering part was the year-over-year: 8.7% in 2020, 17.4% in 2021, 25.8% in 2022, and 44.6% in 2023. How high will it go this year?

High-intensity storms like Helene will become more likely according to climate scientists. Trepp says that coastal regions are at high risk and CRE properties there may see values decline from affected cash flows or increased damage and loss. Occupancy rates will likely drop; increased damage and loss could drive cap rates upward. Temporary and permanent business closures will also hit property owners. All this could also affect debt service coverage ratios.

And there is no suggestion that things will get better with time, only worse.