How Major Hurricanes, Such as Harvey, Impact Real Estate Markets

According to several recent studies the impact of hurricanes on real estate markets, especially those of Category 3 and above, last longer than previously believed. This is based on data from the National Hurricane Center, the National Council of Real Estate Investment Fiduciaries (NCREIF), as well as academic research from Dr. Li Beracha, Ph.D. and Dr. Robert S. Prati, Ph.D.

These results raise several issues, not only for property owners but also for investors such as the hedge funds and private equity funds who place a significant portion of their money in the sector. Among the issues uncovered include the impact of major natural disasters, such as Hurricane Harvey which inundated the Houston, Texas area in 2017, were those surrounding implications for property valuations, rental yields, and the rising insurance premiums.

Beyond this are also the challenges property owners face in paying for repairs following a major event. For example, Guardian Roofing noted that many owners are seeking help from commercial roofers to replace their commercial roofing in Houston because they found that “the roofing structure may not be properly installed leading to potential gaps.”  This not only led to substantial damage during the storm but also increased costs during the cleanup.

As a result, property owners either had to wait for insurance of government aid to cover the cost of repairs and storm drain cleaning, tear down their structure and start over again, or decide to abandon the property altogether. These can be difficult decisions to make in the short-term but what researchers wanted to do was track the impact over the long-term.

In term, very little research into the long-term impact of natural disasters and other events have on the real estate prices over the course of months or even years. This largely because conventional wisdom states that while property values take a massive hit in the immediate aftermath of a disaster, the focus on rebuilding helps the market to recover in short order.

However, the path to recovery – at least in teams of property values – might not be as straightforward as previously believed. This can be seen by comparing the experiences of Houston and Puerto Rico. While the recovery is never easy, by all objective measures Houston was better positioned to recover from Hurricane Harvey.

This is due to a combination of infrastructure that was already in place, the relative area of damage, and the ability of the local government and the private sector to finance recovery efforts. As such, places such as Puerto Rico and the American territories of Saipan and Tinian which were decimated by Typhoon Yutu in late-October 2018 have struggled to get back on their feet.

But even in cases where the recovery is relatively quick,studies of the 10 costliest hurricanes to hit the U.S. can have a dramatic impact on the prices of apartments, hotels, offices, retail space, and industrial properties for up to two years after the event.

Part of the reason is that in the time following the storm occupancy rates tend to suffer. Add to this the need for increased capital investment to cover damages and the result is falling yields for investors and property owners. While some of these expenses can be result in tax savings for owners, this doesn’t offset the cash flow issues.

These storms have been traumatic for those affected, what remains unknown is how the increased frequency of these storms will impact values over time. Some analysts expect that in some cases the decision might be made to pull back investment from areas that are prone to suffer losses.

In fact, this is already starting to bite as flood insurance has become costlier to get and even in instances where properties are in demand, insurers are requiring buyers to make significant upgrades to increase the resiliency of properties.

For example, buyers on the Connecticut shore are no required to raise the foundations of their homes. This is a direct result of the losses incurred by the storm surge which accompanied Hurricane Sandy in 2012.

While Connecticut is largely sheltered from the open waters of the Atlantic Ocean, the massive storm surge made its way into the Long Island Sound and inundated many coastal communities in the Constitution State.

Even though these properties remain in demand due to their proximity to New York and Boston, the added cost associated with such a massive investment as raising the foundation of a home has caused some buyers to rethink their plans.

Granted, this might be the difference between buying a $5 million ocean-front property and a $2 million property but for the hedge fund billionaires who live along the shore, every penny is important.