It’s Hurricane Season: Is Your Multifamily Property at Risk?
The Atlantic hurricane season puts at risk 19 states that border the Gulf and Atlantic coasts — about 3,700 miles of coastline — from early June through November.
Hurricanes can impact multifamily real estate property values, cap rates, rental rates, occupancy and insurance rates. And, they can wreak havoc on supply and demand for years after the initial storm surge becomes a distant memory.
CoreLogic’s 2019 Storm Surge Report shows over 7.3 million homes and apartments along the Gulf and Atlantic coasts this year could face potential storm surge damage, with a total estimated reconstruction cost value of nearly $1.8 trillion. Of that total, more than 246,000 multifamily properties with an estimated reconstruction value of $91.9 billion are at risk because of their locations, according to CoreLogic.
Hurricane experts generally forecast an average 2019 hurricane season for the Atlantic/Gulf/Caribbean region with Colorado State University predicting 13 named storms; Tropical Storm Risk forecasting 12 tropical storms and eight hurricanes, and North Carolina State University expecting 13 to 16 named storms.
How Storms Impact Values
However, the hurricane season isn’t so much about the number of storms forecast, but the damage that just one catastrophic storm surge could cause — should it hit a densely populated area.
In 2018, Sterling Valuation Group consulting expert Jeffrey D. Fisher and freelance analyst Sara Rutledge analyzed data from the National Council of Real Estate Investment Fiduciaries (NCREIF) and the National Hurricane Center, and determined that hurricanes may have a longer-term effect on the values of commercial real estate than one would typically think, they told NREI.
They also found the impact varies, depending on the type of property.
The study looked at the impact of 10 hurricanes on five property types, including apartments. For all property types combined, a hurricane decreased values by almost 6 percent one year after the storm hit. The negative effect increased two years out — to 10.5 percent, perhaps due to the long leasing cycle and the stigma of being in an area impacted by a hurricane.
Apartments were least affected one year after the storm when values had declined by 5.4 percent. Two years out, however, the values for apartments dropped by almost 16 percent.
After a hurricane, residents whose homes are damaged seek out apartments, creating demand. It’s also common for a hurricane to result in a surge in apartment demand from construction workers flocking to the area. After two years, most of these temporary workers leave, residents return to their repaired homes and the apartment market softens, the authors found.
Insurance Rates and Coverage
Investors should take note that property insurance rates typically increase after a hurricane. While some property types can pass rate increases onto tenants, apartment owners will have a harder time doing so because of the short lease terms in the multifamily sector, the authors of the NREI article said.
Insurance may not cover all types of claims, either. A standard business or homeowners policy will cover wind damage but exclude flood damage, according to PropertyCasualty360, a news site that covers insurance issues.
Real estate investors in a flood-prone area can obtain flood coverage from the Federal Emergency Management Agency’s National Flood Insurance Program or possibly from a private insurer, according to PropertyCasualty360. Insurance won’t cover a decrease in the property’s value, however.
The fundamentals of the multifamily sector remain healthy in many regions that are part of the Atlantic and Gulf coasts. Nationally, multifamily construction starts advanced 4.7 percent to a rate of 381,000 units in April, with Washington D.C. and South Florida in the top 10 for metros bringing the most apartments to market in 2018.
Since hurricane season is unpredictable, it’s in the best interests of real estate investors to stay informed of the risks while researching investment opportunities in hurricane-prone regions.