In the aftermath of Hurricane Irma, the clean-up and rebuilding aren’t the only fallout that Florida must deal with. Walter Duke + Partners has survived four catastrophic hurricanes since 1975. Based on our recent and historical experience, below are five ways we see Irma impacting Florida real estate values.
Construction Budget Interrupted
The cost of labor and materials will rise dramatically post-storm putting pressure on already skinny development budgets. In the aftermath of Andrew in 1992, it was common to see construction costs rise as much 30% to 40%. The situation is compounded by the massive rebuilding efforts in Houston in the aftermath of Hurricane Harvey. Contractors may directly elect to walk away from the job rather than face huge losses leaving developers in a pinch. Residential condo developers may decide to table projects due to lack of feasibility in the face of rising costs, growing inventories and declining sales.
Sea Level Rise Gets Its Due
South Florida cities have been implementing adaptive measures to combat sea level rise. So far, the business community has been late to the game but in the wake of Irma and Harvey that will likely change. Look for both the trade and public sectors to further address sea level rise and work with the insurance industry to demand more resilient developments and communities. These storms also lent credence to tougher building codes, because guess what? They worked and saved life and property.
One of the early beneficiaries of Hurricane Harvey in Houston is the self-storage sector. The Wall Street Journal reports a surge in demand for self-storage space in the Houston market since the storm. Before Harvey, self-storage companies had been in aggressive price competition, with incentives such as free rent commonplace. We expect to see this in South Florida where there has been a widespread development of self-storage facilities as well, but landlords will be mindful of not being perceived as price gougers. The need for temporary office space will also tighten up an already tight South Florida office market. Values for these property types should continue to trend upward.
Companies and developers will be more mindful of the importance of hardened buildings and backup systems as everyone seeks to minimize the down time after a major storm. Add to that the increasing likelihood of a terrorist attack, and we think you will see increased demand and value of disaster-proof structures.
Loan Size Does Matter!
Insurance costs for commercial real estate have been declining steadily since the beginning of the current economic recovery in 2012. They are currently the lowest they have been in years. If history is any indicator, that is about to change. Look for insurance costs on commercial real estate to double over the next five years. This will dramatically negatively impact loan proceeds and size due to much less net operating income. In short, values are likely to decline, especially in properties such as multi-family where the landlord bears most of the expenses.
Walter Duke + Partners is a Fort Lauderdale based full service commercial real estate advisory firm founded in 1975. For a personal consultation contact Walter B. Duke, III, MAI, CCIM.