Natural Disasters, Human Response
Commercial real estate professionals discuss planning for, getting through, and recovering from major adverse events.
The frequency of and costs related to natural disasters - including wildfires, hurricanes, tornados, and droughts - are increasing at an alarming rate in recent years.
Between 1980 and 2018, the average number of weather events topping $1 billion in damages (adjusted for inflation) is 6.2 per year, according to the NOAA National Centers for Environmental Information. But that figure has jumped to 12.6 events in the last five years.
While the true cost of these events cannot be tallied by deaths and damage figures, the commercial real estate community can alleviate issues for an area devastated by a natural disaster. Housing, retail and office space, warehouse facilities - all of these contribute to a coordinated response and rebuilding effort.
Come Out Fighting
But how do commercial real estate professionals - including lenders, brokers, developers, and managers - properly prepare to help the recovery effort and accompanying opportunities? In short, plan ahead and do your homework.
Quentin D. Dastugue, CCIM, founder and CEO of New Orleans-based Property One, Inc., has plenty of experience with destructive natural events - but none compared to Hurricane Katrina. When the storm made landfall in August 2005, Dastugue's team was busy converting an apartment building into for-sale condo units in Mandeville, La., outside of New Orleans on Lake Pontchartrain.
“People remember when you step up and help them. If you're more concerned about their safety than how you're going to get paid, they remember that.” - Quentin D. Dastugue, CCIM
“Not only did [that building] not get damaged, it was one of the only places in the metro area that had electricity and internet,” he says. “We moved the main functions of our office from downtown New Orleans to this townhouse model and put our people up in the empty units. We were up and running in a few days.”
It's better to be lucky than good, the saying goes, but Dastugue points out nothing beats being prepared. “Living through so many of these storms, we've learned what needs to be done,” he says. “Have a disaster recovery plan. Write it down and circulate it among your business so everyone is aware. Know how to communicate with your employees, back up your information, know how to stabilize your properties.”
With New Orleans' business community completely shutout of downtown, Dastugue's firm leased 120,000 square feet of office space to various clients the day they resumed operations.
“From a commercial real estate standpoint, if you're on your toes, you can situate clients on a temporary basis or for the long term. That can lead to relationships down the road,” Dastugue says. “People remember when you step up and help them. If you're more concerned about their safety than how you're going to get paid, they remember that.”
Like office space, retail properties, no matter the adverse event, face a population that is often in immediate need. Even if roads remain flooded or infrastructure is damaged, people will find a way to reach necessary goods and services.
For more on this topic, watch CCIM Institute's webinar "Hurricane Florence: A Flood Damage and Insurance Primer" below:
“I spent 20 years in retail and believe me, nobody believes a natural disaster is a reason to stop selling product,” says David Marcotte, senior vice president at consulting firm Kantar Retail, referencing Hurricane Harvey, which battered Houston for four days in August 2017.
The city was underwater, but people required supplies as soon as the storm cleared. “It's the immediacy of need,” he says. “Retail is not a gentle profession. It's unforgiving, regardless of the cost. There's a high-degree of motivation to get things back on line as soon as possible.”
The storm and its aftermath further exposed a problem that was a known secret in the area. Houston - like Texas as a whole - prides itself on being business friendly, which pushed zoning behind development in its priorities. “The city has an awareness of flooding and flood rescue, but it's a mentality of build first, ask questions later,” Marcotte says. “If you're building in a defined flood zone of every 20 years, you're not going to rebuild. You will not get funding; you will have trouble with insurance companies.”
Before, During, and After
Extreme weather and climate patterns don't concern themselves with zoning and risk estimates. If Houston is prone to flooding, water will find its way there. Similarly, California is largely built in high fire severity areas.
The state is no stranger to disasters, with earthquakes, flooding, and mudslides all wreaking havoc in recent years. But in the last two years, wildfires are responsible for the greatest damage, topping $57 billion.
The 2018 Camp Fire burned 153,000 acres in Northern California, resulting in 88 deaths and destroying more than 18,000 structures, according to the NOAA National Centers for Environmental Information. The fire, the deadliest and most destructive in the U.S. in 101 years, resulted from warm and dry conditions partially tied to climate change, according to the NOAA.
But climate-related causes aren't solely responsible for the increasing devastation. Areas in the wildland-urban interface, where populations intersect with forests, are growing in size and increasing in density, “which has many implications for wildfire management and other natural resource management issues,” according to the USDA Forest Service.
Dan Dunmoyer, president and CEO of the California Building Industry Association, acknowledges city planning can affect fire susceptibility. “California is disaster-prone,” he says. “You have to be committed to minimizing risk. We tend to commit for, say, five years but then we let brush to grow back and defensible space to fall apart - then these fire-prone areas become real hazards.”
The Oakland hills fire of 1991 is a case study in what to avoid. “It was devastating,” Dunmoyer says. “Fire trucks couldn't access the affected areas, and hydrant hook-ups were wrong when they could.
“Let's revisit the situation. The road configuration is the same. Eucalyptus is all over the place when you couldn't find a single plant five years after the fire. It's a powder keg. Two-thirds of the people currently in the area lived there during the fire, but we aren't vigilant. We are not, as a society, committed to defending our property.”
Due Diligence - And Then Some
Hurricane Maria, which hit Puerto Rico in September 2017, highlights how CRE professionals need to respond after disaster hits. Multiple layers of due diligence are vital for every deal, considering the complex issues structures face after such a storm.
Following the storm, nearly all of the island has been designated an opportunity zone to spur investment in the rebuilding efforts. Andrew Maguire, a real estate partner at McCausland Keen + Buckman in the greater Philadelphia area, points out the silver lining in such disastrous circumstances.
“The storm is a tragedy,” he says, “but it will create opportunities for commercial real estate developers and investors.” Those open doors, however, can come with more complicated due diligence and risk assessment.
“If natural disasters or major storms are prevalent in an area, the process of acquisition and development will be made more difficult,” Maguire says. “No matter how appealing an asset may be - it's going to make it harder for you to borrow money; you're going to have to buy more insurance; it's going to take more effort to get your lender comfortable along with your partners or shareholders.”
Environmental problems can be immediate - such as exposure of previously contained asbestos - or latent, with mold being a significant risk for water-logged buildings in the weeks and months after a storm.
“Mold could be under the floors or in the walls,” Maguire says. “Buyers need to have the environmental condition of the property investigated in due diligence, so that they can determine the risks that they are assuming.”
Trends and Forecasts
Like any good student of the stock market will say, past performance is not indicative of future results. Natural disasters have trended upward, especially in recent years, but uncertainty and variance are baked into such events.
So how can CRE professional plan 10, 20, or 100 years down the road? “What constitutes an allowable definition of risk is changing,” Marcotte says. “Not matter your political leanings, people are starting to think 100 years is not an acceptable risk anymore.”
Wildfires weren't supposed to erase entire towns in suburban California. Hurricane Sandy wasn't supposed to put parts of Manhattan under water. Most recently, this spring's flooding ravaging the Midwest wasn't supposed to happen.
“The flooding in Nebraska could be a game-changer,” Marcotte says. “It is going to change how people approach risk mitigation.”
The calculus of risk assessment in real estate prone to natural disasters or in areas already affected by one will always fluctuate. But such events can have unintended consequences - some of which can be positive for an affected community. Take for example, New Orleans 14 years after the waters breached the levees.
“What happened here - so many people took the opportunity to start from scratch,” Dastugue says. “A lot of people who came down to help rebuild the city stayed. We have a real entrepreneurial spirit that's playing a big role in employment in the city.” The total workforce in the New Orleans-Metairie area has steadily rebounded from a low of 435,500 in September 2005 to 581,500 in February 2019, according the U.S. Bureau of Labor Statistics, while the unemployment rate is currently at 4.9 percent, one point above the national average.
Disaster recovery, like the CRE projects that play a vital role in the process, is about meeting immediate needs en route to accomplishing long-term goals.
“Nothing happens in big leaps,” Dastugue says. “You just put one foot in front of the other. You learn to walk and, all of a sudden, you're running again."