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 2021 Storm Surge Report shows over 8 million homes and apartments along the Gulf and Atlantic coasts this year could face potential storm surge damage, with 31 million total homes at moderate or greater risk from the
damaging winds of a hurricane.
Hurricane experts generally forecast a slightly above-average 2021 hurricane season for the Atlantic/Gulf/Caribbean region with Colorado State University predicting 18 named storms; Tropical Storm Risk forecasting 18 tropical storms and seven hurricanes, and North Carolina State University expecting 15 to 18 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.
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.
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.