Hurricane Harvey Brings Uncertainty to Texas CRE

Texas commercial real estate will feel Hurricane Harvey’s effects for a long time to come, analysts say.

“The storm could add long-term uncertainty to the performance of [Texas Gulf Coast and further inland] properties if homes are damaged and residents who left are unable to move back promptly,” said Britt Johnson, Senior Director with Fitch Ratings, New York. “That said, it is impossible to make specific assessments as to the precise extent of the impact at this time.”

Trepp Senior Managing Director Manus Clancy said hurricanes have not been a terribly disruptive problem for commercial mortgage-backed securities in the past. “Since properties have been sufficiently insured, the commercial loan toll has been very limited compared to the devastating human toll,” he said. “However, Houston could be somewhat of a different story. With some large area offices facing major lease expirations, an extended inability to show, renovate or release those offices could be impactful.”

Clancy cited the $91 million loan secured by Two Westlake Park, a 17-story Class A office building on Houston’s west side, and the $80 million loan secured by the nearby Three WestLake Park 19-story office property as loans secured by properties with “substantial” blocks of space becoming available in the next two years.

Victor Calanog and Barbara Byrne Denham with Reis, New York, said we can expect to see in Houston something similar to what happened in New Orleans after Hurricane Katrina in 2005. “Many will be forced to abandon their homes and rent an apartment; businesses will need to look for new and/or temporary office space, but retailers may suffer more so and will be slow to reopen their businesses,” Calanog and Byrne Denham said in a special report: Houston after Harvey. “We expect both inventory and occupancy to decline in these markets over the next few months, vacancy rates should fall as well, especially in the apartment market.”

Calanog and Byrne Denham said rent growth could be high, possibly exceeding 10 percent if the supply shock is severe. “What will mitigate high rent growth due to constrained supply is the relatively elastic supply curve of the Houston real estate market: if developers rebuild quickly any rent growth premium is likely to be ephemeral,” the report said.

Morningstar Credit Ratings, New York, said Harvey-related flooding will create uncertainty for 1,529 Texas properties with a $19.4 billion property balance backing CMBS Loans. Most of the properties suffering flood damage are in Harris County, which suffered what the New York Times called “catastrophic” flooding.

“Houston office revenue growth, already flat because of a 16.1 percent vacancy rate, may be further hampered as tenant move-ins will surely be delayed following this major disaster,” Morningstar said, noting that flood damage could jeopardize the payoff of more than $1.1 billion in loans that mature over the next 12 months.

Moody’s, New York, said it expects the damage from Hurricane Harvey could have a “limited” credit-negative effect on CMBS. “Not all properties in the affected areas will suffer damage and property-level insurance should provide coverage to help mitigate losses,” Moody’s said in a special report. But two factors could yet widen the negative credit effect, Moody’s noted: insurance gaps for properties without flood insurance and the as-yet unknown full extent of storm-related damages.

Properties in Texas counties that received a Major Disaster Declaration from FEMA account for 3.1 percent of Moody’s CMBS universe. This included 1,240 properties in 301 CMBS transactions and 37 loans in 18 commercial real estate collateralized debt obligation transactions.

“For the CMBS transactions, retail and multifamily properties have the greatest exposure to hurricane-affected counties by loan balance,” Moody’s said. Retail assets accounted for $3.4 billion, or 31.1 percent of total exposure, and multifamily accounted for $2.7 billion, or 25.1 percent. There are currently 23 Moody’s-rated CMBS deals with exposure to hurricane-affected areas equal to 10 percent or more of current collateral balance. “For CRE CLOs, additional mitigants include servicer advances to the senior notes and cash flow diversion tests, the ability of the collateral administrator to purchase impaired/defaulted assets out of the transaction and assets that are already protected against high credit-loss assumptions,” the special report said.

The Mortgage Bankers Association has developed materials on its website––to assist those affected by Harvey. These materials will be updated regularly as more information and resources become available.