Jessica Hill - September 2017
Harvey’s Impact Ripples Through Houston Real Estate Market
Hurricane Harvey wrought severe damage across the Texas Gulf Coast region and southwest Louisiana. The severe storm displaced thousands of families as it damaged in excess of 200,000 homes across the region. The hurricane’s devastating floods hit the nation’s fifth-largest metropolitan area, Houston-The Woodlands-Sugarland, and although the final assessment of damages is likely months away, it is possible that Houston faces many of the challenges Hurricane Katrina created in New Orleans. A wide swath of homes faces significant water damage that will be difficult to repair, particularly as less than 20 percent of homeowners have flood insurance in the hardest hit areas. The remaining homeowners will be dependent on private charities and government aid, such as grants from FEMA and low-interest rate loans from the government. When compared with the area affected by Hurricane Katrina, the area hit by Harvey has more than twice as many properties with mortgages and nearly four times the unpaid principal balance. The damages could result in a significant wave of delinquencies as homeowners grapple with the recovery process. This will place a strain on the local and regional housing market as a number of homeowners could walk away from damaged homes.
Displaced residents take shelter in region’s hotels and apartments. Families will be forced to relocate, finding temporary housing options in local and regional hotels and apartments. Normally at this time of the year, hotel occupancies in Houston average 59 percent. Following Katrina, hotel occupancy rates in New Orleans surged to roughly 80 percent for the following seven months. Although local authorities are placing considerable effort to restrain price gouging, it is likely that hotel rates in Houston and the state of Texas will climb and occupancy will surge to its highest level on record. The Texas apartment market will also face a spike in demand. Fortunately, a significant wave of apartment construction has added nearly 80,000 apartments to the Houston metro since 2012. An estimated 55,000 units in Houston were vacant prior to Hurricane Harvey, which will accommodate a significant portion of the households displaced by the storm. Still, available housing will likely fall short of demand. Some residents may look beyond the Houston metro, boosting demand for hotels and apartments in other Texas metros, including Dallas/Fort Worth, Austin, and San Antonio.
Houston’s diverse economy and stout infrastructure support recovery. Unlike New Orleans, Houston is a strong, dynamic job creator with a significant economic base that will fuel recovery much more quickly. While a decline in energy prices suppressed hiring over the last two years, employers created an average of 92,000 positions each year from 2010 to 2014. Hiring in the first six months of 2017 had begun to rebound, with companies adding nearly 45,000 positions. Reconstruction and cleanup will boost employment in the final months of the year, potentially pushing job creation for the year to the 90,000 position range. This surge in employment will be concentrated in construction and retail segments, fueled by rebuilding efforts and as households replace damaged goods. The metro area also represents nearly 3 percent of national GDP, signifying a noteworthy portion of the nation’s economy, and companies will press hard to get up and running quickly.
Commercial real estate within Houston’s metro floodplain. Many businesses were forced to close in the storm’s aftermath. Nearly 26 percent of apartments based on square footage, 21 percent of office space and 23 percent of the metro’s retail space are located within the 100- or 500-year floodplain. While it is still unclear how many assets were damaged by the storm, it will create a dynamic investment climate in the metro as investors determine whether to remediate or sell properties, providing some unique value-add opportunities for buyers. Over the long term, Houston’s favorable economic growth and strong demographics bode well for those seeking assets in this metro.
Regional economy feels short-term impact. The regional economy will face short-term weakening as damage is assessed, FEMA is mobilized, insurance policies are reviewed and recovery strategies are defined. There are still many unknowns about the state of some oil refineries and petrochemical facilities, with some operable only in limited capacities for months to come. This may cause a broader economic disruption as other facilities across the country pick up the slack. In addition, many developers were already encountering construction worker shortages and elevated material costs before the hurricane hit. The cleanup process will exacerbate these shortages and could slow the rebuilding process.
Prepared and edited by
Jessica Hill Market Research Analyst | Research Services
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guaranty, express or implied, may be made as to the accuracy or reliability of the information contained herein. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice. Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Federal Reserve; Moody’s Analytics; Real Capital Analytics; Standard & Poor’s; U.S. Bureau of Labor Statistics; Smith Travel Research; MPF Research; Texas Department of Public Safety
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