HOUSTON, TX - SEPTEMBER 03: Paul (didn't want to provide last name) steers his canoe as he looks to help people retrieve items out of homes that were inundated with water in an area where a mandatory evacuation is still under effect after torrential rains caused widespread flooding during Hurricane and Tropical Storm Harvey on September 3, 2017 in Houston, Texas. Harvey, which made landfall north of Corpus Christi on August 25, dumped around 50 inches of rain in and around areas of Houston and Southeast Texas. (Photo by Joe Raedle/Getty Images)
CoreLogic estimates that Hurricane Harvey could cause $40 billion in total damage, making the storm one of the most destructive in history.
The damage to Houston and surrounding areas ranks third to Katrina ($110 billion in 2005) and Sandy ($50 billion in 2012) as the most expensive hurricanes and the impact will be felt for years to come.
According to REITS, “Houston has approximately 1.6 million single family homes and total housing of 2.45 million units (including apartments)” and “the damage suffered thus far has disproportionately affected single family homes more than commercial properties.”
REIS estimates that Houston’s commercial property market is valued at $130 billion and “the demand for apartments will likely surge in the next few months as it did in late 2005 in New Orleans”. Since the amount of new inventory will be cut down, REIS believes “this may boost rents considerably, even as much as 10%”.
According to Matt Werner, Managing Director / Portfolio Manager with Chilton Capital Management,
“The catastrophe from Harvey will produce a ripple throughout the Houston economy. I would expect occupancy to rise among self-storage, apartment, and hotel properties. Pre-Harvey, all three of these property types were overbuilt, so this will help current owners, assuming the property is not damaged or destroyed.
Property repairs will be a boon for job growth, along with new residential construction. This wave will be temporary as the property types attempt to regain equilibrium, but it could last for several years.”
REIS reports that “given that so many homes and commercial properties appear to have been irreparably harmed, the demand for apartments will likely surge in the next few months as it did in late 2005 in New Orleans. At the same time, the inventory will be cut due to the storm. This may boost rents considerably, even as much as 10% .”
Multifamily REITs Benefit
There are approximately 69 multifamily properties owned by 15 SNL-covered companies in the Houston area, with Camden Property Trust (CPT) having the greatest exposure at 25 properties. The second-largest REIT owns is Mid-America Apartment Communities (MAA) with 15 properties. Other REITs with Houston-area multifamily exposure include NexPoint Residential (NXRT), Apartment Investment (AIV), Monogram Residential (MORE), BRT Realty Trust (BRT), and Preferred Apartment Communities (APTS).
REIS explains that “the post-Katrina boost for apartment and office properties were driven by the shock to supply. Residents scrambled to find a place to live and/or to find office space to work after so many properties were destroyed. The apartment vacancy rate fell more dramatically than the office vacancy rate and apartment rents rose more robustly as well.”
REIS expects 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. Rent growth could be high, possibly exceeding 10% 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 build quickly any rent growth premium is likely to be ephemeral.”
I own shares in APTS and NXRT.