A comprehensive review of Hurricane Harvey’s impact on commercial property

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Oct. 12, 2017

By: Eli Gilbert, senior vice president, JLL Research

hurricane harvey's impact

Hurricane Harvey made landfall as a Category 4 storm, August 25, 2017, northeast of Corpus Christi, Texas. The slow moving system was quickly downgraded to a tropical storm but would eventually dump an estimated 19 trillion gallons of water onto Southeast Texas. Harvey wreaked havoc on vital infrastructure and inflicted untold billions of dollars in personal losses. Despite residential property damage on a scale never before seen, the majority of the Houston commercial real estate market emerged relatively unscathed and quickly recovered.

Our research team set out to quantify and qualify property damage wrought by Harvey. Great care and time was devoted to ensure the information was accurate, corroborated and comprehensive. Below is a synopsis of our findings.

hurricane harvey's impact

Source: Erich Schlegel, Getty Images

Office

Small portion of office inventory sustained damage, majority is already operational

Within JLL’s tracked inventory of 167 million square feet, 57 office buildings, totaling 15.5 million square feet sustained damage. Some of this damage was minimal and floodwater intrusion was confined to ground floor spaces. The vast majority of the inventory’s total rentable area was not affected. Thus, only about 1.5 million square feet of interior space like lobby areas, first-floor suites, grade-level building systems, and underground parking garages experienced flooding throughout the tracked market.

Eighty-three percent of these properties were located in the Katy Freeway East and West, Galleria and Midtown submarkets. Most of the buildings that have not yet reopened will be open for business by year-end.

We have seen no reversal from the 6 million square feet of tenants in the market we were tracking prior to Harvey. Some deals were put on hold during the event, but most have re-engaged the market.

A handful of immediate short-term space requirements emerged following the storm, but those were quickly settled into current vacancies or were pulled from the market as tenants’ buildings were repaired. All told, no ‘needle-moving’ requirements have been reported.

Industrial

Geography and design spared the industrial market

Geography and design proved crucial to protecting the industrial market, which emerged from the crisis largely unscathed.

While a large portion of Houston’s industrial inventory is located within the 100-year floodplain, the majority of business parks are in areas not immediately proximal to the bayou system, a main source of flooding during the storm.

Secondly, today’s industrial developments are designed with on-site water detention or retention systems, large lots, and two and four feet above grade. All of these elements protect against flooding.

Since Harvey, we’ve seen a marked increase in industrial tenant demand. Specifically, building supply retailers are expanding to meet what’s expected to be yearslong demand for construction supplies while the city works to rebuild thousands of homes. Retailers with significant warehouse footprints, like furniture and appliance products, will continue to expand into 2018.

hurricane harvey's impact

Retail

Retail real estate largely unaffected by flooding, retailers most impacted by disruption of sales

Houston’s retail inventory was minimally affected by Harvey. The primary issue facing retail tenants was the disruption of sales due to store closures. However these challenges, by and large, were short-lived, and most retail sales resumed days after the floodwaters receded.

Automobile retailers saw the most dramatic effects of Harvey. Car lots and inventories were inundated by the storm. Add to this total the personal vehicles of countless Houstonians. The immediate outcome for automakers and retailers will be a reversal of the recent slowing sales.

Like the industrial market, vacancy in Houston’s retail sector pre-Harvey was very low at 5.4 percent. This is forecasted to decrease further in the fourth quarter.

hurricane harvey's impact

Source: Daniel J. Martinez

Multifamily

Damage less than expected, absorption accelerates rapidly

Houston’s multifamily market was expected to fare very poorly. However, the latest data shows only 10,600 units took on water or were otherwise damaged. This represents just 1.7 percent of the inventory.

When combining the damaged units removed from Houston’s multifamily inventory with a spike in demand from the thousands of residents seeking housing, a continued decline in overall vacancy will be seen in quarters to come.

Also contributing to the forecasted vacancy decrease is the relatively light development pipeline of approximately 7,000 units.

Rents will climb and free rent concessions will likely disappear because of stronger demand and moderation of new supply.

hurricane harvey's impact

Source: United States Department of Defense

Will Houston ever be the same?

Many questions have been raised since Hurricane Harvey. But the fact remains, the reasons for the massive expansion of the Houston metro area over the last several years will be the same reasons the city continues to thrive. With its intellectual capital, concentration of key industry clusters, business friendly climate, diversity and dogged spirit of the Wildcatter…Houston’s not going anywhere.

For more detail on how Hurricane Harvey impacted the commercial property market in Houston, download our full Harvey impact report here.

About the Author

As JLL Houston’s senior vice president and director of research, Eli Gilbert leads a team of five staff researchers in developing best-in-class research deliverables. He has more than 15 years of commercial real estate and research experience and is a LEED certified professional.

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