What CRE investors can learn from Hurricane Michael

What are the biggest lessons for investors?

November 01, 2018

As the U.S. Gulf Coast recovers from the extensive, and in some cases unprecedented, damage from Hurricane Michael, commercial real estate investors and property owners are looking towards the inevitable next superstorm, with an eye on how to storm-proof properties.

“The extent of the damage after a storm is, in large part, a direct reflection of preparation,” says Barry Wood, Senior Vice President and Director of Operations at JLL.

So, what are the biggest lessons for investors?

Storm-proof ground floors

Hurricane Michael left all but the most heavily-reinforced structures flattened in some of the hardest-hit areas. As storms like Michael become more frequent and more intense, investors should consider whether to retrofit properties to be more resilient, says Wood.

“When it comes to high-rise buildings, developers should consider better storm-proof measures on the lower floors of the building, which allow for faster recovery after flooding,” he says.

One way to achieve this is by designating the first two to three floors of a structure as parking. This allows water from a storm surge to flow through with minimal damage. While it could require a larger investment up front to cover the increased cost of construction and may also reduce the property’s long term net operating income, it may ultimately reduce the probability that investors will have to repeatedly rely on insurance payouts and deductables to clean up damage to higher-value retail or office space.

Alternatively, investors might consider only a first-floor lobby. Both options would take the place of lucrative ground floor retail.

“For investors, it’s a matter of calculating risk versus reward,” Wood says. Ground floor retail generates high revenue with a much smaller investment in construction, while parking is costly to construct, but generates less income.

Wind-rated roofs

When considering the risk versus reward, investors should also factor in the vulnerability of the area, Wood says. Some of the hardest-hit real estate in storm-prone areas tend to be high-dollar beachfront properties. For example, the beachfront town of Mexico Beach, Florida bore the brunt of Hurricane Michael’s force when it first made landfall.

Property owners in vulnerable areas should consider retrofitting structures with higher wind-rated roofing. This can mean going above and beyond the requirements set by building codes.

Most storm-proofing elements are dictated by code in a given municipality, but Hurricane Michael showed that what is mandated by the government isn’t always enough.

In the parts of the Panhandle where Michael did the most damage – including Apalachicola, Mexico Beach and Panama City – the design standard for wind resistance was as low as 120 miles per hour and only as high as 150 miles per hour. Deemed a category 4 hurricane, Michael reached sustained wind speeds of 155 miles per hour, ripping the roofs off of many buildings that were constructed to the lower standards set by municipalities.

Wood recalls comprehensive updates to building codes and enforcement following Hurricane Andrew, the category 5 storm that hit Florida, Louisiana and the Bahamas in 1992. He anticipates the potential for similar code reviews in the wake of Hurricane Michael, though the real changes will likely come in the form of more stringent code enforcement.

The insurance factor

Investors should pay close attention to how insurance companies handle the cleanup from Hurricane Michael, Wood says.

“Code changes are driven by the insurance industry,” he says. “If properties aren’t built to withstand the strength of the storms they’re likely to face, they’ll become uninsurable. Building codes will likely be upped in response.”

In order to be best prepared for these increasingly powerful storms, owners are best served securing flood insurance.

“Flood insurance is now required by many lending institutions,” says Wood.

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