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How Much Disruption Will Ida Cause for the CRE Industry?

Among the biggest impacts might be a further increase in the costs of construction materials and construction and industrial labor.

While this summer's Hurricane Ida has already caused massive suffering and extremely high levels of property and infrastructure damage—some residents of Louisiana remain without power more than a week later, many homes in the New York/New Jersey area have been devastated by flooding—when it comes to its impacts on the commercial real estate industry, those are likely to go far beyond the need to rebuild lost structures. The long-term effects will likely range from higher construction and labor costs to a possible reworking of the supply chain logistics in the United States. 

Ida came second only to Hurricane Katrina as the most damaging hurricane to ever strike the state of Louisiana. According to sources ranging from Accuweather CEO to chief economist at Moody’s, the total damage from the storm to property and public infrastructure, including the damage incurred in the Mid-Atlantic and the Northeast, will likely range from $50 billion to $95 billion. According to Moody’s analysts, $4 billion in U.S. CMBS loans the agency rates could be impacted by the damage incurred in the worst-hit areas of Mississippi and Louisiana alone. Ratings agency KBRA estimates as much as $7 billion in securitized real estate loans could be affected just in the South. But Ida will likely have implications for the commercial real estate industry that range far beyond damage to local properties.

The hurricane came at a time when the U.S. logistics industry was already experiencing challenges stemming from the COVID-19 pandemic. Ida-caused power outages cut access to fuel and shut down various ports, rail terminals and roads, reports Lloyds Loading List.

“Hurricane Ida was a significant blow to the Southeast region and a major disruption to supply chains,” says Rich Thompson, international director of supply chain and logistics solutions with real estate services firm JLL. He adds that since many companies rely primarily on trucking for the flow of materials, the trucking sector will be the most impacted part of the logistics supply chain.

That will lead to what is referred to in the supply chain industry as the “bull whip effect,” with immediate disruptions having lingering effects until companies can start moving their products in and out of the impacted regions.

Given the areas that were hit hard by Ida, pipelines, ports, gas terminals and agricultural storage facilities will be among the impacted properties, and that will create a chain reaction in other locations and the overall supply-chain process, adds Grayson Scott, consultant, supply chain advisory, with real estate services firm CBRE.

At the moment, it is hard to say how long the disruptions’ impact will last, Scott notes. In some instances, for examples when it comes to energy supply chains for Louisiana and chain grocery and retail operators, it could be a few days. For mom-and-pop shops and the multifamily/residential sector, it could be a few months. Scott notes that the timeline for getting back to normal depends on a variety of factors, including the resources of individual companies, localities and state governments, what level of aid the federal government/FEMA will provide and the speed of insurance claims processing. As of Sept. 4, FEMA provided more than $135 million in grants to Louisiana hurricane survivors for rebuilding and deployed 1,000 employees to the Gulf Coast and the Northeast to aid in the response and recovery efforts. President Biden also approved federal assistance for disaster clean-up in New York and New Jersey.

“Any iteration of remodeling progress usually takes around three months on average,” says Scott, noting that overall recovery of markets affected by hurricanes takes on average 14 months. But full recovery from big storms like Katrina, Harvey and Sandy, has taken years. “If there are building material shortages, then this may be felt on the development side for other areas, especially if the firm has a central purchasing organization or storage facility in the affected area,” Scott adds.

What’s at risk?

Constraints on the supply chain and a surge in demand for building materials and labor can drive up construction costs at a time when many prices are already elevated, experts warn. While “supply chain disruptions triggered by hurricanes, tornados, floods, fires are typically isolated to the affected regions or markets,” according to Scott, essential products including generators, water and rebuilding supplies will be in high demand. In addition, there might be new constraints on the availability of labor at industrial facilities due to impact on employee residences or ability to commute to work.

As a result, Ida will likely cause delays and lack of inventory for various products nationwide, Scott says. The impact will be particularly notable for products that typically move through the supply chain facilities in Ida’s path. This may require increased labor to make up for the disruption in affected areas, slowing down businesses as they shift resources and expedite inventory shipments from other sources.

Looking at the big picture, James Breeze, global head of industrial and logistics research with CBRE, notes that “Hurricane Ida is another in a long line of supply chain disruptions over the past two years, including COVID-19, labor issues, port congestion, and more frequent extreme weather.” All of these issues combined are leading occupiers to attempt to keep more inventory onshore and/or look into reshoring manufacturing, he notes.

This need to hold more inventory on-site is already increasing demand for distribution space and as more companies reshore their manufacturing operations, will likely increase demand for manufacturing and warehouse facilities in the U.S. as well. And as natural disasters only increase in frequency, Thompson says that it is critical for companies to have a robust risk management focus that looks at their supply chain network strategies, regionalized manufacturing/sourcing and port diversification.

He suggests that when selecting sites for industrial facilities that are critical to the supply chain, developers and investors are keen to avoid locations prone to natural disasters such as hurricanes, tornadoes and heavy snowstorms. But, “while that is something to look at from an investment standpoint, especially as extreme weather conditions are increasing in frequency, there is a risk/reward component in that industrial is a very hot asset type,” says Breeze. “Is passing on an opportunity because of the chance of weather damage worth losing out on an otherwise good opportunity? That is something an investor would have to weigh.”

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