On Wednesday, March 20 ULI New York’s Hurricane Sandy Task Force held a free webinar,Protecting Your Assets: How will Sandy (and Future Storms) affect Real Estate Property Values? Speakers included Michael Hedden, Managing Director, FTI Consulting; Jonathan Miller, President and CEO, Miller Samuel, Inc.; and Dale Todd, Vice President, JP Morgan Asset Management.
In the wake of Hurricane Sandy, there has been much uncertainty over how the real estate market will respond in coastal areas. Michael Hedden provided an overview of factors that affect value and market-resistance post-catastrophe. According to Hedden, while the “jury is still out” on how Sandy will affect property values long-term, coastal properties may see a risk premium as a result of Sandy (and possible future storm) due to development restrictions through zoning and building code changes. Brokers are witnessing a “push and pull” between saving and rebuilding damaged properties as they were before the storm or demolishing for redevelopment. Appraisers should begin to evaluate the physical possibilities of assets and consider the feasibility of redeveloping property to its highest and best use.
Jonathan Miller referred to case studies from Long Island (Nassau County, NY) to draw preliminary conclusions of how Sandy will affect residential property values. According to Miller, appraisers can expect to see higher costs associated with home ownership in Sandy affected areas due to an inevitable rise in flood insurance and home insurance premiums as well as a rise in real estate taxes.
Miller referred to metrics showing prices and number of residential sales, comparing Nassau County to the South Shore of Nassau County, which accounts for 6% of the county’s market and suffered considerable damage from Sandy. While prices were unchanged in the first quarter of fiscal year 2013, the number of sales fell considerably. Weakness in activity is evident as a result of the storm. While residential market resistance/stigma associated with the storm will fade in affected areas in the term, we can expect to see a shortage of single-family homes and more multi-family inventory available.
Next, Dale Todd gave an overview of Sandy’s immediate effect on the Lower Manhattan commercial market. Storm surge flooding and high winds contributed to a loss of power in nearly all Lower Manhattan Commercial buildings. While the financial district was shut down for two consecutive days after the storm, most damage was to systems (electrical, heat and communication) rather than structural. 27 out of 49 damaged buildings reopened after 30 days, and 96% of damaged buildings were open by years end.
The speed of building recovery was largely attributed to landlord crisis management, building fortifications and tenant contingency plans (for example, allowing employees to work remotely). Despite immediate challenges post-Sandy, robust tenant demand remains for the Lower Manhattan commercial market. Over 1 million square feet of leasing occurred post-Sandy, most of which is attributed to Lower Manhattan’s reliable transportation, lower priced office rents (Midtown office rents remain 67% more expensive), and diverse tenant base. The most at-risk areas in lower Manhattan located in flood zone A are already viewed as secondary due to distance from transit. Overall, the basic value proposition for tenants remains compelling.
ULI New York will continue to monitor risk associated with Hurricane Sandy and the effect on real estate valuation. Special thanks to Eli Neuberg, Director of Development and Acquisitions, Best Development Consulting and NYU Schack Institute of Real Estate student for his research assistance with this project.