Hurricane Florence: How Will the Storm Affect Multifamily Fundamentals? - Sachse Construction
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Hurricane Florence: How Will the Storm Affect Multifamily Fundamentals?

One year removed from the devastation created by Hurricane Harvey in the Houston area, the country is once again reeling from another major storm. Hurricane Florence, which made landfall Sept. 14 along the North and South Carolina border, appears to be one of the most catastrophic hurricanes to ever hit the Carolinas with its torrential rainfall and widespread flooding.

Major hurricanes often displace large numbers of local residents from their homes. In Houston last year, more than 200,000 single-family homes were damaged by flood waters, and upwards of 20,000 multifamily units also sustained damage. The displacement of thousands of residents into either hotels or other multifamily communities caused a noticeable shift in apartment fundamentals, resulting in a rapid increase in occupancy.

When Hurricane Harvey made landfall in Houston, the apartment market was in tough shape. Houston’s dominant energy sector was suffering from the effects of depressed crude oil prices and the region had lost jobs over the past two years. Multifamily vacancies were above 10 percent and rent concessions were prevalent throughout the region.

The massive displacement of residents from the hurricane soon sent demand for apartments sky-high. Houston’s apartment absorption level in the third quarter of 2017 was one of the highest on record dating back to the early 1980s, and vacancies plunged.

The surge in demand was also evident in a sharp increase in apartment rents. Average apartment asking rents in Houston increased by about 2 percent in just 30 days — the amount apartment rents typically grow in Houston for an entire year.

While the multifamily markets in Florence’s path, such as Wilmington, Charleston, Florence, Columbia, Augusta and Fayetteville, are vastly smaller than Houston, the potential for a similar ‘Harvey Effect’ on the local multifamily market is very real.

Excluding Charleston, vacancy rates in the aforementioned multifamily markets are relatively tight, with vacancies all below 8 percent. Unlike Houston, where vacancies were above 10 percent at the time of the storm, the low level of available units in the Carolinas to house displaced residents has the potential to result in a big increase in demand and rental rates.

With a storm of this magnitude, it will take a while to fully understand the complete picture of damage that Florence leaves in its path. To understand the effects that storms of this caliber have on residential housing markets, below we look at the experience in Houston in 2016 and Baton Rouge a year later, both of which dealt with large-scale flooding.

Baton Rouge, which experienced significant flooding in August 2016, experienced much the same in terms of the displacement of residents because of flooding of both multifamily and single-family housing. Rent growth soared as the need for housing was at one of its highest levels of all time.

However, one year later, a correction took place. Displaced residents who had previously flocked to multifamily units departed as quickly as they had moved in and the ultra-competitive leasing environment from one year prior was turned on its head. Following this outward migration, apartment occupancies in Baton Rouge have remained below 90 percent since mid-2017.

Hurricane Harvey made landfall in Houston on August 25, 2017 and some parts of the region received more than of 50 inches of rain. As noted above, the surge in demand for rentals provided landlords the opportunity to reap high rents in the immediate wake of the storm.

Although demand for apartments has remained strong, Houston has started to see rent growth slow a year after the storm. After the initial spike in asking rents from August-September 2017, apartment rents in Houston continued to grow through June 2018, but at a slowed pace. At that point, the average asking rents for apartments were about $1,095/unit. As of September 2018, the average had dipped to just below $1,090/unit. This has been a consistent trend rather than a temporary dip that may correct itself in any given day.

As the damage in the Carolinas is assessed, and asking rents are monitored via CoStar’s Daily Rent Series, the potential displacement from the storm has the potential to result in a spike in asking rents. Given the smaller-sized markets affected by the storm with their smaller housing stocks and already low vacancies, the expected subsequent correction that occurred in Baton Rouge and Houston following their recent storm impacts may take longer as the rebuilding process begins.

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