Hurricanes Irma and Harvey: How Natural Disasters Can Impact the Market

Hurricanes Irma and Harvey: How Natural Disasters Can Impact the Market

I remember a few years ago, taking a phone call in front of our large conference room window. I was looking out at the downtown skyline of Tampa Bay, discussing deal points with a client on other end of the phone. Most of the office had cleared out to prepare for a brewing hurricane. The skies were blue and the sun was beaming, but grocery store parking lots were gridlocked as swarms of people flooded the aisles in search of water and canned goods. There was no indication that the storm would even continue heading our direction, but everyone was up in arms about being prepared for the worst. It turns out the Category 3 storm that was headed straight for us took a last minute detour and we maintained blue skies for the bulk of its passing.

Preparation, or non-preparation, becomes a double edged sword. Nine times out of ten, you will over prepare for a storm that never happens, but that one time you decide to overlook your preparations is when you will be hit the hardest. This year, hurricane season has been in full force. First it was Hurricane Harvey, which slammed coastal Texas with devastating power. Homes and businesses were flooded and cars were swept off the roads. The category 4 storm had 130 mph winds that ripped through the Texas coast overnight. At the end of it all there had been as much as 20 inches of rain in some places leaving over 300,000 people without power.

That type of devastation affects not only the residents, but the surrounding businesses, the infrastructure, and the real estate. Darden Restaurants, Inc., the parent company of a number of well known full-service restaurant brands such as Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, and the newly acquired Cheddar’s Scratch Kitchen, reported the storm hurt same store sales and earnings in its fiscal first quarter. Between forced store closures, power outages, and other unfortunate circumstances, their earnings per share took a hit. The Cheddar’s Scratch Kitchen concept was hit particularly hard because of their strong presence in Texas according to Nation’s Restaurant News (NRN).

Hurricane Irma was expected to have a similar impact on Florida markets. With its last minute shift causing a direct hit on the entire state of Florida, there were many Florida markets that were hit hard as a result. The day after all the devastation, our team was out driving the market to help owners assess damages to their properties. Many of the coastal flood zones flooded some houses and businesses. Most of Tampa Bay, however, was able to weather the storm with minimal damage, although many businesses went without power for over a week in addition to having difficulty acquiring supplies to keep their doors open. Some businesses were raking in the sales and taking advantage of being the only restaurants open among some of the densest counties in Florida. One Taco Bell I visited was slammed with guests, but still struggling to save face in the wake of not being able to get the supplies they needed. A guest asking for a spork was met with a manager’s apologetic eyes:

“We don’t have anymore. I might have to go down the street and see if we can get some plastic forks from Publix”

Most of Central Florida, although arguably hit the worst, weathered the storm fairly well. Aside from debris and a few fallen trees paired with a massive loss of power, most structures stayed intact. Many of the restaurants maintaining power served to feed those residents who were going on 5 days without power in their homes.

Other Florida markets, however, were hit harder than they would have wished. South Florida markets on both coasts and everything in between were met with some tough times; properties flooded, power grids out for weeks, infrastructure ruined. Many markets are still working to recover their physical structures, not to mention swallowing the pill of lost sales during the times of closure. Franchisees have been forced to close doors on a number of stores and some have even abandoned specific locations that they deemed too much of a capital expense to get back up and running.

In terms of net-leased investment sales, these factors impacted the market there too. Some properties that were hit the hardest were actually under contract at the time of devastation. Many of the potential buyers in the midst of 1031 exchanges ended up dropping those contracts. We saw an influx of offers shifting from south Florida markets to West and Central Florida inventory we still had available. Investors were looking more critically at hedges against catastrophe than they had previously. In addition, a number of owners had never considered the potential risk of a natural disaster or at least never considered it a risk significant enough to impact their investment. Some owners have had to spend thousands to tens of thousands of dollars on repairs, while others made it out with little or no damage, but now have considered selling due to the increased perception of risk.

These storms have been eye opening for many people in a variety of ways, including the other side of the coin where there are many investors now looking hard at Florida markets trying to identify the opportunities to scoop up some of these properties that may suddenly have value to be added. At this point, most businesses are back up and running in most major markets, and while many are still recovering, everyone is working hard to move forward. Ultimately, though, it is amazing how resilient the market is. For every owner wanting to exit Florida markets for fear of the next natural disaster, there are three buyers looking to buy in the income tax free state.

The show must go on…but now it may just come with a higher price tag for flood insurance.