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PROTECTING YOUR ASSETS: How Will Sandy (And Future Storms) Affect
Real Estate Property Values?
Wednesday, March 20, 2013
Presenters
Michael Hedden, MAI, CRE,
FRICS
Managing Director, FTI
Consulting
Dale Todd, CFA,
MRICS
Vice President, JP
Morgan Asset Mgmt.
Jonathan Miller, CRE,
CRP
President and CEO,
Miller Samuel Inc.
How Detrimental Factors Affect Property
Value
Michael Hedden, MAI, CRE, FRICS
Managing Director, FTI Consulting
Introduction In the wake of Hurricane Sandy, there has been much uncertainty over how the
real estate market will respond in coastal areas. Post-catastrophe, The
Detrimental Conditions Matrix addresses three stages (assessment, repair and
ongoing) during which related issues involving cost, use and risk should be
considered. Members of the valuation and appraisal industry have yet to make
concrete conclusions on how Sandy will affect real estate property values in the
tri-state area as the market plays out.
This webinar will show how detrimental factors affect property value and share
best practices in valuation post-catastrophe.
Storm Winds
Super Storm Sandy Potential Storm Track - October 30, 2012
Source: National Hurricane Center (NHC)
Damage from Sandy
How Detrimental Factors Affect Property
Value
• Detrimental Condition Theory and Terminology
• Risk
• Market Fundamentals
• Highest and Best Use
• Value Measurement
Detrimental Condition Analysis Overview
• Issues
-Cost
-Use
-Risk
• Stages
-Assessment
-Repair
-Ongoing
Terminology Detrimental Condition: Any issue or condition that may cause a diminution in
value to real estate.
Detrimental Condition Model: A graph that illustrates all of the categories of
stages and issues that must be considered when studying the effects of a
detrimental condition on real estate values – e.g., assessment stage, repair
stage, ongoing stage and market resistance.
Detrimental Condition Stages: The three stages of a detrimental condition
analysis, specifically, the assessment, repair and ongoing stages.
Diminution in value: The lost value of real estate before (as if impaired) and
after (or upon discovery of) a detrimental condition.
Environmental risk: The risk associated with a detrimental condition caused by
an environmental issue.
Environmental impairment (to value): Assuming that an environmental risk
exists, an environmental impairment to value may exist if the risk 1) restricts the
use of the property; 2) imposes incremental ownership costs on the property; 3)
makes the property less desirable in the marketplace.
Terminology External Depreciation: Any event or development located off-site that
negatively impacts the subject property.
Impaired Value: The indicated value of a property upon the application
of one or more of the three detrimental conditions to value.
Market Resistance: The risk, if any, associated with the ongoing stage
of a detrimental condition analysis; includes the reluctance on the part of
the real estate market to buy a property that has historically been
damaged or tainted; sometimes call “stigma”.
Project Incentive: The risk, if any, associated with the repair stage of a
detrimental condition analysis.
Uncertainty Factor: The risks, if any, associated with the assessment
stage of a detrimental condition analysis.
Unimpaired Value: The value as if no detrimental condition exists.
Source: Randall Bell, Phd. MAI
Source: Randall Bell, Phd. MAI
Real Estate Risk Analysis
• Market Risk - net operating income will be affected by market
condition changes – (i.e. desirability)
– Location
– Type of property
– Demand for real estate by users
– Supply of space
– Market rental rate
– Vacancy rates
– Operating expenses
– Stage of investment cycle
• Liquidity Risk - difficulty of converting an investment into cash at
market value in a reasonable time
Real Estate Risk Analysis
• Management Risk - competency of management can affect the
rate of return
– Degree and type
• Environmental Risk - risk that its physical environment will
affect a property's value
– Perceived hazards
– Restoration costs
– Acts of nature
• Legislative Risk - risk related to legal factors that may affect a
property’s market value
– Tax laws
– Regulations
– Permitting
Market Fundamentals
• Property Productivity
• Market Area
• Demand
• Supply
• Residual Demand
• Capture
Highest and Best Use
• Physical Possibility
– Development Restrictions
• Legal Permissibility
– Use Restrictions
• Financial Feasibility
– Cost Benefit Analysis
– Risk Return Analysis
– Time Value of Money
• Maximum Profitability
Elements of Feasibility
• Remediation Costs
– Current and future
• Financial Assistance
– Insurance, Gov’t Programs
• Risk Mitigation
– Legal, financial, physical
• Profit Incentive
Fundamental Principles
• Bundle of Rights – Impact upon Fee Simple
• Use • Disposition • Finance
• Market Value – Most Probable Price – Anticipation of Future Benefits – Market Behavior
• Perceived risks
Value Measurement
• Cost – Land Value – Accrued Depreciation
• Sales Comparison – Market Substitution – Market Resistance
• Stigma – Before and After Comparison
• Income
– Incremental changes from the event • Cash Flow • Return Rates
– Mortgage – Equity
Accrued Depreciation-
Curable or Incurable?
• Physical Deterioration
– Cost to cure
• Functional Obsolescence
– Property lacks something
• External Obsolescence
– Economic or locational factors
– Temporary or permanent
– Not usually considered curable
Macro Residential Considerations/Case
Studies
Jonathan Miller, CRE, CRP
President and CEO, Miller Samuel Inc.
Housing’s New Built-in Costs
• Long Term Expanded cost of home ownership
– Flood Insurance
– Access to Credit
– Home Owner’s Insurance
– Expansion of building codes
• Near & Long Term Impact to market transactions
Case Study
-Sales v. Price Trends
-Days on Market, Listing Discount
-Listing Inventory
Insurance
• Flood required for federally regulated, insured lenders
• Many borrowers w/o insurance
• Insurance/loans, many inadequate for regional prices
• FEMA expanded regional flood zones (doesn’t consider
future climate change)
• Insurance costs related to above/below flood line
• Homeowners Insurance – access and cost impact
Access to Credit
• Location in flood zone (ie zone A)
• Residential mortgage lending already historically tight -
has not eased since ‘08 Lehman bankruptcy
• Mortgage lenders risk averse
Building Codes/Costs
• FEMA Base Flood Elevation (BFE)
• Local communities may raise BFE above FEMA
Wind loads
Impact To Market Value
• Short term - market stall
– Sales drop, closings delayed
– Prices remain stable
– Inventory rises and marketing time, negotiability
expands
– Prices eventually decline
*One more “Sandy” in near term and much more
significant impact to housing market.
Initial Impact
Nassau County: Overall v. South Shore Metrics
Initial Impact
Nassau County: Overall v. South Shore Metrics
Initial Impact
Nassau County: Overall v. South Shore Metrics
Impact To Market Value
• Long term - market fights to return to “normal”
– Value stigma of hardest hit areas fades (assuming no
super-storms)
– Higher costs factored into affordability, price structure
softens.
– Use of 1-4 family lots/neighborhoods may change
- Waterfront lots, higher priced homes better able to absorb
costs
- New multifamily development along waterfront, especially with
current development site shortage
Micro Commercial Considerations/Case
Studies
Dale Todd, CFA, MRICS
Vice President, JP Morgan Asset Mgmt
Lower Manhattan (LoMa) Post Sandy
Photo courtesy of New York Magazine
Immediate Aftermath
• Highest storm surge of 13.88 feet
• Seven subway tunnels flooded
• Nearly all LoMa commercial buildings lose power –
except for World Financial Center and 200 West St
• Total downtown inventory of 101m SF in 183
buildings
• 35m SF in 49 buildings (+/- 35% of inventory) ceased
operations as of Nov 5
• Damage primarily to systems from flooding – no
major structural damage
Immediate Aftermath • Closed buildings overwhelmingly
concentrated east of Broadway – 44 of
49 (Jones Lang LaSalle)
• No correlation between age and
damage (Jones Lang LaSalle)
• Typical flooding up to 4 feet on ground
floor
• Typical systems damage included some
combination of electrical, heat and
communication
• Minor damage to ground floor windows
and doors
Source: Jones Lang LaSalle
Recovery
• 27 of 49 buildings reopened after 30 days – bringing
LoMa capacity from 65% to 82% (Jones Lang
LaSalle)
• 44 of 49 buildings reopened by year end – bringing
LoMa capacity to 96% (Jones Lang LaSalle)
• Major hurdles to re-occupancy
– Pumping: generally 2 to 14 days depending on
basement depth, water contamination and pump
availability
– Coordinating among service providers and
regulatory authorities to restore minimum service
Recovery
• Many tenants effected contingency plans that included
temporary relocation or work from home arrangements
• Re-occupancy generally occurred under minimum service
standard as required by DOB and FDNY
– Power mostly from mobile power plants
– Typically limited communications depending on
service provider
• Impressive recovery given the magnitude and
unprecedented nature of the disaster
Competitive Strengths
• Still the cheapest office rents in Manhattan (3Q12 BPO
market report)
– Midtown: 10.5% vacancy with asking rent of
$66.42/SF
– Downtown: 9.3% vacancy with asking rent of
$39.83/SF
– Midtown is 67% more expensive than Downtown.
• Will be Manhattan’s largest transit hub with the
completion of the Fulton Street and WTC projects
• Verizon network upgrades will create some of the nation’s
most advanced communications infrastructure
Post Sandy Leasing
• Landlord differentiation
– Those that fortified their buildings vs. those that have not
– Tenants with business interruption concerns will not look at non-
fortified buildings
– Fortified buildings are able to maintain pre-Sandy rents
– Non-fortified buildings are seeing rent discounts due to reduced
market interest
– Fortifications often result in reduced leasable area
• Robust tenant demand
– Tenant base remains diverse - finance, tech, media, non-profit
– Fortified buildings maintaining pre-Sandy rents
– Over 1m SF of post-Sandy leasing among affected buildings
(Jones Lang LaSalle)
Post Sandy Investing
• Location, location, location
– Proximity to transit still rules
– Avoiding Zone A locations
– Most vulnerable locations already viewed as secondary due
to distance from transit
• Perceived risk
– Lack of fortifications is a capital expense allocation, not a
risk adjustment
– Attractiveness of downtown has not changed because of
Sandy
– Many viewed LoMa as a value add/core+ market pre-Sandy
Conclusions
• Basic value proposition remains compelling for tenants
• Landlord’s crisis management helped mitigate impact
• Building fortification is now a key differentiator
• Infrastructure quality is a primary value driver
• Investor perceptions anchored to long term expectations
Q&A
Contact Us
Michael Hedden, MAI, CRE,
FRICS
Managing Director, FTI Consulting
Dale Todd, CFA, MRICS
Vice President, JP Morgan
Asset Mgmt.
Jonathan Miller, CRE,
CRP
President and CEO, Miller
Samuel Inc.
PROTECTING YOUR ASSETS: How Will Sandy (And Future Storms) Affect
Real Estate Property Values?
Wednesday, March 20, 2013