Hurricane Harvey puts many securitized commercial mortgages in Texas at risk.
Moody’s claims some 1,500 properties may have been impacted by Hurricane Harvey amounting to 19.4 billion in outstanding CMBS loans. The number of CMBS financed properties at risk varies with each analysis. Competing methods of analyzing the storms damage to investors’ portfolios have emerged. One method is to consider the wider area impacted by the storm, the other is to consider the areas that were more acutely impacted.
One method of analyzing the damage is to consider properties in the disaster area declared by Governor Gregg Abbott. The area includes 54 counties and reaches as far as San Antonio. An opposing approach is to consider the disaster area declared by FEMA, an area encompassing some 33 counties. The first approach gives a broader sense of the storms potential impact on CMBS properties, while the second offers a more clinical assessment.
In the state declared disaster area there are about 1,200 CMBS loans amounting to 15.1 billion dollars that could be impacted by the storm. These loans are not government sponsored, and therefore, pose a higher credit risk to investors. Retail properties have the highest exposure among these loans. Making up 32.9 percent of the total, or 5 billion dollars, of the outstanding CMBS loans.
Considering the areas impacted according to FEMA the number of CMBS loans at risk is smaller, but the overall impact remains the same. In the 33 counties declared “disaster-areas” by the agency there are 900 non-government sponsored CMBS loans, amounting to a balance of 12.2 billion dollars… Retail properties again face the greatest exposure, making up about 30.1 percent of the total.
It will be difficult to directly quantify the impact of Hurricane Harvey on the CMBS market and Texas commercial mortgages in the short term.
Whether analysts consider the broader area impacted by Hurricane Harvey or the areas more acutely impacted the extent of the damage to the CMBS market will be difficult to estimate in the short term. The damage to each individual property will have to be assessed.
What is clear from both overviews is that retail makes up the largest share of CMBS loans potentially impacted by the storm. The performance of these loans in the future will largely depend on how the local economy recovers and whether these retailers will be able to retain their customers.
In the long term securitized commercial mortgages in Texas will continue to face risk from natural disasters.
Simply put CMBS lenders don’t underwrite the potential cost of natural disasters. Therefore the market will always face exposure when disasters like Hurricane Harvey take place. Flood insurance, FEMA assistance and the willingness of private insurers to underwrite risk encourages development in disaster prone areas, in Texas and throughout the nation. Insurance may repair the damage caused by these disasters on the surface, putting some investors at ease. But the damage Hurricane Harvey inflicted on the local economy remains unclear. With retail properties facing the greatest exposure, the greatest risk to CMBS loans is not superficial damage that can be repaired, but Harvey’s long term damage to the local economy and whether retailers can secure customers in areas where the population is displaced.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.