Houston Market Mobilizes: Boots on the Ground, Drones in the Sky

Nearly ten years ago, I published a piece on the environmental impacts of Huricane Katrina at a time when the media used terms like “toxic gumbo” and “nasty bouillabaisse of chemicals” to describe contaminated floodwaters in New Orleans. As I sit here writing this, Hurricane Irma, likely the strongest-ever recorded hurricane in the Atlantic, just pummeled islands in the Caribbean including St. John—one of the most pristine and a personal fave of this author.

Our clients in Florida and the East Coast are busy bracing for Irma’s impact later this weekend, and those in Texas have hit the ground running to assist with recovery from the jaw-dropping damage Hurricane Harvey already inflicted on Houston. Here’s what we know so far about Harvey’s impact on the market.

EP FIRMS MOBILIZE GROUND-LEVEL EFFORTS

The immediate impact of Hurricane Harvey was on Phase I ESA consultants who work in the Houston area. Some sustained damages to their office space, and displaced workers needed to be relocated or work remotely in the wake of the hurricane. Others came through unscathed. Environmental professionals from outside Houston, especially in nearby metros like Dallas, have been actively mobilizing and positioning staff with critical expertise to the area to assist in assessing the storms’ environmental impacts.

“Fortunately ATC’s Houston office survived and is still operational. We have our full team of certified industrial hygiene experts on the ground right now in Texas, and already positioned to assist with Irma recovery and those of other storms behind that one.”

~Dale Allison, Director, National Client Management, ATC Group Services LLC

As water levels drop, the Houston area faces many of the same questions that arose after Katrina:

  • What types of hazardous wastes were handled and stored in the hardest-hit area?
  • What potential contributing sources existed in the area before the storms hit?
  • What effect will the storms have on the market for Phase I ESAs as clean up and reconstruction gets underway?

Houston’s position as a large energy hub—home to oil refining and production facilities, chemical manufacturing complexes and other environmental risk operations—makes the area particularly vulnerable to contamination. The storm impacted thousands of contaminated properties, many of which are still submerged, raising concerns of federal, state and local government officials, commercial property owners, lenders, insurance companies and environmental experts about the potential for soil and groundwater contamination.

It will likely be weeks or months before the extent of the contamination is fully known. As property owners slowly return to Houston, damaged properties will need to be carefully assessed for the impacts of any releases of hazardous chemicals and petroleum products. Reclamation of properties is likely to be impacted by the presence of hazardous materials either from floodwater or from storage tanks and drums whose viability may have been compromised. The two most important aspects of the cleanup include environmental sampling, and accounting for the hazardous waste and toxic chemicals in the area. More testing of sediment, soil and groundwater will also be necessary throughout the flooded area.

“Getting business back open and people back in their homes will require a lot of assessments and testing.  Insurance claims for commercial real estate can be complicated and often require professional representation, inspections, and testing–an expeditious response is critical.”

~Joe Derhake, CEO of Partner Engineering and Science, Inc.

Over the near term, environmental firms expect to see more demand for assessments to assist in evaluating the risk of hazardous waste and petroleum contamination in the affected region as insurance companies, commercial lenders and others with a financial stage in devalued properties look for answers. CoStar estimates that as much as 27 percent of Houston’s gross leasable commercial real estate may be impacted by flooding in the wake of Hurricane Harvey, representing $55B in property value and 12,000 properties within the 500-year flood plain.

Commercial lenders and rating agencies will also need to classify which properties in the region may have been compromised, and any impact on the ability of borrowers to pay back loans and whether assessments/testing are necessary to evaluate if properties have been significantly devalued. Banks with holdings in the impacted area will also feel a hit. EDR sister company, Trepp estimates that roughly 2,900 commercial properties with about $29.6 billion worth of debt that was sold as CMBS was in the storm area, according to an analysis of 54 Harvey-hit counties. On top of that, banks, insurance companies and other types of lenders also hold billions of dollars of debt backed by real estate in the affected region.

Environmental consulting firms are already stepping in to provide expertise in the areas of insurance claim support, testing, mold assessments and hazardous waste management. At impacted properties, Harvey will also drive demand for Property Condition Assessment professionals to assess structural damage, as well as mold/indoor air quality professionals whose expertise will be critical for assessing damage related to water intrusion.

In an interesting technology side note, drones are taking to the skies to assess Harvey’s damages for insurance purposes. Companies are using the drones on a much larger scale than ever before to record site conditions across Houston, save time and avoid sending staff into potentially unsafe areas. Travelers Insurance, for instance, has 65 certified drone pilots among the 600 employees deployed to the Houston area.

HOUSTON MARKET CAPSULE

The Houston MSA is the 10th largest market for Phase I ESAs in 2Q17, accounting for two percent of all Phase Is conducted in the U.S., according to EDR’s ScoreKeeper model. The metro’s four-year history paints a period of slow growth, and relatively flat year-on-year growth at midyear.

houstonPhI

Harvey struck an economic blow to Houston just as the metro was beginning to regain its footing after the mid-2014 fall in oil prices. Houston, like Dallas, was once the number-one most promising commercial real estate market in the U.S. in the popular ULI/PwC Emerging Trends ranking. As a result of the oil price decline, Houston fell to #40 this year as investors waited to see if energy prices would hold recent gains and bring strength back to the area. While the office market was already hurting from slump in energy sector, one factor driving Phase I ESA demand there this year was that Houston was still very much a draw for industrial property investors as a major port and distribution market.

LONGER TERM OUTLOOK

The impact of the storm’s activity on the environmental due diligence market will likely closely correlate with how commercial real estate markets react. Economic growth will be slower-than-expected in the near term as barometers like GDP and job growth take a hit, but will likely rebound as rebuilding efforts get underway. Longer term, Houston is largely expected to recover because of its importance as an energy, commerce center and port city as well as being a home to many corporations.

In the hardest-hit regions, the risk of higher commercial mortgage defaults, particularly by borrowers lacking insurance, could drive properties back onto the selling block. There will also be a large concentration of insurance claims, and carriers are likely to be more cautious about issuing policies in the region, particularly given the contamination unleashed by the storm. Moreover, the contamination left in Harvey’s wake could also generate a more acute awareness of the need for environmental insurance as a way for clients to manage business risk, particularly in flood-prone areas. This could lead to Phase I opportunities with insurance providers serving this area. Rating agencies, lenders, insurance firms and investors are also likely to scrutinize loans in FEMA-affected zones much more closely in the coming months and even years. Loans originated for CMBS pools could be subject to the most stringent levels of environmental due diligence.

Longer term, the hurricane has implications for assessing environmental conditions in the affected area. As one EP argues, Phase I ESAs conducted in Houston are now exponentially more complicated:

“Pre-existing soil and groundwater contamination and a plethora of new hazardous substances and petroleum products have mixed and flowed in every direction, and even small quantities of not particularly dangerous household chemicals from many, many flooded residential and commercial buildings can accumulate and combine with each other and other more dangerous substances and complicate and multiply risk…It is obvious that good commercial and customary practice has changed since Harvey stormed into Texas and nearby states.”

~Edward Devine, USA Due Diligence Services

Until an accurate assessment of the full extent of the damage to the area’s soil and groundwater has been made, the impact on the commercial real estate market and demand for Phase I ESAs will remain largely uncertain. There is no question that the assessment and cleanup of the affected region will be one of the industry’s greatest challenges, and there are already concerns that Harvey will drive up construction costs and put pressure on demand for materials and labor in the rebuilding efforts. These epic storms are also raising awareness of the need for urban planning and design to account for the likelihood of severe weather events especially in flood-prone areas, and will likely alter infrastructure and land use development decisions for years to come into the least vulnerable areas.

FOR MORE INFORMATION

  • If you haven’t already, take a few moments to check out EDR’s Harvey Response Center where we’ve unlocked access to a variety of data sets that could assist in recovery efforts, including important government records about environmental hazards and geospatial data for the location of properties that create, manage, process transport of dispose of various hazardous chemicals and petroleum products.
  • Redeveloping for a Flood-Proof Tomorrow: Visionary Dan French, CEO of Brownfield Listings, wrote a great blog arguing that Houston and many other low-lying and flood-prone regions in the US require modern bluefield infrastructure planning that builds in waterways rather than allowing sprawl to go unchecked across flat, flood-prone regions.

NOTE TO READERS:

TXhandsOur thoughts and concerns are with clients and friends who live in the affected area, as well as those who are in the trenches in Houston offering their time and expertise in what is certain to be a long recovery process from the damage inflicted by Hurricane Harvey. At the same time, we are keeping clients who live in Florida and the Southeast coastline in our thoughts, and hoping for their safety as they prepare and brace for Irma’s arrival this weekend.