The Impact of Hurricane Sandy on Commercial Real Estate

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Hurricane Sandy may have been downgraded to an Atlantic storm prior to making landfall in New Jersey, but that did not stop it from becoming one of the most destructive weather events in history. After more than a week following the catastrophic path of Sandy in the Northeast, the impact of the storm on commercial real estate activity is being sharply felt on Wall Street and beyond.

The material effect of Hurricane Sandy on commercial real estate is evident in lower Manhattan, where Bloomberg BusinessWeek recently reported that a third of office space in the financial capital of the world is still not fit for occupation. The immediate impact has already been discussed: falling property values, diminished demand and higher premiums on insurance coverage.

Major tenants in lower Manhattan, like AIG and Morgan Stanley, are struggling to keep their employees working. Looking at the damage caused by Sandy, it is easy to understand if some tenants are not sure if the prestige of a lower Manhattan address is worth renewing a lease agreement. Some firms in the financial district that had offices elsewhere in Midtown or New Jersey have consolidated their operations there for the time being, but the move may be permanent.

The Long-Term Impact

Some New York City staples like the Daily News have also moved out of Manhattan and are planning on staying away for a few months. Most leasing agreements dictate that landlords must be prepared to provide living and working conditions to tenants in order to be allowed to collect rent payments. In such cases, lower Manhattan landlords will have to tap into their cash reserves to issue refunds, credits or prorate rent payments.

It may be a few months until many of the properties affected can be reoccupied. Until then, commercial real estate landlords in unaffected portions of New Jersey are seeing increased interest in their properties. Short-term negotiations may merit a higher monthly rent payment, and they give landlords a chance to be proactive and mindful of their new tenants' needs. Catering to displaced tenants could turn into long-term relationships for attentive landlords.

Commercial Mortgage Bonds

According to investment banking firm Credit Suisse, about $14 billion in bonds secured by mortgages on commercial real estate are concentrated in lower Manhattan. It is too early to determine the impact to these debt securities, but more than 3,000 mortgages may be affected. The time to gauge proper insurance coverage on these bonds is now.

Loan delinquency and defaults are expected in these situations, which may turn off some investors. Just like with residential real estate, insurance coverage for flood damages is a difficult issue. Should commercial real estate owners affected by Hurricane Sandy be forced to deal with inadequate insurance payouts, property values and mortgage bonds will be equally affected.

Erik Braunitzer is a writer for Douglas Elliman, brokers for NYC, Long Island and Hamptons Real Estate.

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