It is not likely that the ripple effects from Hurricane Katrina will cripple the U.S. commercial mortgage backed securities (CMBS) market. Two other factors — mold infestation and higher energy prices — are likely to be more pressing in the weeks and months ahead.

Adam Fox, a director at Manhattan-based Fitch Ratings, believes that the near term effects of the storm on the real estate market may not be as severe as many thought — but he cautions that steeper energy prices and an ensuing mold problem could be even more devastating.

“This will be a test of the CMBS structure in places like New Orleans and Mobile (Alabama). Right now, however, most people are just trying to contact their borrowers with properties in the region,” says Fox, who expects to see an uptick in New Orleans CMBS delinquencies. Borrowers are typically required to carry insurance, including wind damage, which generally carries a 5% loss deductible. Property interruption insurance is also standard.

Risk Management Solutions estimates that roughly 150,000 New Orleans properties have been flooded. That could result in $25 to $100 billion in insured losses — a hefty figure, but still only 1% of annual U.S. gross domestic product (GDP).

The same scale will help the CMBS market weather any localized effects of the storm. After all, says Fox, the $500 billion domestic CMBS market is massive. So far, Fitch has identified $585 million in CMBS tied to New Orleans commercial properties. Fox believes that number will climb as more information is gathered. Fitch reports that the 1,290-room New Orleans Marriott, for example, has roughly $80 million of debt on its books. The floodwaters climbed as high as the hotel’s fifth floor.

The potential for mold infestation is huge. What few can gauge is how pervasive the problem will be, what types of mold (toxic or harmless) will appear and how much it will cost to eliminate mold from the affected properties.

Fox, who has spoken to several loan servicers over the past week, says that most are optimistic about draining the city and ultimately drying it out. He’s hesitant to compare Hurricane Katrina’s impact to previous storms since the CMBS market has grown exponentially since 1992 when Hurricane Andrew roared across the Eastern seaboard.

Bigger Picture

Rebuilding efforts along the worst hit areas of the Gulf Coast are expected to drive economic growth in 2006. Economy.com this week revised its 3.5% annualized GDP growth projection for the first half of 2006 up to 3.9%. That’s good news, but the massive amounts of steel, lumber, concrete and construction machinery needed in the Gulf over the next few years should also push construction costs up nationwide.

Boston-based Property & Portfolio Research also projects that higher construction costs could lead to delays, which would slow new development. That would, in turn, allow net absorption to soak up vacancy a bit faster, pushing up replacement costs.

The one property class that stands to take the biggest hit may be retail, which up to this point has led the market. With higher energy prices eating into retail spending and stimulating inflation, consumers may lose confidence and decide not to shop.

Property & Portfolio Research estimates that a .10 cent increase in gas prices means $1.5 billion extra dollars per month spent at the pump versus the retail store. That increase only equates to 0.6% of monthly retail sales, however. Of course, fewer goods being sold means lower retail NOIs (net operating incomes) and fewer inventories to store in warehouses.

In closing their Sept. 6 analysis, Property & Portfolio Research noted that the retail and warehouse markets would bear the largest impact simply because consumer spending stands to weaken as the flow of goods is interrupted.