According to analysis by Morningstar Credit Ratings, 302 properties, with an allocated property balance of $1.1 billion, may be at elevated risk because of major flooding in Louisiana last month. These properties, backing 214 loans in commercial mortgage–backed securities (CMBS), are in the 20 Louisiana counties, called parishes, that were declared major disaster areas by the Federal Emergency Management Agency (FEMA). Almost all of the properties, with a balance of $1.01 billion, are in the Livingston and East Baton Rouge parishes, which suffered the most damage, according to the New York Times. While we see the potential for physical and monetary damage for many of the properties in affected areas, the undamaged multifamily and hotel properties may see an uptick in demand in the short term, as thousands of homeowners seek out both temporary and permanent residence.
CMBS Largest Exposure
To further quantify the damage caused by the flooding, we called leasing agents at the ten largest properties in the flood zone, which account for 25.3 percent of the total balance. We confirmed flood damage at only one property, St. Jean Apartments, which backs a $27.6 million loan in FREMF 2014-KF05. The multifamily complex experienced flooding on the first floor and will not have available units for the next six to 12 months, said a leasing agent. An additional three multifamily properties were shown in flood zones on local government preliminary flood maps; however, leasing agents were hesitant to confirm whether the buildings had experienced flood damage. While one leasing agent confirmed that availability was limited because of flooding, it was unclear whether this was because of damage or because of increased demand from displaced homeowners.
Most Affected Areas
According to a preliminary report from the Baton Rouge Area Chamber, the hardest-hit area in Baton Rouge was Livingston parish, where an estimated 86.6 percent of Livingston homes experienced flooding. We identified a mix of multifamily, stand-alone retail, and self-storage properties in the area, totaling $59.5 million in allocated property balance. The East Baton Rouge Parish, which houses 129 properties backing CMBS loans, also suffered significant damage, with an estimated 17 percent of houses damaged by the flood. According to the report, approximately 31 percent of these residential properties were renter-occupied.
The map below displays CMBS exposure to five of the hardest-hit parishes. Combined, these parishes account for 30 percent of the state’s CMBS exposure and make up 89 percent of CMBS exposure to the FEMA flood zones.
Property Type
Residential properties were hit the hardest among property types, with local government officials estimating flooding in around 53,000 residential properties, about 13 times the amount of commercial properties estimated to have been damaged. Within the flood zone, CMBS has the most exposure to multifamily properties, with loans backing 52 multifamily properties, totaling $710.1 million in allocated property balance. Although there is risk that many of these properties were damaged by the floods, reports indicate that the Baton Rouge area is undersupplied, so undamaged multifamily properties may see increased demand as people seek out new homes.
Top 10 Loans in FEMA-Declared Flood Zones
According to the Baton Rouge Area Chamber report, retail, which accounts for 31.8 percent of the CMBS exposure in the area, was the hardest-hit industry. Even properties that may not have been damaged may feel the effects of the disaster. Although the economic effects of the flood are still uncertain, malls will likely see reduced foot traffic over the coming months. As a result, we believe that the $126.9 million Mall of Acadiana loan in BACM 2007-2 may suffer from the aftereffects of the floods, even though all stores in the mall were open for business at the end of last month.
Top 10 Loans in FEMA-Declared Flood Zones
Morningstar also sees heighted risk for the loans that are already operating at low debt-service-coverage ratios, such as the $37.9 million Bon Carre loan backed by an office property. The loan is on the master servicer’s watch list because of low occupancy and is operating at a 1.06 times DSCR. Although no flooding was confirmed at the property, finding potential tenants to move into an area with such severe flooding could pose an additional challenge to leasing up the space.
Mold, new regulations, and a lack of insurance could add a layer of risk to damaged properties. Flood damage to businesses is typically covered by a separate policy sold through the National Flood Insurance Program that includes a 30-day waiting period before it takes effect. Not all property owners are required to buy it, depending on the property’s location. Wind-driven rain damage is typically covered by property insurance, but only flood insurance covers damage caused by rising water. In addition, the full extent of the property damage remains unclear. Even properties that did not suffer serious flood damage may be susceptible to mold, which can be expensive to rectify and, at worst, leave properties in disrepair. Furthermore, according to the Wall Street Journal, FEMA is proposing new regulations that both commercial and residential properties be rebuilt on higher ground. Although this would theoretically prevent future flood damage of this scale, it could add to rebuilding costs in the short term.
Sarah Helwig is an associate analyst with Morningstar Credit Ratings.
