For the Atlantic and Gulf Coasts, the thought of a hurricane is a fact of life. Recently, the fact is that violent storms have made life unbearable for millions of coastal residents. In spite of this recurring devastation, there are increasing numbers of Americans living in coastal areas prone to hurricanes. This fact demonstrates the importance of differentiating between short term impacts and long term trends in real estate investing.
Real Estate Markets Triumph in Coastal Areas
There is absolutely no doubt that Americans like to live on the coast and are moving there in increasing numbers. Between 2010 and 2016, coastal counties of South Carolina increased their population by over 13%. This is despite being hit by Hurricane Hugo in 1989, Hurricane Bonnie in 1998, Hurricane Floyd in 1999, Hurricane Charley in 2004 and Hurricane Joaquin in 2015. It does not matter if hurricanes follow each other quickly or after a long lag. The population increases.
The city of Houston is another prime example of this. According to the U.S. Census Bureau, the Houston metropolitan area grew by an average of more than 2,600 people per week from 2010 to 2016. The total population increased from 5.92 million to 6.77 million over this time. Again, this is despite the fact that the Houston area is hit by a major tropical storm every 15 years on average, and that studies have predicted that a direct hit will result in a major environmental catastrophe.
The most telling example of this dynamic is the Miami metropolitan area. In 1992, the area received almost a direct hit from Hurricane Andrew, a category 5 monster that caused $26.5 billion in damage. It was the most powerful storm to hit the state. At the time, the population of the area was just over 4 million people. Hurricane Wilma hit the area in 2005 and caused $21 billion in damage. The metropolitan population at the time was just over 5 million. By 2010 the population was 5.5 million, and by 2015 it was the 8th largest metropolitan area in America with over 6 million people.
Irma and Harvey’s Influence on Real Estate Investing
The dynamic of increasing population in areas that will inevitably be hit by a hurricane is not willful ignorance. It demonstrates that people making informed choices about where they want to live have done a cost to benefit analysis and decided the benefits of coastal living outweigh the costs of hurricanes. This cost, both the inconvenience of evacuation and the property damage caused by a hurricane, is “baked into” the real estate value of the area.
Real estate investors understand this dynamic. There is no “perfect” property. Each project, each parcel, has its strengths and its weaknesses. The financial analysis is to weigh each of these and determine if a project is worth the risk. Hurricanes, and the risk of hurricanes, are just another factor impacting real estate values. Over the long term property values would be higher without hurricanes, but since hurricanes happen, they impact long term values.
Naturally, they have a greater impact on short-term market conditions. Nothing shuts down a real estate market like a major tropical storm. And values might take some time after a storm to fully recover their pre-storm levels. However, the upward dynamic of people moving to an area will eventually take over. In fact, someone planning a move to an area might see the temporary fall in values following a storm as a buying opportunity.
This all means that real estate investors can comfortably consider hurricane prone areas for investment opportunities. They should be aware that a storm can disrupt an investment and potentially delay a sale and time their investments accordingly. Because although it is impossible to tell when the next time Miami will be hit with by a hurricane, it is certainly not going to be during January or February.
