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Hurricane Irma-Related Damage Could Affect Some $26.60 Billion in Securitized Mortgages
Morningstar Credit Ratings, LLC identified some $26.60 billion in securitized commercial mortgages potentially at elevated risk because of major damage in the wake of Hurricane Irma. While the extent of damage still is being assessed, we found 1,840 properties, backing 1,471 securitized loans, in 16 Florida counties that the Federal Emergency Management Agency declared disaster areas eligible for individual assistance. Most of the properties, with a combined balance of $21.11 billion, are in Miami- Dade, Broward, Palm Beach, Hillsborough, and Duval counties.
There could be properties that have significant damage in counties that are not part of the disaster declaration. Nevertheless, Morningstar does not expect waves of loan defaults resulting from this storm, as business-interruption insurance should cover the gap in service, if necessary, for most properties. Still, flood damage could jeopardize the payoff of roughly $1.89 billion in securitized loans that mature over the next 12 months, as the damage may prevent refinancing the existing loan. Ultimately, if a property is operating, meeting its debt obligations, and there’s no lasting hurricane-related fallout, financing should proceed and the loan should pay off.
Commercial mortgage-backed securities have been exposed to five of the hardest-hit counties. Combined, these counties account for 79.4 percent of CMBS exposure to the FEMA-designated flood zones eligible for individual assistance.
The Florida Keys, where Irma made its first U.S. landfall as a Category 4 hurricane with winds of nearly 130 miles an hour, were hit especially hard. According to a cnn.com article citing FEMA, an estimated 25 percent of the houses in the Keys were destroyed and another 65 percent suffered major damage. There is roughly $291.4 million in CMBS exposure to the Keys, of which the Cheeca Lodge & Spa and the Ocean Key Resort & Spa secure the two largest loans with a combined balance of $156.2 million. Both properties remain closed until further notice, according to their websites. Elsewhere, flooding from a storm surge in Jacksonville, Duval
County, exceeded a record set by Hurricane Dora in 1964, the National Weather Service said. The St. Johns Town Center, securing the largest Duval County loan at $350.0 million, is open, according to the mall’s website.
CMBS Largest Exposure
To further quantify the damage caused by the flooding, we called the 10 largest properties backing CMBS loans in the FEMA- designated disaster zones eligible for individual assistance, which account for 12.2 percent of the balance of loans in FEMA-declared disaster zones. We were unable to reach only one, the Arium Resort, which secures a $154.7 million loan in FREMF 2013-K35. The 1,520-unit apartment property is outside of Fort Lauderdale in Broward County, where, according to Florida Power and Light Company’s website, roughly one-third of its customers remain without power.
As damage assessments across hard-hit areas are ascertained, undamaged multifamily properties and hotels could see more demand, as families will be forced to find temporary housing. Further, over the long term, Florida has had consistent job growth, which bodes well for commercial real estate.