CMBS Credit Risk Elevated By Louisiana Floods
A group of 302 Louisiana properties backing over 200 loans totaling approximately $1.1 billion in allocated property balance have, according to Morningstar credit ratings, elevated default risk due to the flooding in the area.
The August 12 floods killed 13, dumping three times as much water on southern Louisiana as did Hurricane Katrina in 2005. The areas surrounding Baton Rouge and Lafayette have seen the worst damage, prompting evacuations of at least 30,000.
Multifamily and Retail Properties Hit Hard
Affected commercial properties located in the 20 flooded Louisiana parishes included a group of the ten largest properties in the area. The properties make up about a quarter of the portfolio backing a 2014 Freddie Mac offering totaling over $1 billion. Morningstar called leasing agents at the properties but could confirm flood damage at only one of the ten, a multifamily complex. In Livingston Parish — the hardest-hit in the area according to the Baton Rouge Chamber of Commercce — multifamily, self-storage and stand-alone retail properties stand amid the 86% of housing that experienced flooding. Morningstar’s research identified the Freddie Mac CMBS has the most exposure to multifamily properties, with loans backing 52 such, totaling over $700 million.
Renter Demand Uptick?
According to Urban Land Institute:
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.
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.
The flood costs to the people of Louisiana are incalculable, but the soaking could well spread to investors and taxpayers — even as the Freddie Mac guarantees are in place to protect principal and interest payments, the shock of a rare event like 2016’s Louisiana flooding has put the structure in all of structured finance to the test.