Lack of availability and affordability of insurance after Katrina is the single largest obstacle to the Coast’s recovery, say commercial real estate agents on the Coast.
“If we don’t get George Dale to do his job, we won’t have any commercial real estate activity,” said Brooks Holstein, manager member, Comvest Properties, Biloxi. “Until Mr. Dale’s office becomes an advocate for Mississippians rather than an advocate for the balance sheets of the insurance industry, there will be no redevelopment on the Mississippi Gulf Coast.”
Holstein recently attended a meeting on insurance topics hosted by the Mississippi Commercial Association of Realtors (MCAR). Holstein, who represents South Mississippi on the board of MCAR, said he felt that Lee Harrell, deputy director of the Mississippi Insurance Department, sounded more like a lobbyist for the insurance industry than a government regulator.
The Coast is in a crisis with multi-family and affordable housing development because of the affordability and availability of insurance, Holstein said. Increased insurance costs are pushing projects out of being affordable, and the problem is compounded by additional costs for labor and construction materials.
“The economy of the Mississippi Gulf Coast and, for that matter, the U.S., is driven on the growth of single-family housing,” Holstein said. “If we can’t develop affordable housing with affordable insurance rates, economic growth will simply not occur. What that means to the commercial real estate business is essentially the same thing. What was a viable condominium development becomes non viable when what was a $200 a month per unit insurance premium has now become a $400 or $500 per month premium per unit, which substantially reduces the market for purchasers. That substantially reduces financability of the project. These are simply economic realities that cannot be ignored any longer. If Mr. Dale doesn’t understand he is failing the economic recovery of Mississippi, then he simply doesn’t understand the mission of his office.”
Insurance is not just a problem south of Interstate 10, but also north of the interstate, where a lot of the new development is occurring.
Holstein has been working with the International Council of Shopping Centers since March exploring legislative solutions to the insurance problems. One concept that holds promise is a national policy that combines catastrophic losses including hurricane, flood, earthquake and tornado be pooled to minimize loss exposure across the country.
“Most people don’t know that in Oregon and Washington State, each month schools have tsunami drills,” Holstein said. “The concept is let’s create catastrophic loss pools today rather than often, as government does, wait until catastrophic loss has occurred and then do a bail out. Combine the East and West coasts in a catastrophic loss pool, and require all hurricane or tsunami areas to participate in the catastrophic loss pool. It isn’t an option but a requirement. In the case of catastrophic loss, you wouldn’t need emergency legislation to compensate lost homes and government.”
Cynthia Joachim, broker-owner, Century 21 Harry J Joachim Inc. Realtor, Biloxi, echoes the sentiment.
“The number one concern is insurance,” said Joachim, a past president of the Mississippi Association of Realtors. “There is no relief in sight for the short run. The wind and hail went up October 1 on commercial properties to 268% higher. The problem is that this is absolutely going to be a major deterrent to the recovery and rebuilding of this Gulf Coast. You cannot add those type of rates on top of debt service and cost of construction.
“Investors won’t be able to collect enough rent to cover that dramatic increase in insurance. If you are a user of your property, you are going to have to make sure you have enough income to cover debt service and the cost of insurance.
Unfortunately here with commercial as well as residential market, rents and salaries are incompatible.” Joachim does a lot of multi-family business. One client on his insurance premium anniversary date saw his insurance go up from $18,500 per year to $53,000 for 14 units. Another complex that is 48 units saw rates soar from $19,000 to $114,500.
“The insurance rates are absolutely going to kill recovery here,” Joachim said. “By the time we add the increased cost of land, construction, material and labor, we will price ourselves out of the market. Unfortunately, with that kind of price point on insurance, there is no relief in sight during the short run. “
But Joachim said investors remain interested. They may be stepping back to regroup, but there continues to be interest, particularly in construction of multi-family units.
“I haven’t seen people pull out of the the market,” Joachim said. “We have been inundated with out-of-town investors who want to take advantage of GO Zone activity. That is a gift from the IRS, no doubt about that. But you still need a correlation between the cost of property and what you can collect. Investors are not in this to have a negative cash flow each month.”
Locals are also interested in taking advantage of the GO Zone tax incentives. But sometimes local investors don’t have as many resources as out-of-town investors.
Joachim is heartened that there is a massive movement with Coast business leaders to work on solutions, especially on commercial insurance.
“Most of us still have a very honest belief in the quality of our life here, and the fact is there are some great things going to happen down here,” she said. “There is a bump in the road now. Land prices are too high, and insurance is extremely unfriendly to regrowth and rebuilding. We have to deal with all those issues. Prices must come down.”
Doug Molyneaux, CCIM, senior advisor, Grubb & Ellis-Sawyer Commercial, Gulfport, is optimistic insurance rates will come back down. He hopes with the help of the state’s congressional delegation, anti-trust laws will be imposed on insurance companies.
“That could be huge in bringing pressure on the insurance companies,” Molyneaux said. “The current insurance rates are prohibiting a lot of new development. Insurance is hard to get and when you can get it, it is very expensive. Projects are pulled at the 11th hour because they got their insurance rate quote. At a closing on a shopping center a couple weeks ago, the insurance increased over eight times what it was prior to the storm.”
He said while GO Zone legislation is a huge plus, the availability and price of insurance is delaying projects. If that goes on, GO Zone legislation needs to be extended for when the insurance rates come back.
“And rates have to come back,” Molyneaux said. “Otherwise you would have to build projects with no debt on them so owners can self insure.”
Recovery has also been stymied by the slow pace of homeowner grants for people who were not in a designated FEMA flood zone, but flooded. As that money begins to flow to the homeowners, there are concerns there aren’t going to be enough construction workers to handle renovations of damaged houses that are still here.
It is estimated by the Governor’s Commission that over the next five years 80,000 housing units need to be built, mostly in the affordable range.
“We previously never built more than 2,000 in a year,” Molyneaux said. “There is going to be a major need for skilled construction workers on the Gulf Coast. There is a huge need for housing just to house those guys. It is a Catch-22 scenario. We need affordable housing to house construction workers, but we need construction workers to build affordable housing.”
And there is going to be stiff competition for the construction workers who can find housing. Prior to Katrina, the most expensive investment in any casino was Beau Rivage at more than $600 million. Now it looks like the average casino resort investment going forward is going to be close to $1 billion.
“That is a tremendous amount of labor and skilled workers in itself,” Molyneaux said. “Understand how difficult it is going to be to build 16,000 residential affordable units per year over the next five years. It has never been done down here. It is not just that we need to increase production. We need to find new ways of doing things in order to accomplish that. I think modular housing is going to be a big part of that puzzle.”
The good news, he says, is the Coast is really ready to turn the corner. It has been approximately 14 months since the storm. The cleanup is for the most part completed.
Infrastructure services such as water, sewer and roads have been restored or are under construction. Retail especially north of Interstate 10 has come back strongly, and some Coast cities are experiencing records increases in sales tax revenues.
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.