Oil Slick Hits CRE Too

By Ken Ashley

ATLANTA (June 19, 2010)

As if the good people of the Gulf Coast didn’t already have enough to worry about; now some longer term financial implications of our Nation’s worst environmental crisis are starting to become apparent. According to a sobering Wall Street Journal article (republished below) “From Louisiana to Florida, fear about the oil spill’s impact is stalling real estate deals, causing owners of languishing hotels to worry that they will be unable to keep up with mortgage payments and giving local bankers nightmares about a new surge in loan defaults by businesses and consumers.” WSJ goes on to say “In recent months, commercial real-estate values have stabilized, with some bargain-hunting investors returning to the market. But the oil spill could push suffering properties over the edge—and scare opportunistic investors from the market.”

And the impact doesn’t stop at the Louisiana to Florida coast. In conversations with local brokers, Houston is worried about not only the fishing issues, but also by the ban on oil drilling which potentially affects employment in the region and even office and industrial occupancy rates. As if to sum up the feeling of the City, a restaurant owner told Click2Houston: “A catastrophe like this just goes on and on and on” (Buddy Treybig, owner of Matagorda-based Arnold’s Seafood Oyster House).

So, for some time to come the Gulf region of the United States will be impacted in many ways and on many levels: from wildlife, to fishermen and the tourist sector and, of course, all manner of commercial real estate. The disaster is man-made and absolutely should not have happened.

I thought it would be interesting to look back at the Exxon Valdez spill for an indicator of what form and how long recovery takes.

This article in The Encyclopedia of the Earth discusses, among other things, the economic impacts of the March 24, 1989 spill. The article notes that a “Severe labor shortage in the visitor industry throughout the state (occurred) due to traditional service industry workers seeking high-paying spill clean-up jobs.” I wonder if the Gulf Coast will have the same issue over the next couple of years. Perhaps this is a positive indication with respect to the service sector in the region.

Also, American Progress posted this article on April 30, 2010, comparing what was then known about the BP oil spill to the Exxon Valdez. Among the take-aways: “The key lesson from the Exxon Valdez is that the oil spill continues to have an impact today—more than two decades after the event.” So we know this will impact the local economy for years to come, but I think we already knew this to be the case.

Finally, this info from the same American Progress article: “Pacific Science Director for Oceana Dr. Jeffrey Short testified in a 2009 House Committee on Natural Resources hearing that, ‘Despite heroic efforts involving more than 11,000 people, 2 billion dollars, and aggressive application of the most advanced technology available, only about 8 percent of the oil was ever recovered. This recovery rate is fairly typical rate for a large oil spill. About 20 percent evaporated, 50 percent contaminated beaches, and the rest floated out to the North Pacific Ocean where it formed tarballs that eventually stranded elsewhere or sank to the seafloor.’ I sincerely hope the outcome is different in the Gulf.

But what happens next? Billions of aid and investment from the US Federal Government and BP are bound to have an impact, and actually getting the well capped will have a very positive, emotional impact on the region and our whole nation. Technology has clearly improved since the Exxon Valdez and recovery efforts are massive in scope. The great hope is that we learned from the Exxon Valdez and that the white hot media and political focus will make BP toe the line here, and all other oil companies in the future.

On the real estate front, this event is the 9/11 of the Gulf Coast, but just like New York and the Northeast recovered, The Coast will too. Unlike the Prince William Sound area, this is a very populous region with a diverse economy.

What we do know is that the people of the Gulf region are tough, resilient and creative. The whole nation and indeed the whole world is watching. We will get through this together.

Oil Spill May Hinder Recovery


June 18, 2010


Brett/Robinson Real EstateORANGE BEACH, ALA. Completion of this condo tower could be delayed because of slumping sales.

The environmental disaster in the Gulf of Mexico is threatening billions of dollars of commercial real-estate investments, along with developers, lenders and investors who already were struggling to ride out the economic downturn and slow-moving recovery.

From Louisiana to Florida, fear about the oil spill’s impact is stalling real-estate deals, causing owners of languishing hotels to worry that they will be unable to keep up with mortgage payments and giving local bankers nightmares about a new surge in loan defaults by businesses and consumers.

“We really believed we were coming out of it,” says Buzz Ritchie, president of Gulf Coast Community Bank, a Pensacola, Fla., bank with five branches and $266.4 million in assets as of March 31. “Now we’re afraid we’re going back right where we were before, if not worse.”

U.S. banks have total exposure of $136.4 billion to commercial real-estate owners and developers in Alabama, Florida, Louisiana and Mississippi, according to research firm Foresight Analytics. Regions Financial Corp., based in Birmingham, Ala., has the biggest exposure to the four states along the Gulf of Mexico, totaling $12.4 billion, Foresight estimates.

A Regions spokesman says the analysis overstates the company’s exposure to coastal areas. “We’re closely monitoring our loans along the coast that could have some exposure, but this is a very small subset” of the company’s $85 billion loan portfolio, the spokesman says.

“At this point, we’re monitoring it, watching it, but not yet ready to quantify the impact,” says John C. Hope III, chairman and chief executive of Whitney Holding Corp., with branches stretching from Houston to the Tampa Bay region of Florida. Just a small portion of the New Orleans bank’s overall loan portfolio will be affected, he predicts.

Realpoint LLC, a credit-ratings unit of Morningstar Inc., estimates that about $2.2 billion of commercial mortgages sold as bonds are backed by properties located along Gulf Coast in the four states taking a direct hit from the oil spill. Delinquency rates on loans underlying commercial-mortgage-backed securities in the region already are higher than the 8% U.S. rate—including 12.6% in Florida.

Real-estate developers and lenders on the Gulf of Mexico know that the sugary white beaches and dazzling sunsets that draw money to the region come with major risks. In 2005, hurricanes Katrina and Rita battered more than a dozen banks with a substantial presence in Louisiana, Mississippi or Texas.

“What we’re doing is a similar process to the one we did five years ago,” says Paul Guichet, vice president of investor relations at Hancock Holding Co. The Gulfport, Miss., bank is conducting a “thorough analysis” of its loan portfolio to gauge the potential impact of the oil spill.

But while BP PLC has pledged to reimburse financial victims, it isn’t clear if that will help real-estate-related businesses or other borrowers not directly tied to fishing or tourism. “We have no relevant measurement tool to judge this by,” says Mr. Ritchie, the Pensacola banker.

Julian MacQueen, an owner of hotels from Orange Beach, Ala., to Pensacola, says he has alerted lenders that he might be unable to make his mortgage payments on time, because the oil spill is costing his hotels business.

“We’re walking down this tightrope with no net,” says Mr. MacQueen, who is investing $100 million in two new hotels. “I’m not sleeping at night.”

Mr. MacQueen plans to file claims for lost revenue with BP, but he doesn’t know whether the company will reimburse him for what he insists would have been a much better year than 2009—or just for his lower revenue.

“All claims are being evaluated for compensability under OPA as well as for the amount of the claimed loss,” a BP spokeswoman said in a statement, referring to the Oil Pollution Act of 1990.

In recent months, commercial real-estate values have stabilized, with some bargain-hunting investors returning to the market. But the oil spill could push suffering properties over the edge—and scare opportunistic investors from the market.

On Monday, Sandler O’Neill & Partners LP analysts cited a decline in real-estate values as “the most daunting of the risks” facing lenders with exposure to the oil spill.

John Stone, a Clearwater, Fla., real-estate broker who sells troubled condominium projects, says the spill “has brought a number of deals to a screeching halt.”

One real-estate owner under financial pressure since the Deepwater Horizon rig explosion April 20 is Beach Resort Investment Corp., the owner of Ramada Plaza Beach Resort in Fort Walton Beach, Fla. While no oil has fouled the beach or the contrasting streaks of greens and blues in the Gulf of Mexico, “advanced booking for July is just terrible,” says Joe Guidry, general manager of the hotel.


Even before the oil spill, the hotel couldn’t cover interest payments on the $26.3 million mortgage backed by the property, according to Realpoint. Gail Cluck, chief financial officer at Beach Resort, declines to comment on the company’s ability to continue meeting debt-service obligations. “We’ll be expecting BP to compensate us for the lost income,” she says.

Tillis Brett, developer of a delayed $250 million condo project in Orange Beach, Ala., says it could be snarled even further by the oil residue already washing up nearby. Sales have slowed even though he reduced prices on some units by 10% to as low as $510,000 after the spill began.

“We have to depend on our sales to finish the building,” he says.


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