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How commercial real estate markets react to flood risk

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How commercial real estate markets react to
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The impact of serious flooding on the commercial real estate market is highly variable. Here we present three case studies of flood events, and their impact on the commercial property market.

Thailand floods, 2011

Following the 2011 floods across Thailand, prices of industrial land in low-risk areas were 10-25% above pre-flood levels a year afterwards. Rents for industrial properties in flood zones, two years after the flooding, remained 15-20% below rental levels for comparable premises in low-risk areas.

Financial factors play the biggest role in relocation decisions, with land purchase and the building of new facilities representing huge investments. Many companies have chosen to focus on being more prepared, developing more robust business contingency plans and being ready to secure temporary space should flooding return.

Brisbane floods, 2011

Despite historic levels of flooding across Queensland, the CBD of Brisbane suffered relatively little damage, in part thanks to good planning. Indeed, by 2014, no tenants in the CBD had prematurely terminated their leases.

The Fringe office market was more affected, but the impact on market dynamics was still minimal with very few occupiers choosing to walk away. Some industrial occupiers chose to move, but office tenants remained largely in situ due to limited alternative space and value for money. Insurance cover was another reason that flood damage and losses could be absorbed by affected businesses.

Hurricane Sandy, 2011

Looking at how tenants reacted to the flooding produced by Hurricane Sandy in the New York metropolitan area, a report by the Alliance for Downtown New York, a multi-stakeholder organisation for New York’s Lower Manhattan area interests, revealed that no office tenants had cancelled their existing leases in Lower Manhattan following the ‘superstorm’ and, more importantly, that 10 office tenants from outside Lower Manhattan had signed to move into the district.

In both New York and Brisbane, the effect of flooding on tenant behaviour was minimal. There are several factors behind this:

  • For many professional services businesses, location trumps everything.
  • The business risk is worth accepting, given the low probability of another flood in the immediate future.
  • Lower leasing costs for commercial buildings and access to talent outweigh flood risk.

Originally published : April 2014

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