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CRE Hurricane Preparation: How Lenders Get Ahead of Portfolio Risk

Hurricanes pose a severe threat to real estate properties in coastal regions. Unfortunately, many CRE professionals fail to prepare sufficiently because of poor visibility into portfolio exposure. In this post, we review how they can get the insights they need to assess and mitigate hurricane-related risk.

Hurricane season runs from June 1st to November 30th.

During this time, hurricanes bring severe winds, flooding and destruction to real estate properties located along the East and Gulf Coasts. For an example of the devastation, you only have to go back a few years to the $125 billion in damages from Hurricane Harvey.

Because of the growing damages caused by hurricanes, insurance premiums for commercial property owners have jumped significantly in the last few years. Rates had been steady, but everything changed after a string of damaging hurricanes pummeled the U.S. in quick succession during the end of the third quarter in 2017. Since then, premiums have increased anywhere from 20-50%, especially for CRE owners in high-risk, coastal areas like California, Florida and the Gulf.

Needless to say, sufficient preparation is an absolute necessity for CRE lenders, investors, and servicers that want to avoid such loss. This means first assessing and then getting ahead of the threat of a hurricane and its potential impact on your portfolio.

Assessing Your Portfolio Risk in Advance

Get Ahead of the Storm

Every year around April, the various news channels start talking about how many storms are predicted for the season and how this year compares historically. While these networks do a fine job of letting the general public know the number of potential storms and a breakdown by intensity (i.e. category 1-5 hurricanes vs tropical storms vs tropical depression, etc.), these predictions tend to be based on statistics and are only labeled as probabilities.

For example, meteorologists cannot accurately state that in the months ahead a particular hurricane will hit Miami on July 4th, only that there is a x% percent chance of a major storm hitting the east coast from April to November. That said, it is better to know in advance if the upcoming hurricane season is on track to be more or less severe compared to prior years and what cities and states may be affected the most. But what you really want to know is what a particular hurricane is going to do — what its path is going to be, and when it’s going to strike your area.

True risk assessment begins as soon as a storm system has formed. Once a hurricane has formed, it can be tracked. Scientists, like those at the National Hurricane Center, Central Pacific Hurricane Center and National Oceanic and Atmospheric Administration (NOAA), can usually predict a storm’s path and intensity with a high degree of accuracy 3-5 days before landfall by using an array of forecasting models and supercomputers to process all the aggregated data. Meteorologists then utilize visualizations plotted on a map to present a visual of a hurricane’s potential path.

After you know a storm is coming, quickly getting your arms around what assets are most at risk is critical to determining your exposure, if any, to the storm system. There are generally two ways of going about it – without technology or the tech-enabled way.

If you do it the no or low tech way, or manually, you will probably jump on Google Maps to crosscheck which properties sit in the hurricane’s path. If you find that any of your assets will be in harm’s way, you will likely pull the actual insurance policies, most recent property inspection and engineering reports and other relevant documents and try to quantify your exposure anecdotally based on educated guesswork, past experience, and memory. Without a way to quickly get to this information, the process becomes very time-consuming and prone to human error.

Instead of looking at one location at a time, technology can enable you to evaluate the entire portfolio all at once and then make data-driven decisions to help prevent any otherwise avoidable issues ahead of time.

Imagine being able to type Miami into a search bar or draw a cone around Miami on a map, since that is where the hurricane is headed, and see all of your assets plotted on the map with every data point, document and file at your fingertips.

Using modern integration tools, like API’s, you can integrate market research and publicly available information like FEMA or the US. Census Bureau and visualize it all on a user-friendly map with sorting, filtering and advanced search functionality. Taken one step further, you can then create a report on the spot, say an insurance report for specific investors with all the relevant insurance information, that can then be immediately shared with anyone who needs to see it.

Understand Your Vulnerabilities

Once you’ve identified all your at-risk properties, you can start to assess what the vulnerabilities are. With a software solution that can manage large datasets, you can get answers quickly, i.e. which assets are in certain flood zones? You can filter for properties built before, say, 1990, and then further narrow down the list to only those with wood roofs, electrical issues or basements. Or pull up a report to see all the various escrow accounts to make sure each asset has sufficient capital reserves available for potential storm damage.

Without the help of technology, managing a large portfolio can quickly become unmanageable. What normally would take one person or even a team of analysts days or weeks, should only take minutes and hours if you are using the proper technology.

This is because tracking data, accessing key information and consolidating it into reports is extremely tedious and time-consuming if you have to do it by hand. It also increases the likelihood of mistakes because you would have to locate the original documents, i.e. deeds, loan docs, appraisals, insurance policies and third-party reports, one by one. By using reliable CRE software, you can significantly reduce the time it takes to make proactive decisions, like ensuring that critical equipment, notices and supplies are available on-site. A system with robust data management capabilities will also provide actionable analysis and real-time reports that you can share with your managers, investors, and clients.

Be Proactive

Once you’ve identified that a storm is on the way and what assets are most at risk, it’s time to get to work! With only days before a hurricane is expected to make landfall, you’ve got to hunker down and protect your collateral and your tenants. Here are the three important things that you can do to prepare for and mitigate the risks you’ve identified.

Notify Tenants – The first step is to notify tenants at affected properties of any hurricane-related risk they may need to prepare for. This includes things like sending out notices, putting up emergency procedures and checking fire alarms. You want to make tenants aware they’re in a hurricane zone and that you’re taking proactive measures. Preparation of this kind helps you avoid additional risk or liability. Additionally, it gives tenants the opportunity to secure or move their valuable assets.

Prepare Physical Assets – Next, you can work collaboratively with owners, operators, and managers to secure your properties in advance. This includes weatherproofing windows, fixing any roof damage, putting up flooding barricades, addressing any known drainage issues and taking care of any other deferred maintenance.

Get Your Paperwork in Order – The third step is getting your paperwork in order. This can include making sure all insurance certificates are in compliance and paid up, reviewing covenants, obligations and who the responsible parties are.  Many CRE lending software applications allow you to set up alerts that automate the process for you, sending employees and investors notifications of important events and updates.

Conclusion

Hurricane season exposes CRE properties to a variety of risks and liabilities. Preparation is complex but critical if you want to maintain a healthy portfolio. With a technology solution in place, like RealINSIGHT, CRE pros can quickly – and more easily – identify and protect their at-risk assets.

Need a more reliable way to assess your portfolio risk? We can help. Demo RealINSIGHT today.