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Baton Rouge Flood’s Impact on Apartment Market

Effect Less than Katrina on New Orleans

By Louis Rosenthal | Friday, September 9, 2016

Eleven years after Hurricane Katrina, Louisiana was once again buffeted by severe storms and extensive flooding this summer, particularly in Baton Rouge. As of this writing, 13 people have died from the Baton Rouge flood and at least 60,000 homes have suffered damage from the “once-in-a-thousand-years” flooding that struck in mid-August.

Once the initial shock and devastation of the flooding recedes, Baton Rouge and neighboring parishes will have to contend with a different sort of aftershock: a disrupted housing market as those who lost their home (or those whose homes suffered extensive damage) find temporary or permanent lodging.

We can expect a few things to happen in the market for Baton Rouge apartments, according to Lawrence Yun at the National Association of Realtors (as reported in Forbes). In general, local housing markets see decreasing and/or delayed home sales in the aftermath of a natural disaster because lenders usually request updated appraisals to assess the full scope of damages.

However, Yun insists this slowdown is typically only temporary and, in fact, housing markets outperform their pre-disaster levels within six months. The laws of supply and demand hold: Natural disasters cause supply shortages, which in turn boost prices as demand rebounds quickly.

Looking directly at the impact of natural disasters (floods, in particular) on the apartment market, the aftermath of Hurricane Katrina on the New Orleans market is an example of what might happen in Baton Rouge in the coming months.

Job growth is the most important indicator of apartment market performance: More jobs mean more demand for apartments because workers need somewhere to live. The chart shows that job growth plummeted from -0.9% in the third quarter of 2015 – when Katrina struck – to -28.3% in the following quarter. Apartment rents, however, actually continued to rise after the disaster. Rents grew at an annual average of 2.6% in the four years before Katrina, and increased by an annual average of 10.8% in the two years after the hurricane. In fact, annual effective rent growth was as high as 16.0% in the first quarter of 2007.

Supply was one reason for the massive rent hikes. An average of 509 new units was delivered per quarter in the four years before the hurricane, compared to 160 per quarter in the two years following. Development activity reversed in 2008 and 2009. Rents skyrocketed during the supply shortages and nosedived once supply ramped-up again. Adapting the post-Katrina market in New Orleans to what’s happening today in Baton Rouge can be instructive, but the two Louisiana metros are very different markets. Most importantly, the Baton Rouge housing market is heavily influenced by Louisiana State University, so the dynamics of college enrollment and economic growth will play a major role.

Rent growth and job growth in Baton Rouge, compared to other major markets (including New Orleans), tend to be inversely correlated because of the presence of LSU. When the economy is doing well, more jobs are created, and there is less need to go to college to get a leg-up in the job hunt. Likewise, when the economy is doing poorly, people want to acquire new skills and make themselves marketable in a down economy. As an aside, the spikes you see in the above chart between 2005 and 2008 illustrate the aftermath of Hurricane Katrina on the Baton Rouge market.

Baton Rouge is also a smaller market than New Orleans, and smaller markets are more sensitive to external shocks, simply because the housing supply is lower in Baton Rouge. This means that as displaced individuals go to find alternative living arrangements, they will have much fewer options and face much higher prices.

What does all of this mean for the future of Baton Rouge? Before the flooding, Axiometrics forecasted rents to grow by an average of 2.6% per year between the third quarter of 2016 and the fourth quarter of 2021. This is quite a bit higher than the average growth rate of 1.2% between the first quarter of 2010 and the second quarter of 2016. Likewise, job growth was 1.5% on average between 2010 and 2016, but is projected to be 1.6% over the outlook period. In terms of new development, on average, 227 units were added to the Baton Rouge market between 2010 and 2016, but we were anticipating a major increase in new supply in the forecast window: 769 new units on average, per year.

Axiometrics Senior Real Estate Economist KC Sanjay broke down the long-term impact of the flooding in Baton Rouge in this way: “When Hurricane Katrina hit New Orleans, Baton Rouge as a metro benefited as occupancy rates and rents went up. This time, because the devastation is centered in Baton Rouge, New Orleans is poised to see their occupancy rates and rents increase — though the magnitude of the change will be much smaller as the scope of the Baton Rouge flooding pales in comparison to what we saw in New Orleans in 2005.”

The primary question in Baton Rouge is what will happen to the supply of rental housing in the area. As Sanjay argues, “In the aftermath of the flooding, the stock of existing units goes down as some of these units are renovated or rebuilt. During this time, the former occupants of these offline units will find alternative arrangements in New Orleans. But slowly and surely, they will start to come back.”

In fact, considering the scope of the damage — relative to what we saw in New Orleans in 2005 — we might see a return to normalcy within one year.

Furthermore, there might actually be a medium- to long-term benefit to the employment picture in Baton Rouge as the extensive recovery needs generates job growth tied to the recovery efforts. At the same time, the influx of federal dollars earmarked for the recovery might further boost employment in the metro area.

Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on and Axiometrics’ blogs, among others.

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