As the industry goes into a new hurricane season, retail property owners and tenants have had nearly a year to evaluate their responses to last year's trio of hurricanes, which caused a record $202 billion in damage in the U.S., and $370 billion worth worldwide.
Waterlogged A volunteer heads out to search for people needing help after the torrential rains of Tropical Storm Harvey, on Sept. 3, 2017, in Orange, Texas
Deterrent examples are many, but one overriding lesson is clear: Large segments of the retail industry were unprepared for the worst last year, according to Andy Carlson, JLL's national director for retail in Puerto Rico, the Caribbean and Latin America. "The lesson is, if you think you have planned for it, you probably haven't," he said.
When Category 5 Hurricane Maria struck Puerto Rico, commerce all but ground to a halt, with 90 percent of the territory's electrical grid destroyed. Home life in that U.S. territory became a "disaster," Carlson says. "People had no food and no air conditioning, and the shopping center became a clearing house for information," he said. "Walmart and Kmart set up huge lounges for them." Hence, centers need to prepare to resume business as soon as possible — and not just for economic purposes, notes Carlson. "It's important to have a place where residents can charge their phones and use the Internet and get a hot meal — things that bring back a bit of normalcy and get your people working again."
JLL created a systemwide RedFlag Alert System a few years earlier, enabling employees and tenants to manage crisis communications and alerts in a mode of their own choosing after a major storm. RedFlag helped save time in locating workers last year, says Carlson. JLL has since added a corporate-communications portal for even swifter connections with personnel.
Kimco Realty, which has seven centers in Puerto Rico, exercised pre-event protocols, prepping for high winds and flooding and putting vendors on standby, then stationing security guards at centers with enough supplies to hunker down for a week. "That was very useful, because they were our only eyes and ears out there," said Christopher Freeman, Kimco's senior vice president of property management. Stores that were able to quickly reopen usually did so without power and water and were forced to conduct cash transactions under the illumination of large flashlights, he says. Kimco managers in San Juan had to hold conference calls with statewide corporate decision makers late at night near the island's one functioning cell tower, because residents were swamping the area during the day.
On the mend An employee of the Puerto Rico Electric Power Authority (PREPA) repairs a power line affected by Hurricane Maria
"Hurricane Maria was literally the perfect storm because it was out in the middle of the ocean, and it was extremely difficult to communicate with the mainland U.S. and to get supplies and relief shipped in," said Freeman. So Kimco, cash in hand, quickly found contractors in San Juan and the surrounding islands to supply building materials. "Quick reaction time is critical in a storm's aftermath," he said. Because Kimco has a relatively flat organizational structure, approvals during the recovery process "were just an instant-message or phone call away," Freeman said.
Kimco also settled its losses before most of the rest of the industry did. "We were very aggressive in getting insurance adjusters to our properties, signing and approving things on the spot," said Freeman. "Unfortunately, the same didn't happen for other real estate companies." Though Kimco prepared thoroughly, it still hired an outside expert after the tumult to evaluate its response and suggest improvements. One weakness was post-storm coordination with vendors. "We find that they are usually slow to respond after a catastrophe, because they're taking care of their own families," Freeman said. "But in Puerto Rico, the problem was multiplied almost 10-fold. It was difficult to rally the troops."
Hurricane Harvey, which dropped rains of up to 60 inches in the Houston area, offered more harsh lessons. "What we saw in Harvey were areas that have never been flooded before were getting flooded," said Billy Short II, vice president of large loss for North America at FirstOnSite, a Canada-based disaster-restoration firm. "These included businesses in 1,000-year flood plains and a very large number of ones that weren't in a flood plain at all."
Some takeaways from the hurricanes
* About 70 percent of Harvey flood damage was uninsured. Most centers in the region need to buy National Flood Insurance Program coverage, but owners must realize that there is a 30-day waiting period for new policies, according to Short.
* Many nonflooded retail businesses will be unable to reopen right away after a major hurricane and/or flood. "In Harvey, the infrastructure around centers wouldn't allow it in many cases, and the centers had no power," Short said.
* Commercial property insurance usually does not include flood or business-interruption coverage.
* Most business-interruption policies typically require “direct physical damage” as a coverage condition, according to the Insurance Information Institute.
* Supply chains are bound to be disrupted. "With road and port closures, getting new merchandise was a problem right after Harvey," Short said. It was especially problematic for retailers relying on items from China and elsewhere overseas. Houston ports were closed for at least a week after Harvey, and much longer in some cases.
* Do not wait to buy a generator. Retailers purchasing their first portable generators just before last year's storm season often suffered problems with ventilation, maintenance, sizing and lack of diesel fuel, all considerations that a vendor can easily address in the off season, says Short. Disaster specialists have relationships with fuel providers that can ensure priority deliveries in such crises.
* Permanently installed backup electrical generators with automatic power-transfer switches might make more sense for many retailers in areas prone to blackouts and storms, says Short.
* Data-preservation plans to save business servers and files were overlooked far too often in last season's hurricanes, says Short.
* Plan for cell towers to fail, says Short. One solution is to purchase two-way radios such as those used by emergency responders and have an ample supply of batteries on hand, or else spend the money on satellite phones.
"You as a business owner have to have some of these conversations with yourself when it's business as usual, then take time to figure all this out," Short said. "It's an investment in your business."
Several Houston-area retailers enlisted crisis-abatement services well before the storm, including HEB, which used Houston-based microgrid firm Enchanted Rock to supply on-site generators and underground natural-gas pipelines to keep the lights on, despite widespread flooding and power outages. Austin-based Riskpulse, a risk-predictive supply-chain-analytics firm, briefed about 800 stores in high-risk zones last year on when to contact suppliers to delay shipments and when to close stores and safely reopen them. That helped retailers to determine which staff members were most likely to need to evacuate, which ones could stay, and which had special needs, according to Riskpulse.
In Florida the inexact nature of storm-modeling was reinforced last year. At the last minute, Hurricane Irma took an unexpected turn westward, from the Miami region toward the Fort Myers, Jacksonville, Naples and Tampa areas. On average, initial storm-track forecasting can err by as much as 80 miles when a storm is 45 miles out, according to the National Hurricane Center. Since the southern portion of the Florida peninsula is only about 50 miles wide, anyone on either coast is at risk when a hurricane approaches.
“Catastrophic storms are more of the norm coming into the future”
Crisis communications are especially challenging in Florida, because employees live in scattered flood zones, and many cannot make it to work after a storm, says Michael Vullis, a principal with Avison Young Real Estate Management Services. "The best way to overcome this is to establish a volunteer team prior to a weather event to attend to assets once the dust settles," he said. "Safety is always the first priority, but speed in addressing immediate needs is a close second, once conditions are deemed stable.” Also important is maintaining an employee call list and establishing a hotline with recorded messages.
To expedite insurance claims, Vullis suggests that property owners maintain up-to-date photo records of their real estate assets to establish a baseline for their prestorm condition. Another administrative lesson is that casualty provisions in leases "really do matter," according to Kenneth Katz, a principal of Houston-based retail brokerage and development firm Baker Katz. Those determine rent abatements during reconstruction, which party pays for which repairs, and whether a lease can be terminated if the space is destroyed, he says. "These have significant financial implications and can impact the speed at which a property owner can recover from significant loss,” said Katz.
Sachse Construction, which rebuilt several Puerto Rico retail buildings after Maria, says companies that strongly leverage their insurance partnerships post-disaster tend to fare better in recovery. "Work with them as soon as possible to come up with a custom strategy, hire a reputable industrial [environmental] hygienist to represent you, and hire a trusted construction team that understands the unique reconstruction requirements of your property,” advised Noah Wolfson, the Detroit-based firm's program-management director.
Though the current hurricane season may be milder than last year's, catastrophic storms are "more of the norm coming into the future," said Jose Sanchez, deputy director of research and development with the U.S. Army Corps of Engineers, at a Harvard forum. "We as a world need to come together with better solutions and be better prepared."
By Steve McLinden
Contributor, Shopping Centers Today