Will Sandy Sink Commercial Real Estate Stocks?

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Since the hurricane-turned-superstorm battered New York and its neighbors on October 29, much of the focus — from a stock perspective — has been on its potential to depress retail names and lift construction stocks. There’s also been talk of its ongoing effect on waste service providers.

There is, however, a growing possibility that Sandy could have a big negative impact on another group: firms involved in commercial real estate services such as CBRE Group (NYSE: CBG) and Jones Lang LaSalle (NYSE: JLL). And some believe the effect on this sector could potentially be worse, and last longer, than those involved in it initially projected.

Despite some ominous clouds still hanging over the industry in the U.S., not to mention abroad, executives at CBG and JLL have behaved like most in real estate and over the past few months generally remained upbeat about market potential. Movement of their stock has mostly justified that position, too, with shares of both companies rising more than 5% each since the storm hit — which, coincidentally, kicked off the week that both reported last quarter earnings.

3Q12 Results Mixed for JLL, CBG

JLL announced first, and it surpassed earnings expectations and met those for revenues during the quarter. Nonetheless, officials conceded at the company’s National Commercial Real Estate Outlook a few weeks later that a great deal of uncertainty remains. The U.S. fiscal cliff negotiations and European economic picture were still major concerns, they said, leading to forecasts of only moderate performance improvement during 2013 in the multifamily, hotel, and industrial sectors and balance in retail. Sandy was not mentioned.

CBG, which announced a day after its worldwide rival, recorded disappointing 3Q12 earnings and lowered full-year guidance citing concern over economic conditions in the U.S., debt in Europe and growth in China. (Other industries are concerned about the latter as well, as we reported a few days ago in a post on how slowing growth there is impacting heavy equipment makers.) CBG said in its earnings call that it was still too early to judge the impact from Sandy, but at its own conference in early December pegged the impact at “less than 1%.”

New Factors Might Change the Picture

However, certain revelations since then have been decidedly more sobering. A New York Times report last week said 15-18 million square feet of office space in Lower Manhattan remains unusable because of the storm — an astonishing amount that is greater than the total amount of office space available in cities such as Miami, Phoenix and San Diego. What’s worse, officials from Verizon Communications (NYSE: VZ) say 95% of their network in the area was destroyed by seawater and diesel fuel and they now expect that telephone service won’t be fully restored to the properties affected until May.

A lack of phone service will prevent these structures from reopening, no matter the state of the rest of the building. Such a continuing disruption would likely free scores of tenants from their leases, many of which were signed when rents were much higher than they are today. This would depress the value of real estate portfolios throughout the area, and scramble the picture further as displaced tenants sought new space — in New York, or elsewhere.

Another Brick in the Wall?

The ultimate impact of such a game of musical chairs is unknown, of course, but one thing is certain: it would throw another kink into the always volatile world of commercial real estate. Because of its unique positioning, the New York area has remained a bright spot for the industry throughout the Recession. Companies like CBG and JLL depend on it for stability, if not growth. Any unsteadiness could exacerbate weaknesses elsewhere, particularly if stumbles are detected in other currently strong regions like Houston (which has depended on the strength of oil and gas) and San Francisco (which has boomed with the booming fortunes of the tech industry).

If the U.S. economy, Eurozone uncertainty and Chinese growth also remain of concern to businesses considering new commercial space and investors focused on commercial real estate, Superstorm Sandy may just add a few more victims when CBG and JLL report 4Q12 results in about eight weeks.

TheChiefToo has no positions in the stocks mentioned above. The Motley Fool owns shares of Jones Lang LaSalle. Motley Fool newsletter services recommend Jones Lang LaSalle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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