Scorching Real Estate: Comparing the California, B.C. and Fort McMurray Wildfires’ Impact
Last August was devastating for British Columbia (B.C.) and California — each had declared a state of emergency because of wildfires. Both the province and the state experienced a severe decline in tourism, mass evacuations and seemingly unending fights to contain the conflagrations. There was significant loss on both sides, though as far as impact on commercial infrastructure and industry went, California’s wildfires took more of a toll on the local economy. This commentary explores the immediate effects of the wildfires across B.C. and California. In addition, this commentary looks at the impacts of the Fort McMurray fire that devastated a large part of Alberta’s infrastructure back in 2016.
B.C. Impact by the Numbers
The first fires along the Canadian West Coast were reported at the beginning of April 2018 (the beginning of wildfire season) and have grown in volume from there. According to Global News, between April and mid-August, BC Wildfire Service responded to about 1,823 reports of wildfires — 1,291 of which have been larger than 0.02 acres. As of November 2018, over 3.3 million acres have been destroyed by wildfires, most of which are concentrated in the northernmost areas of the region, as shown in Exhibit 1 (BC Wildfire Service, “Current Statistics,” accessed November 2018). The amount of smoke polluting the region is putting a strain on the tourism industry, according to CBC News, which reported that businesses were seeing fewer visitors, who were staying for a shorter amount of time. Despite these reports, the B.C. tourism industry reportedly enjoyed 5.7 million overnight international visitor arrivals in 2017, a 3.3% increase since 2016, according to the Tourism Industry Association of BC (“Tourism by the Numbers,” n.d.).
California Impact by the Numbers
Between the beginning of wildfire season and the start of August 2018, the wildfires across the Golden State were significant enough to cause the government to declare a state of emergency on August 4th. The recorded wildfires, including both contained and ongoing, scorched approximately 8.3 million acres, according to the National Interagency Fire Center; Exhibit 2 shows the extent of these contained and uncontained fires as of late September 2018. Visit California reported that although the state experienced a 0.9% decline in international visits, overall visitation growth should increase 2.1% in 2017 (“2017 California Travel & Tourism Forecast — State,” n.d.). However, Visit California also reported that 11.0% of travelers reconsidered their trips to California because of the wildfires, costing the tourism industry about $20.0 million in August 2018. Hotel investors may find fewer visitors on their properties, which may affect their bottom line, especially in high-risk wildfire zones.
Note that an infographic of final-damage metrics has not been provided for uncontained fires because the impact radius may change; the fires are unpredictable. Before finally being contained on November 25, 2018, for example, a newer major wildfire known as Camp Fire killed a total of 85 people; burned through over 153,000 acres; and destroyed 18,804 structures. Camp Fire is California’s most devastating fire to date.
Fires like Donnell and Delta also wreaked havoc on structures, scorching 155 buildings between them. The biggest impact that the California wildfires will have on its multifamily market is the predicted increased demand for housing for displaced citizens whose homes have been destroyed.
Alberta Impact by the Numbers
The wildfire in Fort McMurray took off much more quickly than anyone expected; Alberta declared a state of emergency within days of its discovery (on May 4, 2016). The fire cleared out 589,552 hectares of land, or approximately 1.5 million acres, in Northeastern Alberta (CBC News, “Fort McMurray Wildfire Now Considered under Control,” July 5, 2016; see Exhibit 3). The fire also devastated 2,579 residential units, according to an Alberta government report (Home Again: Recovery after the Wood Buffalo Wildfire, n.d.). CBC News, moreover, reported that it destroyed 665 units of temporary housing at Black Sand Executive Lodge, which provided housing for surrounding oil facilities workers, further complicating the province’s industry.
The Fort McMurray wildfire was the largest insured catastrophic claim event in Canadian history. In May 2016, while the wildfire continued to rage, DBRS published a claim loss estimate of $1.9 billion to $5.8 billion, with $3.9 billion being the midpoint. Catastrophe Indices and Quantification Inc. (CatIQ) reported that the six-month estimate for actual industry loss in this single event stood at around $3.7 billion. This figure excludes loss-adjustment expenses. Post-wildfire, DBRS estimated that overall claim losses for property and casualty insurers in Alberta were significantly higher in 2016 versus the previous two years; however, the impact of the insured losses after the events in Fort McMurray was mitigated by reinsurance risk sharing. BNN Bloomberg noted that the cost of the Alberta wildfire reached $9.5 billion in total economic losses.
The wildfires made a relatively small but notable contribution to the softening housing market in Fort McMurray. The impact of falling oil prices and cutback of major oil operations continued to be the main driving force behind declines in resale prices and sales volume in the region known as Alberta’s Oil Hub. Exhibit 3 illustrates housing market indicators for Fort McMurray between January 2012 and 2018. According to the Canadian Real Estate Association, before the wildfire, resale prices averaged $441,653 with 48 residential homes sold in April 2016. Having already fallen from an average resale price of $659,012 and 182 homes sold in February 2014, average prices and sales volume further declined by 21.6% and 87.5% to $346,111 and six homes, respectively, by the end of May 2016, after the wildfires ended. The market bounced back in the following month once the resident re-entry plan took place between June 1st and 4th. As at the end of June 2016, average resale prices were $447,247 with sales volume of 61 homes and approximately 252 new listings. Despite this, the housing market continued to slow due to the downward pressure caused by the struggling oil industry in Alberta. As at YE2018, the average resale price was approximately $350,266 and sales volume was roughly 74 homes, down 17.7% and 32.7%, respectively, when compared with YE2017.
The Scorching Effects on Industry
The wildfires in California are expected to have a negative effect on the state’s tourism industry due to road closures that lead to places like Yosemite, a national park that brought in an estimated $452.0 million in 2017 with 4.3 million visitors (Business Insider, “‘Roads Are Money, and Without the Roads Open, We Die,’” August 12, 2018). Despite the monetary impacts on national park tourism, Visit California states that hotel performance appears to be steady with an occupancy of 80.8% as of August 2018 (a 0.1% increase from 2017) and an average daily rate of $178 (up 2.7% from 2017). Local communities are bracing for dramatic losses, like Madera County, which is expecting a hit of $10.0 million in losses because of the Highway 41 closure. Attractions in B.C. experienced a decline in visits as well, such as Barkerville Historic Town & Park (Toronto Star, “B.C. Wildfires Hitting Local Tourism Industry Hard,” August 30, 2017).
Retail is also affected by wildfires on both sides of the border, with lower-than-usual numbers of tourists and lower consumer spending. In California, fewer people are interested in shopping in the middle of a state of emergency (Reuters, “Retail Suffers as California Wildfires Burn,” October 25, 2007). Similar effects can happen within the B.C. retail market as well. With road closures and decreased tourism in both areas, mall owners may have trouble keeping the foot traffic up in their properties during wildfire season.
As far as Fort McMurray’s industry impacts go, oil production industries (since the fire was largely concentrated in an oil production zone) experienced the highest losses. Alberta’s oil production suffered a loss of approximately 47.0 million barrels and cost producers $1.4 billion in revenue in 2016, according to the Conference Board of Canada (The Economic Impact of the Fort McMurray Fires, November 29, 2016). The displacement of workers may have temporarily put a strain on the multifamily industry in Northern Alberta, but the largest reported impacts still come from industrial properties.
Properties within CMBS Transactions
Properties recorded in CMBS transactions within the California wildfire zone can be found on Viewpoint’s 2018 California Wildfires Portfolio. The properties in this selection have an approximate average original appraised value of $9.1 million, and in a worst-case scenario, the wildfires have potentially threatened about $292.2 million of CMBS-rated appraised property value. In B.C., there are a handful of properties recorded on the Viewpoint platform in the northern regions of the province where the largest concentration of wildfires took place. These properties had an average original appraised value of $6.0 million, and the fire threatened a total appraised value of $60.0 million of properties. The majority of Fort McMurray properties DBRS reported on were multifamily (738 units), none of which seem to be damaged by the wildfire. The hotel properties had a total of 225 keys, which seem to remain online as well. On average, the properties across the selection reported an average original appraised value of $24.4 million with the total value of the stock being about $293.4 million — all of which in Fort McMurray are known or presumed to have had value declines since the fires due to lack of demand.
In all reported areas, the damage caused by wildfires has been immense. As far as monetary damage goes, California is the most deeply affected wildfire state with an estimated economic impact of $85.0 billion (AccuWeather, “Devastating California Wildfires Predicted to Cost US Economy $85 Billion; Containment May Take Weeks,” October 15, 2017). These costs stem from tax revenues from affected businesses, tourism and federal wildfire-suppression costs. The reported costs also include $56.0 million in insured losses from the Mendocino Complex fire and $1.5 billion in Carr fire losses, as well as an outlay of $432.0 million by the California Department of Forestry and Fire Protection in July and August 2018 alone. The number is expected to climb as uncontained fires wreak havoc along the West Coast. Fort McMurray’s economic impact is reported to stand around $9.5 billion (BNN Bloomberg, “Costs of Alberta Wildfire Reach $9.5 Billion: Study,” January 17, 2017). The economic impacts of the wildfires on B.C., in their entirety, have not yet been reported, though according to CFJC Today, the cost of fighting the B.C. wildfires has so far exceeded $450.0 million. Fires in California have also reported the most estimated damages with 8.5 million acres affected by the infernos (National Interagency Fire Center). B.C. follows that figure with 3.3 million acres (BC Wildfire Service), and Fort McMurray’s fire consumed approximately 1.5 million (CBC News), which is a significant figure considering that the damage was largely caused by one fire. Exhibit 5 shows a cost and damage comparison among the affected zones. Wildfires are unpredictable, and the potential costs and damages made to economic and commercial real estate activity in these areas are equally uncertain.
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