FDI outcome for hurricane-struck states will vary

The climate scientists who predicted 2017’s hurricane season would be active were correct. In the US, Hurricanes Harvey and Irma have been devastating to Texas, Houston in particular, and to Florida.

The damage caused by Irma appears to be extensive but not as catastrophic as early forecasts predicted. At the very least, clearly there are weeks, if not months, ahead of cleaning up, restoring infrastructure and getting power back online. On the other hand, there has been more time to assess the damage caused by Harvey and unsurprisingly its impact in the Texas-Louisiana region was severe.

One estimate by CoStar Group notes that $55bn in property value is located in flood zones and may have suffered damage. CoStar also reported that flooding in Texas and Louisiana affected nearly one-fifth of US oil refining capacity, a cause for concern regarding future supply.

Just as their domestic counterparts do, foreign investors must assess this data, as they evaluate the respective regions for future investment. Manufacturers or foreign-based companies typically take several months to make a decision to invest, says John Scannapieco, co-leader of law firm Baker Donelson’s Global Business Team.

“Therefore, a manufacturer or foreign-based company should not be impacted by the current issues affecting the Houston area. However, these companies may see shortages or increased costs of building materials or construction-related services in the short term,” he says.

In the longer term however, hurricanes pose specific problems. As Hurricane Katrina showed in 2005, it can take as long as a decade for a city or region – in this case, New Orleans – to recover its pre-hurricane stability. In general, areas that are larger and have more diverse sources of growth tend to recover faster, says Chuck DiRocco, director of research at the Altus Group.

That does not bode well for Houston, which has limited market diversity and a volatile economy that is heavily influenced by energy prices. Also, Mr DiRocco points out, Houston was already slowing down in terms of foreign capital buying commercial real estate (a good proxy for FDI as a whole). In the second quarter of 2017, foreign investment represented 13% of Houston’s property market, having hit 18% at the end of 2015. Miami and south Florida, however, have developed a healthy international business services sector that conceivably could run remotely for a while.

Another indicator is how quickly residents return to a stricken area and how many decide to start anew somewhere else. “Investment needs local talent. If not enough people return, that is a major problem,” Mr DiRocco adds.