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OIL SPILL LEGAL NEWS, Vol. 5, The Gulf Oil Spill Impact on the Coastal Real Estate Market

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06.24.10

Oil Spill Legal News – Update No. 5, June 24, 2010

Don't expect to see many real estate sales occurring along the Gulf Coast this year. There is no question that the Gulf Oil Spill will negatively impact real estate values, but trying to quantify the severity or the duration of the downturn is very difficult at this point in time. Most real estate investors and homeowners are going to try and wait out this crisis before making decisions on whether to buy or sell. The single most important factor which will determine the severity of this downturn is how long oil continues to flow into the Gulf. While it is impossible to predict, hopes are high that the well will be capped in August when the relief wells are completed. It is also possible, however, that oil could continue to flow into the Gulf over the winter and into the next year. The Ixtoc I exploratory oil well, which suffered a blowout on June 3, 1979 in the Gulf of Mexico, was located in waters only 160 feet deep. The flow from that well was not capped for more than 10 months. By comparison, the Deepwater Horizon Rig was located in waters more than 5,000 feet deep, and MC252 is one of the most productive wells in the Gulf of Mexico. If the leak is not contained within the next few months, the fallout for the coastal real estate markets in Louisiana, Mississippi, Alabama, and Florida could be significant.

Losses in real estate value attributable to the oil spill alone may total $4.3 billion along the 600-mile stretch from the tip of Louisiana to Clearwater, Florida, according to CoStar Group, Inc., a property information service. CoStar values the coastal property at $3 million an acre and $43 billion for the entire coastline measured. CoStar derived its forecast for the decline by assuming a 10% decrease in value based on previous disasters, including oil spills, hurricanes, and the 1979 Three Mile Island nuclear accident. Real estate experts in the hardest hit areas have reported that property values have already declined 20 to 30% in the 63 days since the oil spill. However, most experts agree that too many variables remain to forecast the final impact on coastal real estate values, e.g., how much oil will come ashore, how many people will be out of work and default on their mortgages, and how the market place will respond once the spill is contained. Until there is greater certainty, buyers are likely to wait on the sidelines.

The Gulf Coast is one of the country's largest second-home vacation markets. It has been heavily impacted by the nation's housing crisis with homes and condominium's along most of the immediate coastline deflating an average of 65% from the market's peak during the real estate boom. An additional 10 to 30% decline in values as a result of the oil spill could spell disaster for these already strained areas. Owners of rental property, who had anticipated a busy season based on early bookings, have seen significant cancellations. Hotel operators in some areas are already reporting cancellation rates of up to 70% for summer bookings. Hotels and restaurants may have difficulty making debt payments if tourists avoid the area during the peak summer season. With deepwater drilling operations and fishing and tourism industries facing uncertainty, the looming threat of increasing delinquencies and foreclosures could further diminish values if banks are forced to auction properties to salvage what value they can. One mitigating factor is that banks are unlikely to commence foreclosure proceedings on distressed properties until the oil leak is stopped as there won't be any buyers. Similarly, banks allowed people to stay in their homes after Hurricane Katrina rather than let them sit vacant.

Property owners are also trying to determine whether they are entitled to compensation if they are affected by the oil spill. While BP has stated that it will honor "legitimate" claims, it is not clear what exactly would be covered. Some property owners are already preparing cases claiming lost rental from cancellations, but there are more questions than answers at this point in time.

Until these questions can be resolved—including the severity of the oil spill, the impact of economic losses on property owner's ability to make mortgage payments, and the length of time to clean up the affected areas—property owners may be best served by not attempting to sell in this uncertain environment. Once the leak has been capped, valuations will be more realistic and people will start completing real estate transactions again.

Waller Lansden will continue to monitor events and issues related to the Gulf Oil Spill. For additional information on the impact on coastal real estate.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.

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