CRE Still Reckoning With Unforeseen Costs One Year After The Collapse of Texas' Grid

For a couple of tense days earlier this month, it all came back like a bad dream.

A winter storm rolled into Texas Feb. 3, dumping sleet and snow on northern parts of the state and leaving about 71,000 without power over the course of some 48 hours. A panicked public flooded grocery stores and gas pumps, venting their angst to friends, neighbors and on social media.

In the end, Texas’ power grid held steady with 15,000 megawatts to spare — enough capacity to power 3 million additional homes, according to the Electric Reliability Council of Texas, or ERCOT, which operates Texas' self-contained electrical grid and supplies power to more than 25 million residents.

But the mini-crisis was a chilling reminder of the catastrophic failure that brought the state to its knees almost one year earlier. In what is widely accepted as the worst energy infrastructure collapse in Texas history, the state’s electricity market ground to a halt on Monday, Feb. 15, 2021, unleashing widespread shortages of water, heat and food, leaving more than 4.5 million homes and businesses without power — in some cases for days. It directly or indirectly caused at least 246 deaths, though some estimates put the number as high as 978.

The toll on property was also devastating, and for some in commercial real estate, the costs keep coming.

All told, Winter Storm Uri was responsible for somewhere in the range of $80B to $130B in losses due to power disruptions, physical infrastructure damage and lost economic opportunities, according to Texas’ comptroller. Texas’ Department of Insurance had tallied 500,196 freeze-related insurance claims as of July, noting about $10.3B was expected to ultimately pay out. The average incurred loss for residential property hovered near $16K; for commercial property, it was about $127K.

Opinions differ on whether state officials have done enough to address the grid’s stability in the past 12 months, but what is sure  is Texas’ commercial real estate industry has been coming to grips with — and paying the price for — the storm ever since. Insurance premiums and energy costs have skyrocketed. Companies and institutions are spending big money to protect vulnerable people and assets. And the storm set off costly supply chain snarls the state is only now beginning to unwind.

While the industry has no control over winterization of the grid, it has had to adapt and evolve to proactively prepare for weather events that are likely to become more routine thanks to climate change.

“We weren’t set up in Houston or Austin the way we would have been set up in Denver or Dallas or D.C., where we have winter events,” said Ric Campo, CEO of Houston-based apartment giant Camden Property Trust. “There’s a lot of protocol things we do now [in Texas] that set us up the same way we would be in ... other colder markets that have big freezes.”

In the days leading up to last year’s storm, multifamily property managers like Camden began preparing for the possibility of frozen pipes. Residents were asked to leave their faucets on a slow drip, and extra insulation was added to vulnerable infrastructure. 

“Water damage is really scary and takes a long time to fix,” said Nic Balsamo, partner at Kalterra Capital Partners, a multifamily developer in Texas. “It has a tendency to linger for a long time. It was really important to us to prevent that from happening — we did not want pipes to break.” 

Despite widespread efforts to prevent burst pipes, a report by the University of Houston said one-third of Texans reported water damage. The insurance nightmare that ensued resulted in $2.2B worth of insurance claims reported by commercial properties and much of that damage was caused by broken pipes, according to the Texas Department of Insurance.

Campo, whose company owns more than 19,000 apartment units across Texas, said Uri caused around $20M worth of water damage across Camden’s 53 properties. This contributed to the $4M increase in property insurance the company saw between 2020 and 2021, Campo said.

“The premiums went up pretty dramatically,” he said. “It’s definitely hurt the business pretty good.”

As if to underline that point, 100-plus insurance companies, out $10.3B so far, sued ERCOT and 37 power-generating companies last month, alleging they displayed gross negligence in failing to prepare for last year’s extreme cold weather. ERCOT’s own meteorologist noted a “very good” chance for such an event as early as Nov. 5, 2020, they claim, adding ERCOT and the other companies “failed to adequately prepare for the 2020/21 winter season, and in fact, planned to fail.”

Kalterra has seen premiums spike 30%-50% and Chief Financial Officer Brandon Marlow said the cost is impacting the bottom line for the company’s new builds.

“We’re trying to figure out how to underwrite that better on our side when we are pitching these investments to investors,” he said. “It feels like we are always playing catch-up with the carriers.”

Campo’s crews swiftly reacted to the disaster by evaluating systems that froze and strengthening infrastructure where necessary. The company added insulation, installed auxiliary drains for pipes in areas subject to freezing and put into place backup protocols for the next freeze. 

“One of the biggest problems last time was that you couldn’t get parts or workers,” Campo said. “Now, we already have the inventory in place of the things we couldn’t get last time, and we have contractors already contracted that will respond immediately to us.”

More stringent building standards — such as the use of spray foam instead of batt insulation — are now more common among new projects, according to insights from Kalterra’s in-house construction team. This is adding to the already exorbitant cost of construction caused by cramps in the supply chain, Balsamo said.

“We were already fighting increases in building materials across the board, and then compound that with the cost of increased insulation specs …,” he trailed off. “There was a cost to the weather events that happened last year, and future events could cost developers moving forward.”

Those costs are potentially mounting as well for hospitals, clinics and other medical facilities. At Texas Medical Center, the densely packed district of dozens of hospitals and other research and medical facilities in Houston, the lights remained on through the crisis, but no water was running. 

The district itself kept power due to TMC’s priority placement with CenterPoint Energy and its own thermal energy cooperative, Thermal Energy Corp. But hospital workers still came to work from dark and cold homes, and because TMC relies on a city water supply, hospitals saw the same lack of clean water as the rest of Houston. 

To prevent this from happening again, TMC is considering severing itself from city water altogether — at a cost of $10M.

TMC Chief Operating Officer Isaac Middleton told Bisnow the project, in early phases of research, would take the district off city of Houston water and allow it to produce and treat its own supply. Each campus in TMC uses about 2 million to 3 million gallons of water a day. TMC is still weighing the option of staying with the city but is currently forced to move its cisterns and drain them daily to avoid the chance of contamination from inoperable pipes. 

Should TMC move forward with becoming water independent, Middleton said, maintenance would come in at between $500K and $1M each year in addition to the hefty upfront infrastructure costs.

Other facilities are considering similar major investments to prevent the confusion and havoc that ensued in the days after the storm, including upgraded generators.

“We’ve learned that traditionally HVAC systems — specifically the chillers — were not on emergency generators at most U.S. healthcare facilities,” said Michael Wargo, vice president and chief of HCA Healthcare, Enterprise Readiness & Emergency Operations in an interview with the American Hospital Association. “With the number of recent hurricanes and other natural disasters, we are seeing a trend in modern healthcare construction in making buildings able to transition to generator power. This is a huge investment but it’s increasing retroactively and is a must in any new construction.”

Industrial assets largely incurred less financial fallout than those meant to shelter and care for people, and few plan to invest in infrastructure upgrades. But there were still costs. Stream Realty had close to 300 industrial properties in its DFW portfolio at the time of the storm. Many sustained periods of no electricity due to rolling blackouts implemented by ERCOT to reduce strain on the grid.

“That really hurt us because we weren’t able to keep pipes from freezing and to keep heat going into the buildings,” Stream Regional Director of Building Operations Juan Lopez said.

Finding workers available to repair damage from burst pipes presented a new challenge, said Mica Hopkins, Stream’s managing director of property management. Hopkins said her team circumvented this issue by tapping contractors outside of Stream’s vendor list; however, the shortage of workers elevated the cost of repairs.

“Vendors were strapped, so we were having a really hard time getting [them] out to properties,” she said. “We may have been paying a premium to get some repairs completed.”

But outside of one-off repairs, Hopkins and Lopez said they are unaware of any widespread changes to industrial infrastructure as a result of the storm. 

“Buildings are not constructed in this area to sustain that long of a freeze with no power,” Hopkins said. “It would cost a significant amount of money to prepare for something that’s pretty rare.”

Andrew Coupe, vice president at Avison Young in Houston, agreed, adding his clients are mostly concerned with ensuring their facilities aren't in flood-prone areas and have humidity control and air conditioning. Winterization is not a high priority, though that could change.

"The freeze just isn't necessarily top of mind, and I just think that's just because of the lack of number of events, not to say that won't change with climate change,” he said. 

A notable exception was what happened to Houston’s petrochemical plants. Industry giants Westlake Chemical and Huntsman Corp. were named among the biggest losers of the 2021 ice storm, according to the Houston Chronicle, with losses of $100M and $25M, respectively.

Jesse Thompson, senior business analyst with the Federal Reserve Bank of Dallas in Houston, said that the ice storm's effects on operational production were worse than any hurricane on record, going back to the 1980s, and led to a months-long supply chain shock for compounds like polyethylene and polypropylene used for auto and computer parts. 

"You had the power outages cascading, you had natural gas freezing in some of the pipes, which adversely affected all the facilities that separate that gas," Thompson said. "Things are shutting down, we're losing power, we're losing feed stock, we're losing heat, and it all came so fast." 

Reducing disruptions is likely to become increasingly important going forward, and CRE experts said other asset classes could learn a thing or two from data centers in terms of mitigating risks. Spending extra money on emergency equipment may be a wise investment considering the breadth of damage a natural disaster can cause, said Mikey Jaillet, associate with CBRE Data Centers.

“For mission-critical real estate, in whatever asset class it might be, [data centers were] the perfect use case on why spending those extra dollars per square foot makes sense when you need it to stay up, because it did,” he said.

Texas’ data centers emerged relatively unscathed from the grid’s collapse. Those that lost utility power quickly kicked over to backup generators, sparing systems from potential downtime.

There were, however, longer-term consequences to data centers that were not immediately clear in the aftermath of the storm. Those that stayed on utility power saw massive spikes in the cost of electricity, and, in the most extreme cases, operators were hit with bills 10 times higher than average, according to Jaillet.

“Some groups were relatively unimpacted because the data center operator they chose had a four-hedged power strategy that worked out perfectly,” he said. “There were some groups that really rode the free market, and that really hurt. So, I think you are seeing more groups look at their power strategy in terms of, how do we insulate ourselves from anything like that happening again?”

This has spurred changes to the way operators buy power, said Ali Greenwood, executive director with Cushman & Wakefield’s Data Center Advisory Group. Some operators are opting for agreements where they pay more on the front end to hedge against price increases in the event of another disaster. 

“That is the No. 1 thing we hear about as a result of the storm,” she said. “It’s never about the facility experiencing downtime or how it held up. It is 100% based on how we protect against price increase fluctuations like what occurred during those couple of days in February.”

If there is one strong takeaway for CRE in the wake of last year’s disaster, it is the need to plan for the next one because severe weather isn’t going anywhere. Property managers now approach freezes like they do hurricanes in Houston — understanding that they’re coming and doing what it takes to minimize the damage.

“I don’t think anybody anticipated the craziness that we had last time, but we’re ready for that same kind of craziness if it happens again,” Camden’s Campo said.

CBRE Data Centers Senior Vice President Brant Bernet said that in some ways, the grid collapse had a silver lining.

“Going forward, we will see more caution taken, more steps to prepare for the future,” he said. “It may be a blessing in disguise that that happened, but it will make us only that much more resilient.” 

Bill Fulton, director at the Kinder Institute for Urban Research at Rice University, moved to Houston in 2014 and has become used to serial calamities, noting it “has been whacked with more disasters in the last few years than any other American city.” 

The key going forward, he said, will be gearing up for them. He pointed to California, which experiences unpredictable earthquakes, but creates legislation and building codes to minimize damage as a possible model.

"That's a good example of cities responding to disasters by trying to be more resilient, rolling with the disaster and bouncing back more quickly," Fulton said. "That's not been our traditional approach here. We are moving in that direction, and it's very positive, but it's slow, and we have to change our mindset."