A new way to invest in a weather-weary world
Not a day goes by when there isn’t some sort of mention of climate change and sea-level rise. Pundits may debate the validity of the science behind the issue, but Miamians and other South Floridians are becoming increasingly adept at wading and driving through flooded streets and sidewalks.
Businesses, too, keep a supply of sandbags on hand to protect their investment from flood damage, while neighborhoods have seen tidal flooding rise from an infrequent to a regular occurrence.
With more than $130 billion of US commercial real estate (CRE) located in the top 10% of cities most vulnerable to sea-level rise, the CRE industry is at looking at ways to help investors weigh the risks, prepare for the challenges, and make wiser investment decisions.
Investing at water’s edge
While experts are in no way recommending a mass sell-off of coastal properties, they are advising that if investors do not prepare today, their real estate values could be severely impacted tomorrow.
- In 2017, the year of hurricanes Harvey, Irma, and Maria, damage to US properties hit a record high at more than $300 billion.
- In 2018, from May to July, rainfall along the entire east coast was three times higher than normal.
- In 2019, temperature records, including those throughout October in SoFlo, were shattered on a daily basis.
Because the real estate industry is especially vulnerable to climate change, the Urban Land institute embarked on a global study that looked at the issue and its long-term impact on property investment. Results indicate that meeting the climate-change challenge will require futureproofing structures and projects, as well as working with governments to develop proactive policies and plans.
Assessing the risks of climate change
When assessing the risks associated with a particular property, developers and investors generally rely on insurance data. But because insurers usually determine prices on an annual basis, long-term risk factors—such as those associated with climate change—are often not considered. It’s difficult for that industry to use actuarial science to charge for future risks that are as unpredictable as the weather.
As a result, a new analytics industry—one that merges climate science with business and policy decisions—is emerging. It allows real estate professionals and investors to become better informed and it’s rapidly becoming a part of the due diligence process.
In addition to assessing the physical risks to a specific property as it’s impacted by climate change, these analytics also include transition risks or those factors that will most likely occur as a result of climate change. These include:
- An increase in disruption for tenants as weather-related events become more frequent.
- Higher operational and capital costs as properties experience greater wear and tear due to extreme weather.
- Higher taxes as cities and municipal jurisdictions cover protection costs. In Miami, for example, residents approved bond issues to raise their taxes to pay for pump station installation and raising sidewalks, roads, and seawalls.
Meeting the climate change challenge in South Florida
In case you haven’t figured it out, the Morris Southeast Group team fully believes that South Florida is worth fighting for—and it will meet the challenges posed by climate change. And we’re not alone.
In more and more projects around the region, developers are adding soil to raise the ground level beneath new construction, as well as investing in and incorporating climate-mitigation and adaptation technologies. These building-for-resilience strategies, in turn, help to lower operational costs while increasing the potential return on a CRE investment.
Speaking of resilience, it’s more than just a means of meeting the needs of a property. City leaders, for many reasons, want to ensure that their municipalities remain attractive for residents and developers.
In many regions, resilience strategies are taking center stage, and it’s important for investors to let policymakers know—on local, state, and national levels— that they’re interested in the issue and want to see action.
To learn more about these issues or Morris Southeast Group’s commercial real estate investment and property management services, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Tags: Climate Change, climate change challenge in South Florida, real estate industry, risks of climate change
