Real estate sits at the heart of the American economy, playing a central role in the financial health of millions of families and companies. It’s also susceptible to disruption from climate change, as rising risk from flooding and wildfires alters the economics of real estate in some regions.
As climate change advances, analysts say it is likely to drive shifts in the valuation of properties, as well as the cost to insure them. Over time, this could also impact the tax base and price of debt for municipalities with exposure to climate impacts, including disasters and sea-level rise..
Today we’ll take a high-level look at real estate and climate risk, identifying some trends to watch going forward. We’ll explore some of these in greater depth in future newsletters, identifying risks as well as opportunities. One thing seems clear: Understanding climate’s impact on real estate will be crucial to the financial future of many American households and businesses.
The good news is that there is a growing set of tools to plan for different climate scenarios. These can help drive awareness and investment, and hopefully bring better outcomes.
Climate Risk in Residential Real Estate
The property insurance market in the U.S. is being reshaped by climate-driven disasters. Multiple insurers have pulled out of the already-distressed Florida flood insurance market in the wake of Hurricane Ian, which caused more than $50 billion in insured losses in 2022. Meanwhile four major insurers have limited new business in California, citing higher wildfire risk.
The national average for insuring a $250,000 home in the U.S. rose 20% from 2022 to 2023, according to BankRate. In disaster-prone markets the increases can reach 50%, reflecting price hikes by reinsurers. U.S. catastrophe reinsurance rates have risen as much as 40 percent year-over-year.
Home valuations are also at risk from climate change, particularly in regions where disasters leave properties vulnerable and difficult to insure. A 2023 peer-reviewed research paper in Nature Climate Change says climate risk is largely missing from current valuations, estimating that residential properties exposed to flood risk are overvalued by at least $121 billion.
“Low-income households are at greater risk of losing home equity from price deflation, and municipalities that are heavily reliant on property taxes for revenue are vulnerable to budgetary shortfalls,” the report says.
Climate Risk and Commercial Real Estate
Commercial real estate and climate risk is also in the mix, as several REITs (real estate investment trusts) with large portfolios have reported higher expenses from insurance costs.
Nareit, the trade group for the REIT sector, is highlighting climate risk in its member communications. “Understanding the potential financial risk to individual properties from the increasing frequency and intensity of extreme weather events —both today and over the next 30 years—is becoming ever more important for the REIT industry,” the group said.
Lower valuations can create risk for commercial real estate projects funded with loans. That’s why lenders are also assessing emissions and climate risk in underwriting projects.
Bond ratings agency Moody’s highlighted the climate-related credit risk in a report issued this week ahead of the COP28 climate conference.
“Total Moody’s rated debt held by sectors with high or very high environmental credit risk now exceeds $4 trillion, more than double the $2 trillion held in 2015 when the Paris Agreement climate change accord was signed,” Moody’s analysis says. “That means a range of global sectors will see their ability to pay their debts exposed to potentially greater risk from rising sea levels, hurricanes, carbon emissions, pollution, and other environmental pressures.”
Moody’s asserts that “climate risk is business risk” and in 2021 acquired disaster risk specialist RMS to help build a research and advisory business focused on climate risk.
Tools to Assess Real Estate Climate Risk
The Moody’s acquisition of RMS reflects another trend – the financial sector is beefing up its ability to analyze climate change scenarios, which in turn provides better data and tools for understanding risk for homeowners and businesses. Complex climate models are being built into tools for homebuyers, investors and businesses. These can offer broader guidance than flood maps, integrating data from trends like more powerful rain events.
Homeowners can use ClimateCheck to get a “snapshot” that weighs the relative future risk of storms, heat, flood, drought and wildfires. A similar tool is available from Risk Factor, which also offers estimates of the cost to rebuild from disaster damage. These solutions are being incorporated into traditional real estate search tools like Redfin.
Real estate portal Zillow says more than 80% of home shoppers now consider climate risk.
“While all generations juggle trade-offs like budget, floor plans and commute times, younger home shoppers want to know if their home will be safe from rising waters, extreme temperatures and wildfires,” said Zillow senior population scientist Manny Garcia.
In commercial real estate, the First Street Foundation is positioning its Risk Factor platform as a tool for REITs and other large portfolio owners to assess their exposure.
First Street CEO Matthew Eby says the tool allows users to “understand specifically how the building might be impacted by showing where on the site and what depth the water might reach, indicating whether it’s just the parking lot and roads, or to what extent it could reach the building itself.”
AI technology is highlighted in research at Climate Alpha, which targets the investment, development and insurance communities. Climate Alpha’s models assess climate impact on the value of real estate assets and portfolios, predicting valuations at future dates. The firm also offers a tool for homeowners assessing values in 2030 and how much of the change is climate-related. But its primary focus seems to be finance use cases, such as working with “asset managers at the front-end of the investment process to guide capital allocation into high-performing, climate-resilient geographies.”
That goal underscores the likelihood that there will be upside as well as downside as climate reshapes the real estate market. Some cities are positioning themselves as “climate havens,” and cities like Duluth, Minn. have seen above-average home price appreciation.
Resources (Nov. 29, 2023)
Podcasts
- The GARP Climate Risk Podcast features expert insights working at the forefront of climate risk. The podcast is hosted by Jo Paisley, President of the GARP Risk Institute from the Global Association of Risk Professionals. Highly recommended.
Links
- Most Climate-Resilient Cities (2023): There are lots of articles seeking to rank cities on climate, but this one from Architectural Digest incorporates governmental engagement and adaptability as well as the usual weather and disaster assessments. It breaks out maps and “best and worst” as well as a ranking of the top 50 cities.