Tag: commercial real estate

Credit Rating Service DBRS Morningstar Explores Threat Sea Level Rise Flooding Poses to Commercial Real Estate

DBRS Morningstar, a global credit ratings business, released a report this week titled “As Seas Rise, Coastal Commercial Properties Will Need to Batten Down the Hatches” that explores the threat sea level rise flooding poses to commercial real estate.

Analysts combined data from the National Oceanic and Atmospheric Administration (NOAA) — which estimates sea level rise in the next thirty years will exceed the total rise that occurred in the last 100 years — and flood risk data from First Street Foundation and Arup to identify the coastal communities most at risk of flooding. “The five metropolitan areas with the highest aggregated total projected structural damage costs across office, retail, and multi-unit residential buildings are the Miami (with an estimated $1.07 billion in structural damages), New York ($0.58 billion), Pittsburgh ($0.45 billion), Boston ($0.33 billion) and Houston ($0.29 billion) metropolitan areas,” according to the report. Inland Pittsburgh was included in the report because its proximity to three rivers that meet makes it “particularly susceptible to flooding”.

The report notes that in addition to a heightened risk of flooding from higher more powerful storm surges, more intense rainstorms, and nuisance flooding (tidal flooding that occurs when there are no storms around), owners of commercial real estate may find it difficult to pay for flooding-related repairs. That’s because the Federal Emergency Management Agency’s National Flood Insurance Program caps coverage at $500,000 for a commercial building and $500,000 for its contents. Owners have to turn to the private insurance market for additional coverage.

To combat sea level rise flooding, the report mentions options such as raising elevations at development sites, elevating mechanicals, and installing temporary/portable seawalls, but the authors also note that site-specific solutions aren’t enough. They have to be made in tandem with community efforts to protect critical infrastructure.

In addition to flood damage, insurance, and prevention efforts, the DBRS Morningstar report also mentions that credit rating agencies are beginning to consider the impact of sea level rise flooding as a factor in financial transactions. “Investors and underwriters no longer have the luxury of simply checking if a property is outside of FEMA’s 100-year flood zones and verifying there is some evidence of flood insurance,” the report says. “Because climate change is rapidly evolving, models based solely on historical data have become less accurate.”

The bottom line here is that commercial real estate owners can expect far more closer scrutiny of their individual properties and their exposure to sea level rise flooding when they’re seeking loans. This report is a must-read for anyone involved in commercial real estate located in coastal communities experiencing or at-risk of experiencing sea level rise flooding.

Commercial Real Estate Investors and Developers Need to Consider Sea Level Rise Flooding Risk

Sea level rise is impacting public lands and residential and commercial real estate. Just as residential real estate investors need to consider the threat of sea level rise flooding, commercial real estate buyers and owners need to keep on top of it, too.

A recent article (“What CRE Execs Need to Know About Sea Level Rise and the Law”) written by Anca Gagiuc and published by CommercialSearch.com — a multiple listing service for commercial real estate — takes a detailed look at what commercial real estate buyers and owners should consider when they’re deciding how to proceed in coastal communities. In the article, Gagiuc interviews Emily Lamond who works in the environmental department at the Cole Schotz law firm.

Lamond says that commercial developers are already responding to sea level rise by raising land elevation, buildings, roads and critical infrastructure. Renters, buyers and mortgage providers are also interested in buildings that can resists or withstand sea level rise flooding.

Other issues explored are who has liability if a property is flooded and damaged to the point that it is essentially totaled. Lamond says typically the owners are responsible for demolishing and removing damaged buildings. She recommends that owners review their insurance policies to see what’s covered in this situation and also prepare for the possibility of unexpected costs.

Lamond touches on several other points that commercial and residential real estate buyers and owners should consider when evaluating property located in coastal communities threatened by or currently experiencing sea level rise flooding. The entire interview is definitely worth a look.

Sea Level Rise Poses Challenges for Commercial Real Estate

Residential real estate isn’t the only sector facing challenges from the threats posed by climate change and sea level rise flooding. Commercial real estate is under pressure, too.

According to a report recently released by Dechert LLP, a global law firm that advises corporations, financial institutions, sovereign states and wealthy individuals, “Climate change is forcing the commercial real estate industry to re-think the effectiveness of flood insurance that developers, lenders and investors have relied on for decades.”

The report notes that extreme weather and sea level rise flooding are pushing the commercial flood insurance system “to a breaking point.” Specifically, the report notes that 14 weather and climate disasters in the United States resulted in $91 billion in damages. Each event had losses exceeding $1 billion mostly from damage to residential and commercial real estate.

Among the challenges faced by the commercial real estate sector discussed in the report:

1) The National Flood Insurance Program (NFIP) administered by Federal Emergency Management Agency is financially unstable. The program is now running over $20 billion in the red, and it relies on government bailouts to continue to operate. Its authority to operate is due for renewal next fall. If it’s not renewed the report says, “The potential for disruption is most concerning for property owners in special flood hazard areas seeking mortgages from federally-backed entities and federally regulated banks because flood insurance is legally required for these loans.”

2) FEMA’s flood maps, which are supposed to identify a commercial property’s exposure to flood risk, are notoriously outdated and they do not consider sea level change or increased flooding estimates. “This has led to costly and catastrophic errors,” the report says. “For example, in 2018, at least 140 Florida homes were demolished following the destruction of Hurricane Michael. However, the relevant FEMA flood map reflected that the properties were in flood zone X (0.2% chance of flood in any year) and flood insurance was not required.”

3. Flood insurance only covers damages, not loss of value. The report says this is a problem because as properties become increasingly vulnerable to flooding, the will inevitably lose value over time. “The worst-case scenario here is particularly bleak,” the report says. “Billions of dollars of real estate will be underwater not only in terms of their market value being less than the outstanding mortgage debt, but also because these properties will be at greater risk of someday being literally underwater. Refinancing these mortgages and insuring these properties will undoubtedly become more challenging each passing year.”

The report goes on to explain how uncertainty in the flood insurance market is leaving the the commercial real estate finance industry without a “uniform strategy to underwrite the increased frequency and severity of flooding due to climate change.” The report says the public and private flood insurance industry “will soon be forced to adjust to face the environmental and economic realities of a country more prone to frequent, catastrophic and repeated flooding.”

The authors predict that the commercial real estate finance industry will evolve to meet the challenges to the marketplace. They identified several issues that need to be monitored: “Among the questions are whether the National Flood Insurance Program will be reformed, whether private flood insurers raise their rates to levels only wealthy real estate sponsors can afford, and whether banks and real estate bond buyers will call for more detailed disclosure to more accurately balance the risk of loss.”

The Dechert LLP report focuses on the commercial real estate industry, but most of its discussions, conclusions and warnings also apply to residential real estate. Buyers, sellers, owners and real estate agents in coastal areas should take the time to read this insightful report to better understand the broader issues that will impact their local real estate markets and property values.

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