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.

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