Tag: residential real estate

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.

Global Consultant Recommends Steps to Protect Florida Real Estate Value from Sea Level Rise Flooding

McKinsey & Company, a global consulting firm, released a report this week that analyzes the risk sea level rise flooding poses to billions of dollars worth of Florida’s residential real estate and recommends steps that could be taken to mitigate the damage.

The report, titled “Will mortgages and markets stay afloat in Florida?”, starts by stating the simple fact that Florida’s unique location — in a hurricane-prone zone — and geology — extra low elevation with a porous limestone foundation that allows sea water to move freely — makes it very susceptible to sea level rise flooding. In fact, the authors cite a First Street Foundation study that concluded sea level rise will increase the number of days that many coastal areas experience tidal flooding each year from a few days today to 200 days a year by 2050. In addition, the average annual damages from storm surges will itself surge from $2 billion today to up to $4.5 billion by the middle of this century.

The report goes on to discuss how sea level rise is already depressing home values in areas that experience sea level rise flooding compared with those that don’t. “About 25,000 homes in Florida already experience flooding at frequencies of more than 50 times per year (almost once a week on average),” according to the report. “With rising sea levels, 40,000 coastal properties representing $15 billion of value could run this risk by 2030, and 100,000 properties worth $50 billion by 2050.”

The threat to the value of Florida’s residential real estate isn’t posed only by direct flooding, either. The report says as buyers are increasingly made aware of the flooding and the expenses involved in owning a property in a flood zone, prices will likely drop. Buyers could also balk at the higher insurance premiums and taxes that are sure to be levied as a result of flooding. A final point of pressure is the mortgage market. With the risk of flooding increasing every year, experts are wondering how long mortgage providers be willing to write 30-year-mortgages — or even 15 year mortgages, for that matter — for high risk properties when the owners might never pay back the loans.

The report authors offer a few potential solutions that could help mitigate the risk. Among their recommendations are that: 1. Real estate markets become more transparent about the risk of sea level rise flooding, so buyers don’t lose confidence in the market; 2. More money be spent on projects needed to upgrade the infrastructure — such as sea walls and storm sewers — needed to fend off the flooding ; and 3. Policy makers, engineers, investors and community organizations band together in groups to decide which properties to protect from sea level rise flooding and which to abandon.

In the end, the authors write that “While the state and communities face hard choices in the face of rising sea levels and worsening hazards, planning today can help manage the consequences and minimize the costs of climate change in the future.”

It’s clear from this report that the day of reckoning is here for buyers, sellers, owners and real estate agents in coastal communities. Understanding the roles played by individual property owners, governments, insurers and mortgage providers in the health of a real estate market impacted by sea level rise flooding is critical to protect your financial future.

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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