How Climate Risks May Impact Long-term Real Estate Owners

If you plan to invest in real estate for the long haul, climate risk should probably be a part of your buying calculus. Consistent changes in weather are having a negative impact on property values in certain areas as safety concerns of potential buyers increase.  

In California, recurring wildfires are causing more destruction than in previous years. According to the National Interagency Fire Center, the average fire in 1982 burned around 25 acres. In 2017, the average was more than 100 acres. The Tubbs Fire of 2017 caused an estimated $4.6 billion or higher in estimated insured losses in California’s wine country.

Meanwhile, in Florida, the McKinsey Global Institute predicts that damage from extreme 1-in-100 year storm surge events could grow from $35 billion today to anywhere from $50 to $75 billion in 2050. Three particular counties in Florida — Miami-Dade, Lee, and Collier — are more likely to bear the brunt of these losses due to their geographic characteristics. 

Despite the vulnerability to multiple climate risks, high demand and low inventory mean that many are still building and buying real estate in these areas. The question that should be on the minds of potential buyers and long-term investors is whether or not the now in-demand amenities of coastal or mountain living are worth the long-term risks. 

How Does Climate Change Affect Real Estate? 

Much of these costs will depend on where you live and own property. A few regions are more vulnerable than others. If you own property in a high-risk area, you may feel a pinch in your pocketbook or see a squeeze in your returns as climate impact grows. Here are a few ways that you can expect the cost of these risks to shift in the coming decades. 

The Cost of Climate Change

• Higher homeowners insurance premiums: Swiss Re Institute forecasts the property risk pool to grow by 33%-41% by 2040, generating $149-$183 billion of new premiums.

• Higher energy costs: staying cool in popular retirement and tourist destinations like Arizona and Florida will come at a higher price. Property owners and tenants can likely expect to pay more in utilities as temperatures rise. 

• Possible higher property taxes: as people move away from areas prone to flooding, fires, and other extreme weather events, the tax base will likely shrink. Municipalities may have to counteract those trends by increasing the tax burden on those who remain.

• Infrastructure and resiliency projects: as local governments plan to fight back against extreme weather, special task forces to plan and execute projects will likely increase property taxes in these areas as well. 

• Increased maintenance costs: whether required by local authorities or your insurance company, property owners can expect to undertake more proactive measures to curb the impact of extreme weather. This could include ongoing maintenance like clearing vegetation or upgrades to the structure like adding hurricane-grade windows. Cleanup from disasters is likely to increase and become more costly as well.

• Decreased property values: homeowners and investors will likely see their property values fall, especially in coastal areas where agents are more likely to believe in climate change. In one analysis, there was a 7% decrease in home prices for properties projected to be underwater in “believer” counties. 

Changes in Insurance Policies

When you purchase a property, you’re typically required to carry at least a general homeowners insurance policy. However, general insurance policies don’t cover all types of natural disasters. Many property owners are unaware of the growing risks and are underinsured to cover the costs in the event of certain disasters.

As harsh weather becomes more consistent, owners may want to consider enhanced policies to protect against floods, earthquakes, and other events that aren’t covered by the general policies. Unfortunately, higher premiums in the coming years won’t necessarily mean more coverage. For certain homeowners, there may be no coverage offered at all. 

Between 2018 and 2019, about 30% of homeowners in high-risk fire areas of California were dropped by their insurance company. Increasingly, finding any option for coverage in the riskiest areas is becoming more difficult despite state regulators imposing a one-year ban to stop insurance companies from refusing coverage. Now, two of the biggest firms offering fire protection on multi-million dollar homes in one area are notifying about 9,000 customers that their policies won’t be renewed this year. 

Many property owners may hope to counterbalance the risks of climate change with their insurance policies, but California serves as a warning. There’s no guarantee that companies will continue to insure high-risk areas. 

The Federal Emergency Management Agency (FEMA) is also implementing new methodologies for determining flood insurance policy premiums. In the past, the policies were based on location and elevation, but now variables like rainfall, climate change, and sea-level rise have been added to the equation. The change hopes to address the massive discrepancy between the number of claims paid out compared to premiums collected. Inevitably, the new rating system will push premiums higher for many property owners on the coast. 

Tools to Better Assess Climate Risk

For those concerned about climate risks, investors and homebuyers can purchase evaluations from for-profit firms or turn to these free tools to help guide their buying decisions. 

Flood Risks

Floodfactor.com is integrated into a few real estate platforms like Redfin, realtor.com, and Estately. The application is powered by data gathered by more than 80 experts and based on peer-reviewed research. The data is compiled into a Flood Factor for a property to rate whether it has a minor, moderator, major, severe, or extreme risk of flooding. 

Sea Level Rise

The National Oceanic and Atmospheric Administration (NOAA) offers a Sea Level Rise Viewer. This online tool allows you to enter a property address and customize risk scenarios based on different water levels. The user interface isn’t that intuitive, so here’s a walkthrough to help.  

Fire Risk, Heat, and More 

ClimateCheck provides property-level insight into fire risks as well as coastal flooding. Five individual ratings are assigned to each address for flood, storm, fire, heat, and drought in a property snapshot. You can also request a full free report. 

Adding Climate Risk Calculations to Your Due Diligence 

These are just a few of the free resources available to homebuyers and investors to determine the long-term risks of purchasing a particular property. This is by no means a comprehensive list of the potential tools you can add to your due diligence process. Take time to evaluate what will be most useful in assessing risks relevant to your location. 

Evaluating real estate is more complicated now, but it’s worth adding these climate risks into your buying and investing equation. As younger populations begin buying or renting, these concerns are more likely to affect their future decisions. Popular locations might not retain the same historic long-term value if exposure to floods, fire, and other extreme weather conditions make living, vacationing, and renting there untenable.