October 9, 2018

This weekend, Bloomberg published a stunning article on the imperiled state of Miami-Dade’s fresh water supply due to rising seas. This reportage threw into stark relief a welter of climate change-related threats to coastal communities and private real estate holdings, particularly on the Atlantic seaboard of the United States. Only clear-eyed management of physical climate risks can help mitigate the financial jeopardy facing homeowners, investors, and local governments.

The case of Southeast Florida’s fresh water is particularly alarming because of the problem’s apparent intractability. Miami-Dade sits on the Biscayne Aquifer, which serves as a primary water source. However, its porous nature and proximity to the surface make the aquifer highly vulnerable to hazardous substances. Very likely, the rising sea level will lead to saltwater intrusion, while anticipated flooding could bring toxic chemicals from nearby Superfund sites into the aquifer. While some water treatment technologies are available, significant and growing costs would put local governments under greater budgetary pressure.

While utilities’ viability may pose an indirect threat to homes and businesses, many other coastal climate change impacts pose a direct threat. As the Carolinas continue to reel from flooding and its aftereffects weeks after Hurricane Florence’s storm surges and record-breaking rainfall, concerns grow over property damage. CoreLogic has estimated total residential and commercial property damage at $28.5 billion, with 672,000 homes affected. But the hurricane is not the only problem property owners should worry about.

Even without extreme storms, routine ‘nuisance’ flooding is undercutting home value and undermining livability in some communities. Tidal flooding, exacerbated by sea level rise in recent decades, has erased $6.7 billion in relative home value in New York, New Jersey and Connecticut since 2005, finds a recent study by First Street Foundation. Together with losses calculated in the Foundation’s earlier report on Florida, North Carolina, South Carolina, Georgia, and Virginia, the total quantified loss in home value appreciation is $14.1 billion. As the states most impacted by tidal flooding, Florida, New Jersey, and New York have lost $5.4 billion, $4.5 billion, and $1.3 billion, respectively.

The series of studies are based on an approach initially used in a peer-reviewed article, which explores the impacts of sea level rise on property value in the Miami-Dade region. The researchers identify the areas at risk by analyzing sea level rise projections, sea level trends, and property lot elevation data, and combine it with 3.2 million property transactions to analyze the financial impacts of tidal flooding. Between 2005 and 2016, the total value loss in Miami-Dade’s real estate market was $465 million.

Similarly, researchers at the University of Colorado-Boulder and Pennsylvania State University found that homes vulnerable to floods were selling for at most 14.7% less than similar unexposed homes. The primary driver of the price drop is believed to be discount requests from second home or multi-property investors, who tend to be better educated and to demand discounts in exchange for bearing flood risk.

The losses could grow more substantial in the near future. A federal report shows that the frequency of high tide flooding has doubled in the past 30 years and that the U.S. broke the records for average number of high tide flooding days in 2017. With sea level continuing to rise for the foreseeable future, tidal flooding is highly likely to become more common and to intensify even under less extreme weather conditions, causing road closures, overwhelmed drainage systems and flooded real estate properties. It could ultimately contribute to further coastal home value losses, reduce investors’ return, strain municipal budgets due to lost property tax revenue as well as increased flood-related expenditures, and hurt real estate companies’ bottom line.

To prevent and cope with home value loss, real estate investors and homeowners must actively engage real estate developers and local governments to ensure the resiliency of properties. By upgrading drainage systems, building floodwalls, elevating critical infrastructure, and updating building codes, developers and policymakers can together make the growth of local real estate market more sustainable and resilient. Though these potential infrastructure projects may require significant capital outlay, studies show that resilience measures are critical to preserve the property value and local economic vigor. Communities without resilient houses and infrastructure will not only experience property value loss, but may also lead to residents migrating to other regions, harming economic growth.

In addition to residential properties, commercial real assets in coastal regions, as discussed in Climate Finance Advisors’ recent publication on infrastructure investment, can be impacted as well. As sea level rises and the frequency and intensity of hurricanes grow, market demand may decline as people shift to less risky regions and properties will require additional capital for disaster recovery. To cope with such hazardous events, building floodwalls and levees will incur extra costs and flood insurance premiums may also increase. Essentially, all the factors mentioned above will impact the asset value of commercial real estate.

That said, flooding risk could provide local government and communities with opportunities to protect residents and properties by investing in flood-resilient infrastructure. To guard against future risks related to sea level rise, local governments in flood-prone areas have started planning and implementing resilience projects. Almost six years after Hurricane Sandy, New York is embarking on the Big U project funded by the Department of Housing and Urban Development. This project provides a ten-mile protection area along the southern tip of Manhattan, comprised of levees, a floodwall and a park to serve as a buffer. Miami Beach, one of the most flood-vulnerable cities nationwide with 93% of its territory in a flood risk zone, is also taking action by building roads at high elevation, upgrading drainage systems, and installing pumps to remove water from streets. And New Jersey has a comprehensive coastal resilience planning process that has spawned numerous working groups and reports. One such report prepared by New Jersey Future, “Sustainable and Resilient Coastal Communities: A Comprehensive Coastal Hazard Mitigation Strategy,” released in September 2017, outlined five complementary strategies:

  • “Enacting more resilient building codes and standards;
  • Refocusing development away from high-risk areas;
  • Protecting and restoring marshes and wetlands;
  • Disclosing hazards;
  • Re-aligning capital investment priorities.”

The fifth strategy, ‘re-aligning capital investment priorities’, underscores that to ensure the successful implementation of resiliency projects, securing sufficient funding is of vital importance. One year after hurricane Irma, the Center for American Progress and the Miami-based CLEO Institute advocated for the Florida Future Fund for investment in several key sectors, including flood resilience. The proposed funding sources comprise a mix of public and private capital, including municipal bonds, taxes, foundation grants, utility fees, and private investment from green banks. Given public capital’s financial constraints regarding resilient infrastructure investment, only attracting public and private capital together will be sufficient not only to meet the funding gap, but also achieve more significant impacts.

For investors with infrastructure portfolios, neglecting the impacts of climate change may be tantamount to inviting exposure to financial risks. It is estimated that the built environment could lose $415 billion globally over the next 15 years. This reveals tremendous opportunities for resilient infrastructure, which can yield stable returns while lowering the overall risk exposure of investors’ portfolios. As the owners of substantial climate-related coastal risk, investors are well-positioned – and duty-bound – to manage them.