Climate Change’s Inexorable Approach To CRE

In light of all the attention directed towards Florence and her brothers and sisters now churning in the Atlantic this ongoing hurricane season, climate change and rising sea levels are increasingly on everyone’s mind — including commercial real estate people. As co-founder of Singer Xenos, he has helped hundreds of families create financial security and wealth, Marc Singer has some thoughts on those subjects. He also founded and heads up the Advisor Forum, which manages over $9 billion in assets.

Recent studies like one from Harvard University deal with how climate change could impact the general housing market. How much of a threat is it to the commercial market, and how do you counsel clients?

Just like the threat climate change poses to the general housing market, the impact it will have on our commercial market is both real and substantial. If you own commercial property, like a rental building, it’s always a good idea to begin reducing your exposure to vulnerable assets over time, especially in South Florida–ground zero for climate change and sea level rise. To be clear, we are not advising against investing in Miami or coastal cities altogether, but to do so in a way that can safeguard your portfolio and limit your exposure to vulnerable real estate assets.

For example, if you own multiple warehouses or hotels in South Florida, consider exploring how new opportunities outside the region may benefit your bottom line, too, where you’re less likely to deal with complications of sea level rise. You have years to lower your risk, but start the process now, and slowly move some away from the area over time so your assets truly become better protected.

Some skeptics have questioned how severe or imminent is the threat of climate change. We can’t get into a detailed description but can you name the single factor or two that are compelling arguments to take the issue seriously, and how local officials are responding to it?

Global warming, climate change and sea level rise are global issues and their effects are far-reaching. It is a very real issue, and it should be taken very seriously. Here in Miami, a 2016 University of Miami study found that before 2006, the average annual rate of sea level rise was about 3mm. After 2006, this rate jumped to 9mm a year.

Just take a look at how Miami’s public and private sectors are approaching climate change and sea level rise. The City of Miami, Miami Beach and Miami-Dade County resiliency officers are, together, creating a master plan to identify areas of critical need and potential solutions. For example, Miami Beach is spending $500 million to elevate more than 100 miles of roads, install dozens of pumps, build higher sea walls and improve drainage systems. And City of Miami voters passed a $400 million general obligation bond in 2017, with half that sum earmarked for combating sea level rise and protecting against stronger storms. Additionally, academic institutions, like The University of Miami and Florida International University, are all studying climate change and its potential impacts closely while identifying innovative ways to mitigate it. And regardless of the reason or reasons climate change is occurring, we can agree it is present, here to stay, and necessary to ensure our future generations are both infrastructurally and financially sound.

Florida’s vulnerability is obvious with its coast line location. Any particular areas on the Atlantic or Gulf Coast more susceptible to the impact than others?

The issue of climate change stretches far and wide, extending outside of Florida. According to data by Climate Central, a quarter of Boston could be underwater by 2045. Additionally, catastrophic flooding in New York City may become more common over the next few decades, as pointed out in a 2017 study by Rutgers. This is similar to what happened in that area after Hurricane Sandy. However, it’s important to note that this is a global issue, and that many parts of the world can be impacted from its effects, from stronger storms to hurricanes and rising seas.

What about the insurance issue?

There are several changes looming when it comes to insurance, its cost, and the anticipated impact of climate change and sea level rise. In just a few years, Congress may choose to change the way it sets rates for FEMA’s National Flood Insurance Program, with the purpose of reflecting more realistic assessments of risk. For the first time, sea level rise would be factored into insurance for the program. That means a likely significant rise in flood insurance cost for those required to have it because of where they live, and in return, impact on the overall cost of living near the coastline as well as foreign investment coming in.

Additionally, and even more immediately, FEMA will likely increase the number of designated flood zones throughout our region. In fact, mapping is underway with preliminary data expected from FEMA as soon as late this year or early 2019. These maps are intended to guide flood insurance requirements and regulate development standards in high-risk areas. We will likely see more homeowners in high-risk areas be forced to buy flood insurance, as required by lenders. Not only will more homeowners not be able to use the fact that their home is outside a flood zone as a selling point, but we may notice homes selling for less, given the higher carrying costs due to additional flood insurance.

What will this threat do to home prices in South Florida and other coastal areas? Should you diversify assets?

We used to say that the home is your safest investment, but that is simply not true in South Florida anymore. Coastal real estate prices are likely to flatten or fall due to the fear or climate change and sea level rising.

It’s always a good idea to diversify your assets, but even more so if you live in South Florida. Think of it as “The Rule of 50 Percent” – meaning, you shouldn’t have more than 50 percent of your total assets in vulnerable real estate. Over time, as more of the region falls susceptible to the impact of climate change, that standard percentage may evolve to “The Rule of 40 Percent” in as a little as 5 to 10 years. The first step is to identify what you have and whether it is more than 50 percent. If it is, you need to begin diversifying your portfolio now. Bottom line, you shouldn’t expect your home in a vulnerable area like Miami Beach to rise in value, and while it’s unlikely many people will sell their homes because of that, it’s a good idea to begin saving your money or expanding investments elsewhere. Consider not moving forward with those expensive upgrades or renovations, and instead, pay off your mortgage, save or find other areas to invest to begin diversifying vulnerable assets and protect the family portfolio.

What should people in the commercial business know about the subject, and how can they minimize the threat to their assets and portfolio?

The purpose of developing or owning commercial real estate is steady income growth and value increases over time, so owners need to assess the environmental resilience of the investment location, especially when reflecting on climate change and the risk from hurricanes as well as coastal flooding. Understanding how climate change will impact the affected insurance and property markets in a given area is key to evaluating the viability of the market for a particular investment.

Those who have commercial real estate assets in high-risk areas, like the coastal locations in South Florida, should reassess their real estate holdings, and limit exposure to vulnerable assets over time. To minimize threats to a portfolio, it is important to diversify, and look for other opportunities outside of South Florida. And the best advice is to start this process early.