CRE Properties at Risk of $13.5B in Flood Damage Next Year

A new analysis of commercial real estate flood risk suggests that 3.6 million commercial real estate properties face a growing chance of flood damage. The report from First Street Foundation and commercial engineering firm Arup suggests that US businesses will collectively lose 3.1 million days of operation due to flooding next year that is expected to cause “severe structural damage” as a result of climate change.

Additionally, of these, 729,999 retail, office, and multi-unit residential properties face annualized risk of more than $13.5 billion in 2022, growing to top $16.9 billion by 2052, about a 25% increase. The lost productivity impact on local economies would start at $49.9 billion next year and grow to $63.1 billion.

Typically, reports and analysis have focused primarily on residential property impact of flooding. But commercial real estate is also at risk.

The Federal Emergency Management Agency recently updated its National Flood Insurance Program to incorporate new technology and data analysis of how it views floods. The new approach uses new physical models and actuarial models, looking at flood frequency, flood type, distance between the property and water body, and property rebuilding cost. 

This is in keeping with a general change in how insurance views and covers flooding. Underwriters have been trending to higher deductibles and premiums over the past five to ten years. With the new FEMA modeling, an estimate of 70% of those with insurance coverage will find their policy rates go up because of greater risk of flooding brought on by climate change.

Increased insurance costs could be significant to a property’s operations and value, both immediately with the new modeling and over time as risks grow. But that is just one result. Another is that companies, concerned about growing costs and down time, will abandon long-held sites and move to what they consider safer ground. 

Businesses and CRE have already been seeing the impact. Spirit Airlines decided last year to move its operational center, along with 240 jobs, from South Florida to Nashville. Several years ago, Hewlett Packard Enterprise moved its manufacturing operations center from an existing site in Houston to Chippewa Falls, Wisconsin. And last month, Roper Hospital revealed a $500 million plan to move its main facility from the Charleston, South Carolina peninsula, an increasingly flood-prone area, after 165 years in the general area.