Climate change, also referred to as global warming, has accelerated in the past century. The normal ebbs and flows of our planetary climate have jumped off course beginning in the mid 20th century. Political opinion, root causes, and other debates aside, this trend is set to continue or even accelerate in the near future. The impact of climate change has been felt in many industries, and the real estate market is certainly no exception.
It may be a tempting thought to envision ourselves as being untouchable if we leave in a temperate area, far away from the coastline. The fact of the matter is that all real estate values may be touched by climate change in the coming years. It isn’t just hurricanes that change real estate values. New laws, regulations, and economic realities which may result from climate change will likely lead to a volatile real estate landscape.
How Climate Change Devalues Real Estate
To understand the reality of how climate change impacts real estate, let’s look at some of the more well known examples of real change already being experienced today.
A recent study performed by the First Street Foundation concluded that amongst Mid-Atlantic states, nearly $16 billion was lost from residential real estate values alone between the years of 2005 and 2017. The reasons for these real estate devaluations? Rising sea levels, tidal flooding, and the associated fallout. Florida was found to have the largest financial loss. While this study focused on residences, the commercial real estate market was hit equally hard.
Another less obvious reason why commercial real estate properties lose their value due to climate change is the influx of stronger, more frequent storms. Many of us have heard that climate change has caused warmer waters and stronger hurricanes. Climate change has also been potentially linked to worsening tornado seasons in the midwest and across the globe. All of this can destroy real estate, raise insurance rates, and devalue properties overall.
Using Climate Change Projections to Make Wise Real Estate Investments
Of course it isn’t all doom and gloom. There are ways for savvy real estate investors to educate themselves on climate change and its impact on future decisions. While it may take time to develop a deep understanding of this relationship, even a cursory understanding of how climate change will impact your region’s real estate market can be a start.
Immediate risks include some of what we discussed in the previous sections: namely flooding, hurricanes, tornadoes, droughts, and so forth. Some regions have always been subject to these considerations while some regions may find themselves in the crosshairs for the first time. These types of risks are potentially catastrophic including total loss of investment and/or lengthy closures.
Less immediate risks might include an area being depressed over time due to climate change. The relationship between climate change, population growth, industry regulations, and everything in between can be the difference between a highly profitable investment in commercial real estate and a financial failure.
Last but not least, insurance costs are expected to increase due to climate change. This may impact your region more or less depending on the volatility of the climate and by extension the likelihood of property damage due to climate-related events. As with all real estate (and business) decisions, the decisions stems from weighing the potential benefits vs. the possible risks.
Coastal Property Values are Taking a Major Hit
With the melodrama of the 24 hour news cycle, it can be hard to separate fact from fiction. Are sea levels truly rising causing massive property damage or is this yet another Y2K? We already referenced the massive financial losses which have been incurred all along the eastern seaboard. Unfortunately, those losses are just the tip of the proverbial iceberg.
Records for real estate damage resulting from natural disasters are being broken all the time. In 2017, the total costs in real estate damage caused by floods, wildfires, and other natural disasters topped $300 billion in the US. And yes, rising sea levels will continue to be a very real threat to any real estate close to our shorelines.
If you have an interest in real estate in a city like Miami, New York or New Orleans, this might come as old news. If you live inland, the potential ripple effect might cause shifts in real estate valuation in either direction. As Mark Twain once quipped, “buy land, they’re not making it anymore”.
Going Forward
When it comes to projections on climate change, the future is murky. What we do know is that the real estate market has already seen a material impact as both a direct and indirect result of rising temperatures, stronger storms, and everything in between. Moving forward, businesses and real estate investors should keep climate change on their checklist for any potential real estate transaction. Even the most seemingly isolated locations are not isolated from the shifting climate.
The trickle down impact of stricter environmental regulations might also influence real estate value as well as local, state, and national economies. As with all economic shifts, staying ahead of the curve might well lead to the greatest possible outcome.