Weather and climate-related insurance losses in 2017 cost the U.S. more than $300 billion, making it the most expensive year for such losses in recorded history, according to NOAA’s National Centers for Environmental Information.
That’s just one of the reasons the Counselors of Real Estate ranked weather and climate-related risks as the third most urgent issue that will impact the overall real estate market, according to a survey of its membership of 1,100 real estate experts.
The risks from extreme weather disasters are becoming more obvious every year, with disasters like wildfires in the west, river flooding across the midwest, and coastal flooding from hurricanes making headlines around the country.
Jeff Levine, SIOR, senior vice president of APEX Commercial Group, and a local Counselor of Real Estate, says he is already seeing developers and investors beginning to design around weather disasters, but he sees a crisis brewing in the insurance industry.
“I think where we’re really going to see the effect is the inability of insurance companies to cover these catastrophic losses with the resources they have,” he says. “The cost of insurance is going to increase dramatically.”
Levine anticipates that soon, many cities at high risk for flooding will have to buy out property owners in vulnerable areas and redevelop those properties into managed flood plains. And in this effort, rising insurance costs could play in cities’ favor.
“If you can’t buy insurance, you’ll have to walk away from your investment,” Levine says, noting that vulnerable homes will range from low-income neighborhoods in low-lying areas to coastal mansions.
Another downstream effect of insurance companies seeing higher losses could be either a decrease in lending activity from insurance companies, or lending at much higher costs, both of which could lead to a slowdown in building and investing across all real estate sectors.
Levine says he is seeing developers and property owners consider changes in building design to mitigate the risks of weather disasters, such as improving their evacuation plans, moving living areas to higher floors, and moving mechanical areas to higher floors. And while those changes can be done with only minimal investment if incorporated into the original construction plans, owners are also considering more costly changes like investing in power storage and generation supporting their buildings to mitigate the risk of power surges and losses.
“You can build batteries to operate buildings,” Levine says. “You can generate and store your own electricity. It’s a big cost going in, but the exposure is reduced.”
These are just a sampling of the ways weather-related risks are increasingly factoring into real estate decisions in the U.S. But the nation also faces the larger economic risk from the broader trend of climate change, which will likely result in decreasing farmer yields, decreasing property values in vulnerable regions, and recurring threats to essentials like the local water, food and power supplies.
Levine says proactive cities will see the importance of investing in infrastructure that mitigates their risk from weather-related disasters.
“The progressive thinkers are trying to spend the money on the front end to avoid the exposure on the back-end,” he says.