Weather Is Becoming An Albatross That Could Reshape CRE Investment In Texas, Across U.S.

Hail storms, hurricanes, tornadoes and floods are typical occurrences across parts of Texas and the U.S., but the frequency, severity and resulting damage of these weather-related events could start reshaping real estate, from investment decisions to design of developments and property insurance underwriting and availability, a new report from the Urban Land Institute and Heitman says. 

The risk of building in storm-prone areas is getting harder to ignore.

"I have definitely seen an increase and an uptick in storms, and the damage is only getting worse. The [building] code is getting better, but the damage seems to be getting worse and worse," DFD Architects Inc. Vice President Shawn Gillen said. 

Global losses from weather events reached well over $3 trillion over the past decade, up more than $1 trillion from the previous decade, ULI/Heitman reported.

The report warns municipalities and building owners that real estate investors and liability insurers are paying closer attention to potential weather-related losses on buildings in at-risk markets — and increasingly, that means writing off investment in storm-prone areas like the Texas and Louisiana Gulf Coast. 

The report cites a discussion with one investment manager whose firm exited Houston after Hurricane Harvey hit in 2017, with the decision to go partially based on "the climate risk factor." Its decision is not that unusual, according to ULI and Heitman. 

"The consensus from interviews with leaders in the industry is that market-scale climate risk assessment will play a role in future investment decisions, mirroring the recent advances in assessing physical risk at the asset level," the authors wrote. 

This shift in behavior is playing out in altered actuarial risk assessment associated with weather patterns in certain parts of the country and new loss mitigation strategies to protect real estate, ULI and Heitman said. 

There are steps developers, building owners and architects can take to effectively protect against storm damage. Gillen told Bisnow mitigation strategies like ensuring new construction follows the most up-to-date building codes, tying down mechanical equipment sitting atop commercial facilities, and upgrading existing structures when possible to deal with flood and wind risk can help protect assets. 

Gillen has been on the ground in the wake of a few Gulf Coast hurricanes as part of AIA's Disaster Assistance Committee. He observed storms ripping through older buildings, leaving extensive damage, while newer buildings constructed to comply with modernized building codes received minimal damage even when sitting close to coastal areas. 

A Federal Emergency Management Agency report on Hurricane Harvey's impact found the average closed flood insurance claim for assets built after 2000 hovered at $18K, while Texas buildings constructed between 1982 and 2000 reported an average damage claim of $154,928 in the wake of Harvey.

Overall, Hurricane Harvey led to about $125B in total economic losses, according to the National Oceanic and Atmospheric Administration’s National Centers for Environmental Information and the National Hurricane Center. 

Commercial Property Insurance Rates Keep Rising With Flood Levels

Commercial building owners and insurance companies are already feeling the financial impact of growing insurance costs stemming from weather-related events. 

One of the most recent Gulf Coast storms, Hurricane Sally, hit Alabama in September as a Category 2 storm, killing eight people and leaving about $5B in economic losses in its wake. Insurance carriers ended up on the hook for about $2.5B of the total loss amount, risk management product provider Aon plc reported. 

ULI/Heitman predicted there will be a shift in insurance practices with insurers paying more attention to climate issues inside specific communities when underwriting policies.

The impact on property insurers is already evident, said James “Chip” Stuart, chief sales officer for HUB International, an insurance broker.

"In the Gulf [Coast], hurricanes have now started, and this is our third major one that is coming up, so that does put pressure on what we call Tier-1 windstorm damage, which makes it harder to buy windstorm and flood [insurance] in those areas," Stuart said. 

While commercial property insurance rates stayed the same in 2017 and 2018, the impact of roughly three years of high-powered hurricanes, tornadoes, storms and wildfires pushed insurers to raise rates in 2019, Stuart noted. 

Insurance rates on commercial policies starting rising about 15% to 25% upon renewal last year, Stuart said. For those that didn't suffer a big rate increase in 2019, it's likely they will take a substantial hit at their next renewal date, Stuart said. Those that suffered through major rate increases last year may still experience substantial, but smaller, rate hikes in 2020, he said.

Making matters worse is that 2020 brought additional financial risk with insurers having to sift through claims tied to rioting damages in various U.S. cities and wildfires across the West Coast. 

"With all of those things happening at the same time and insurance companies looking for rate increases because of past years, it is putting an awful lot of pressure on rates and renewals in our property market," Stuart said.