Don't Go Near The Water: Climate Change Risk And Its Impact On Investment

As hurricane season kicks off and the Northeast emerges from a haze of choking wildfire smoke, the impacts of climate change on people and property alike are once again at the front of mind for many, and new analyses from CoreLogic shed more light on which specific regions of the U.S. are most at risk over the next 30 years.

The Southwest and Rocky Mountain West are home to the least risky areas with respect to climate change, in spite of wildfires and an evaporating supply of water, according to CoreLogic. On the flip side, low-lying areas like Louisiana and Florida are the riskiest, threatened by hurricanes and angry rivers.

Data sets like these are increasingly factored into decision-making at the top levels of major U.S. investors as they seek to avoid property damage and find places where they can still get insurance, and at an affordable price. 

“There has certainly been an increase in firms factoring physical and transition risks into their decision-making in recent years and best practices for identifying and responding to these risks are undergoing a period of rapid development,” Moody’s Analytics Associate Director of Research Natalie Ambrosio Preudhomme told Bisnow by email.

“I increasingly hear CRE investment managers highlighting that they need to consider not just their hold period but also the sell-off value of their asset, which means they have to look at future climate risks when evaluating an asset,” Ambrosio Preudhomme said.

Specifically, CoreLogic’s riskiest places are Plaquemines, Jefferson and Orleans parishes in Louisiana; Monroe County, Florida; and McMullen County, Texas. On the safer end are McKinley County, New Mexico; Duchesme and Emery counties in Utah; and Conejos and Summit counties in Colorado. Further, these areas are expected to maintain their relative levels of risk through 2050, according to CoreLogic.

Most of these places are sparsely populated and somewhat remote, but others are home to notable cities like New Orleans or tourist destinations like Key West, or Breckenridge, Colorado, which has drawn investment dollars from companies seeking to capitalize on the area’s busy ski season.

But as climate change and its impacts worsen, studies show that people will increasingly flock to places viewed as safer from inclement weather or other consequences of a warming planet. 

In a 2021 report, the Urban Land Institute said heightened climate risk will spur climate migration, and that will mean societal challenges that are directly relevant for real estate investors.

Some property markets could see decline as individuals and businesses drain from communities beset by their immediate environments. New real estate investment opportunities will rise in places better poised to absorb climate shocks and stressors, ULI said.

“I would say that over the past several years CRE investment managers have improved their understanding of asset-level physical risk exposure and have ample tools at hand,” Ambrosio Preudhomme said. “At the same time, there has been a growing understanding that it’s not only the asset-level risk exposure that will determine loss, but also the market-level exposure.”

That market-level exposure feeds into a more immediate problem for investors: Shifts among insurers have companies second-guessing where they’ll put investment dollars.

Insurance giants like State Farm and Allstate have made big moves lately, electing to stop writing new residential policies in California, and the insurance industry has avoided hurricane-prone areas for years.

“Weather patterns such as increased hurricane and tornado activity do influence our decision to enter — or shy away from — particular markets,” Investors Management Group co-President and Chief Financial Officer Marc Gordon said. “Our decision to stay out of a market typically has more to do with the risk of not being adequately insured.”

Gordon, whose company owns about 5,500 apartment units nationwide totaling more than $1B, said he has seen policies in high-risk areas have gone up as much as 35% in recent years, and after a “reasonable-sized claim, insurance can double or triple,” he said.

“The federal and state governments may have to step in to figure out a way to subsidize carriers against catastrophic weather events, so that premiums and deductibles can remain at affordable levels," Gordon said.

Insurance was a longtime proxy that helped investors determine where their money was safest from natural disasters, but that is changing as tech advances, offering companies more sophisticated ways to direct their funds.

“Ten years ago, investment managers were much more reliant on insurance, using insurance as a proxy for climate risk,” Heitman Head of Global ESG Strategy Laura Craft said. “More recently, there has been a shift, with investment managers using third-party climate risk modeling, often using external data sources.”

A new wave of data analytic companies specializing in climate risk have been somewhat of a game-changer for CRE, Craft said, especially compared with the models investment managers used to rely on, such as Federal Emergency Management Agency maps, which tend to be backward-looking and binary. Often enough, risk is more subtle than determining whether something is in a flood plain or not, for instance, and data analytic companies can help make more subtle assessments.

“You can give them the geolocations of an asset and they will tell you whether the asset is vulnerable to particular risks such as flooding, hurricanes, sea level rise, heat, water stress,” Craft said, noting that investment managers have access to more granular information than ever before, which is informing their decision-making on acquiring or selling assets.