Climate Change and its Impact on Investment Property
The world’s climate is changing, and so are our methods of adapting. Real estate investors need to improve their due diligence when they purchase properties and be attuned to the local environmental and climate conditions as they make the decision to purchase a property.
Climate change in the United States
The fire seasons in the US have been getting longer. Wildfires are burning for longer than ever before, and there has been a significant increase of large fires that have broken out across the country. Areas such as Arizona, New Mexico, Colorado, Oregon, Washington, and California have all experienced more challenging wildfires recently than they have in the past, with power lines igniting dry grass and timber (1) .
It is expected that short-term droughts will intensify across the US and that longer-lasting droughts will worsen in large areas such as the Southwest, the southern Great Plains, and the Southeast. Changes in climate are the reasons behind these increasing droughts, as various lakes and rivers across the country see dropping water levels.
Climate change is also causing more flooding and heavy rainfall across the country. Floods are one of the most common and costly weather-related disasters in America. Coastal areas are among the worst affected thanks to the rising sea levels and worsening storms (2).
Temperatures are increasing
Since 1901, the average surface temperature across the 48 contiguous states has risen at an average rate of 0.17°F per decade. Average temperatures have risen more quickly since the late 1970s (0.32°F to 0.55°F per decade since 1979). Nine of the top 10 warmest years on record for the contiguous 48 states have occurred since 1998, and 2012 and 2016 were the two warmest years on record (3).
Warmer sea surface temperatures intensify tropical storm wind speeds, giving them the potential to deliver more damage if they make landfall. Over the 39-year period from 1979-2017, the number of major hurricanes has increased and the number of smaller hurricanes has decreased (4). Based on modeling, the National Oceanic and Atmospheric Administration (NOAA) predicts an increase in Category 4 and 5 hurricanes alongside increased hurricane wind speeds (5). Warmer sea temperatures will also cause wetter hurricanes with 10-15 percent more projected precipitation from storms. Recent storms such as hurricane Harvey in 2017 (which dropped more than 60 inches in some locations), Florence in 2018 (with over 35 inches), and Imelda in 2019 (44 inches) demonstrate the devastating floods that can be triggered by these high-rain hurricanes. Global warming seems to be triggering increased environmental damage (6).
Florida and the Gulf States are the bellwether states for hurricane damage
Some states like California and Florida are adjusting their building codes to harden their infrastructure and increase survivability. Not only do investors need to prepare for hurricanes and flooding, but also for earthquakes, fires, and tornadoes.
Following hurricane Andrew in 1992, Florida adopted a new building code, the Florida Building Code (FBC), which mandated that new construction be able to withstand hurricane-force winds and feature shutters or impact-resistant glass in all openings. It’s common in South Florida to see buildings constructed of concrete, cinder block or metal instead of wood, which is a more commonly used material in other states. The hardening of the code means increased survival of people and buildings as hurricane damage continues. The Florida building code is constantly updated. It is currently in its 7th edition and the 8th edition will be put in place in 2023 (7)(8)(9)(10).
Unfortunately, the Florida code applies mostly to new buildings built since 1992, and not to older buildings. It is also impossible to imagine mobile homes surviving hurricanes. They do not meet the requirements of the FBC. Mobile homes fall under the construction requirements of the US Department of Housing and Urban Development (Federal Regulations Title 24, Housing and Urban Development Subtitle B, most notably Part 3280 and Part 3285). These standards are not geared to Florida weather, high winds, hurricanes, or tornadoes.
Clearly, properties in Florida and the gulf states as well as states located in Tornado Alley need to be built more stoutly, with more protections such as hurricane-standard window shutters, roofs designed to take on winds of up to 190 Miles an hour, and flood resistance. It is challenging for property owners to be experts on all climate conditions (11)(12).
Insurance
Property insurance is crucial to successful property ownership. No one would buy anything in Florida if the state did not support property insurance programs by private companies. Florida developed and funded a state-backed residential insurance company called “Citizens” that recently crossed the 1 million policyholder mark. Insurance in Florida is very expensive and is increasing by about 30% year over year. To better manage the insurance increases, the state is trying to actively reduce the number of lawsuits to keep insurance affordable. This is complicated by the fact that there are many types of insurance to consider, such as specific hurricane and tornado coverage for:
Wind, hail, and storms
Flooding damage
Fire
A knowledgeable insurance agent is vital to owning property in a state with many climate-driven events (13)(14)(15)(16).
Planning Ahead
Most properties can be hardened. You can sandbag and build sea walls. You can cut trees away from buildings so a storm will not topple trees onto them. You can buy newer buildings that are earthquake-resistant and that have been retrofitted to resist hurricanes. You can make sure sump pumps are working and that generators are installed and hardwired to your electrical systems. You can annually inspect your roofing, electrical, and plumbing systems to make sure they are in good working order.
Most importantly, your pre-purchase due diligence needs to adjust to changing weather and climate conditions. Historical maps are available online that show weather patterns. Unfortunately, they are changing, and you should revisit these every five years. Some states like California and Florida have taken active steps to protect their citizens with aggressive code modifications and insurance regulations. It is possible that these weather pattern changes might drive investors away from older buildings that are not updated to current construction codes.
The world climate is changing and getting warmer. It behooves every real estate investor to include climate change-driven due diligence in every purchase decision to insure the property they invest in can survive flooding, hurricanes, tornadoes, fires, and earthquakes.
Sources
(1) https://www.businessinsider.com/pge-caused-california-wildfires-safety- measures-2019-10
(2) https://www.climateandweather.net/global-warming/climate-change- united-states/
(3) https://www.epa.gov/climate-indicators/climate-change-indicators-us-and- global-temperature
(4) https://www.pnas.org/doi/10.1073/pnas.1920849117
(5) https://www.gfdl.noaa.gov/global-warming-and-hurricanes/
(6) https://www.c2es.org/content/hurricanes-and-climate-change/
(7) https://www.usglassmag.com/2022/08/30-years-later-hurricane-andrew- redesigned-modern-building-codes/
(8) https://www.baynews9.com/fl/tampa/news/2022/08/24/30-years-later-- hurricane-andrew-creates-universal-building-code-for-florida
(9) https://www.cbsnews.com/miami/news/south-florida-building-code- toughest-in-the-world/
(10) https://archinect.com/news/article/150325739/building-codes-saved-this- florida-town-from-hurricane-ian-s-ravages
(11) https://jsheld.com/insights/articles/does-the-building-code-apply-to- mobile-homes
(12) https://www.americangeosciences.org/critical-issues/maps/interactive- map-historical-hurricane-tracks
(13) https://www.boginmunns.com/blog/the-importance-of-hurricane- insurance-for-your-florida-business/
(14) https://shochet.legal/florida-hurricane-ian-damage/?gclid=CjwK CAiAyfybBhBKEiwAgtB7fqfhdawdYA8juAiu5NWtiJkjhxon89xwrGATC- hmDmifDfOy9Ok3CRoCP1wQAvD_BwE
(15) https://www.myfloridacfo.com/division/ica/2022propertyinsurancechanges
(16) https://www.npr.org/2022/10/06/1127083845/hurricane-ian-florida- property-insurance
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
