What Climate Change Means for Coastal Property Values | APM

We can’t deny it—climate change is having a tangible impact on the real estate industry, especially in coastal communities. Warming oceans and a rising sea level has already caused a major loss in east coast property values from Maine to Florida. From property appreciating at a slower rate to the risk of damage from extreme weather to taxes for local resilience measures, property investors and owners have a lot to think about when it comes to coastal property. 

Cities on the water are popular as ever, but smart investors will weigh risks with ROI as well as analyze elevations to find the best locations where to buy property. In this post we’ll dive into what to consider when deciding to invest in coastal communities and what to keep in mind when managing those properties once they’re in your portfolio.

What’s Going on With Coastal Property Appreciation Rates?

Sea level has climbed eight inches since 1900, and the pace is accelerating—three of those inches have come in the time since 1993 according to the 2017 federal climate report. This might not seem like much, but it matters to cities built at sea level close to the water. Looking out to the future, models predict the ocean will rise three to seven inches by 2030 and possibly 4.3 feet by 2100, which could put some of our favorite places underwater sooner than you’d think.

Underwater, a study from the Union of Concerned Scientists estimates a steep $1.07 trillion worth of property is currently at risk from its exposure to the encroaching coastline. It also predicts 300,000 residential and commercial properties will face chronic and disruptive flooding by 2045 (meaning flooding occurs 26 times per year or more), amounting to $135 billion in property damage and forcing 280,000 Americans to adapt or relocate.

As a result of this frequent tidal flooding, sea level rise, and proximity to waterways, many coastal communities have seen real estate values significantly decline. The First Street Foundation reports, “Among the 17 states analyzed to date, Florida has seen the greatest loss in relative home values at $5.4 billion, followed by New Jersey at $4.5 billion, and New York at $1.3 billion. Ocean City, New Jersey; Miami Beach, Florida; and Charleston, South Carolina saw the greatest losses in relative property value.” 

The Washington Post reports, “By comparing properties that are virtually the same but for their exposure to the seas, researchers at the University of Colorado at Boulder and Pennsylvania State University found that vulnerable homes sold for 6.6 percent less than unexposed homes. The most vulnerable properties — those that stand to be flooded after seas rise by just one foot ­— were selling at a 14.7 percent discount, according to the study.” Researchers noticed that property investors were partially driving the decline—the savvier real estate buyers are demanding reduced prices to balance the risk.

However, this doesn’t necessarily mean property value growth has gone negative. Home prices are still generally increasing, even in neighborhoods with repeat flooding and more significant exposure, but at a noticeably slower rate. The data from the First Street Foundation accounts for these losses and the sharp decline in appreciation speed.

Interestingly enough, researchers at Harvard University published a paper that reveals homes at higher elevations are appreciating faster than homes at lower elevations. They named the phenomenon “climate gentrification.” In one extreme example in the First Street Foundation report, a house in Boston, MA is currently valued at $373,725, but would be worth close to $800K if at a higher elevation. One South Carolina woman chose to demolish her historic home after being unable to sell it despite reducing the price 11 times. Each time she finished repairing the damage from one flood, another would hit, so she made the call to sell the property without a structure, allowing future owners to build an elevated home safer from the rising tides. 

Homes that have seen water damage are also selling slower because there’s a higher risk of repeat damage as well as structural harm and mold growth. That means a need for more repair upon buying the home, preventative maintenance, and frequent repairs after weather events. Homeowners and investors can determine the flood risk of their properties by visiting FloodIQ, a website that uses models and scientific data from NOAA, United States Geological Survey, National Weather Service, US Army Corps of Engineers, and Columbia University to help owners evaluate investments, risk, and dangers from flooding and storms.

Risk of Extreme Weather Events

“Sunny day flooding” (flooding as a result of high tide, not storms) aside, coastal communities are also significantly more vulnerable to extreme weather events. And though it’s impossible to predict exactly when and where they’ll occur, they’re happening more frequently and causing much more damage. 

In 2017 we saw the worst hurricane season ever recorded between hurricanes Harvey, Irma, and Maria, causing close to $300 billion in damages and over 3,000 deaths. Why? Warmer conditions in the air and the water are a recipe for higher intensity storms. The hotter the water, the more energy it drives into a storm, and the warmer the air, the more water it can hold.

Rising seas and warmer waters mean intensified hurricanes, stronger and higher storm surges, and slower rates for flooded areas to drain. However, property owners and investors can better manage the risk of natural disasters through underwriting and the proper insurance. And as long as these coastal communities are still drawing populations, owners can still expect renters because tenants get all the benefits of living in a desirable area without the investment risk.

Financial and Insurance Considerations

To complicate it a bit more, investors also have to factor in speculative costs. For coastal properties, that means flood insurance and repair. For properties at risk, even the more inland ones and ones at higher elevations, risks (and associated costs) can change as seas rise. As we said, models predict a sea level rise of 3-7 inches by 2030, which is well within the period of a 30-year mortgage.

When buying coastal property, we recommend investors do their due diligence in research. John Macomber, a Harvard Business School professor with a long career in the property industry, told Propmodo, “I think a lot about probabilities. First, look at range estimates like the Unified Sea Level Rise Projection of the Southeast Florida Regional Compact...Second, the insurance industry also looks carefully at probabilities and exposures. The main probability tool is an exceedance curve. It considers likelihood of a loss event and, if the event occurs, the range of economic impacts. This curve contemplates high probabilities for a low-damage event, and a low probability of a high-damage event.”

These curves are an investor’s friends when buying (or deciding to sell/keep) their coastal properties. Investors must analyze the probability of a flood event today and what it would cost now, versus the probability and costs in a few years as sea levels rise. Currently there isn’t a need to be alarmist, but more thought should be put into all decisions involved with coastal property. Investors can be proactive and negotiate lower sale prices, make resilience upgrades, find solutions to make recovery less expensive, and work with property managers who are experts in the local market, including setting fair rent pricing and risk mitigation strategies. 

On the plus side, the cost of insuring coastal properties hasn’t skyrocketed. It still costs more to insure coastal homes, and many require additional policies, but these prices haven’t spiked. Flood insurance is largely brokered by the National Flood Insurance Program heavily subsidized through FEMA and funded year to year by Congress. The program is currently carrying a $20.5 billion-dollar debt due to the strain of repeated billion-dollar storms, which is unsustainable for a likely future of similar storms. FEMA’s flood plains are reassessed every five years and don’t yet account for the increasingly extreme and heavier storms. 

However, FEMA has released the Coastal Hazard Analysis Modeling Program (Microsoft compatible only) to help owners gauge risk. As the probability of flooding increases, especially in places where repeat flooding is frequent, the flood insurance program could change. However, the general insurance industry is not looking ahead because insurance is determined by today’s risks—not future potential. It would be impossible and unrealistic to model the change in insurance costs over the next decades.

The Impact of Climate Change on Property Taxes

Cities are starting to understand there are higher costs associated with protecting their infrastructure and their residents’ property. In fact, the city of Miami is investing $200 million in resilience by installing pump stations and upgrading infrastructure. Miami Beach intends to double that by raising sidewalks and building seawalls. Maine also passed a $106 million bond that will be used to upgrade water and land transportation systems. Voters are choosing to raise their own property taxes to protect their property.

Resilience doesn’t come cheap, and taxpayers are fronting a lot of money to protect themselves. As federal, state, and local governments will play a role in upgrading resilience measures, taxes will likely increase. As an owner and investor, you want to know your properties are safe, but you too will be covering your share of these costs. And on the flip side, in less desirable coastal towns where property values are slipping, residents may start to leave, causing towns to have less tax revenue to protect infrastructure and property.

How Should Owners and Investors Handle Coastal and Waterfront Property?

Despite the concerns with flooding, rising seas, and increase in extreme weather events and the associated destruction, coastal building is continuing and properties are appreciating (just more slowly). Living in and owning beachfront property is still highly desirable. However, more attention is being paid to building reinforced, resilient homes with waterproofed electrical systems, relocated ductwork, generators on the second floor, flood barriers, and even fully elevated structures. 

If you’re deciding whether or not to purchase coastal property for investment, plug your numbers into our Real Estate Investment Calculator to get a clearer picture of ROI. 

1. Input your current property value, mortgage, expected rent, improvement costs, sale price, and value of the land.
2. Map the risk of sea level rising, exposure/vulnerability to water, and costs of mitigation and repair. You’ll have to pay special attention to this info when projecting the sale price and land value.
3. Understand what your responsibility as a landowner in these communities looks like as a taxpayer. Think about engaging with local policymakers on resilience strategies to —you don’t want to be reactionary when it comes to protecting your investment.
4. Discuss your risks and strategies for mitigation with a local property management company. Property managers can help you set fair market rent to absorb some risks, brace the property for potential disasters, implement a solutions for damage, and prepare residents for how to handle storms and floods.

We recommend analyzing everything in your portfolio to make sure your properties are diverse in the case a weather event does happen and puts a rental out of commission while you make repairs. Run the numbers on your other rental properties too with the calculator. We at All Property Management are always here to help you make the best decisions for your rental properties and help you maximize the value of your investment.