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New Report Exposes Possible Effects of Rising Sea Level on Real Estate

Good investors take a long view of future value. Few sectors know this better than commercial real estate. Buildings last for hundreds of years and switching costs are high, especially if an asset is distressed. Real estate investors know that property values are interconnected to macro-level influences like economic stability, changing consumer preferences and local political risks. These factors are researched and considered in by sophisticated portfolio managers.

Now there is another important ingredient in the recipe for investment success (or should I say disaster): sea level rise. The scientific community is largely united in the prediction that sea levels will continue to rise. This creates a huge risk for many coastal properties that should be factored into their value since, as every investor knows, the price of an asset reflects current and future risk.

Today a new resource has been published in the form of a report by Union of Concerned Scientists. They used data from Zillow and ran three possible scenarios of future sea levels created by the National Oceanic and Atmospheric Administration to create a comprehensive understanding of the risk to American real estate. “By the end of the 21st century,” the report states, “nearly 2.5 million properties will be at risk for chronic flooding.” They assign a $1.07 trillion value to those at risk properties.

The financial risks of sea level rise, according to the study, are largely unaccounted for in the current market. States with low elevation and a significant amount of structures near the ocean, like Florida and New Jersey, are at particularly high risk. Interestingly, the way we respond to natural disasters is partially to blame for this disparity between risk and property prices. The study states: “Some federal and local policies, in their current form – particularly those related to disaster risk response, flood insurance and zoning regulations – unintentionally serve to mask the risk to coastal communities.”

It sites Douglas M. Poutasse, EVP and head of strategy and research for Bentall Kennedy as a possible change of how we think about incentivization for future construction, “Flood  insurance  creates  risky  behavior  when  it  is extended  to  new  development.  Zoning  regulations  should be  considering  the  100-year outlook  for  the  land,  including  the  future  cost  of  providing  access  and  infrastructure to  the  land,  incenting  construction  in  areas  without  sea level  rise  risk,  and  ‘charging’  areas  with  [sea  level  risk]  to cover  the  future  public  costs  of  mitigating  those  risks.”

While it is hard to think about a world where we would not help those affected by flooding it does bring to light the inefficiencies of fixing properties that probably should be built in the first place. After the spat of disaster that wreaked havoc on the eastern seaboard last year, an article came out in the Wall Street Journal that profiled a house that had been through twenty two floods. This is an extreme case but it embodies the problems that arise from insuring buildings that are in inherently dangerous areas.

The dangers of sea level rise have a much more important impact than just the loss of investment capital. The human suffering and the ongoing economic hardships that could be the result of sea level rise are a reminder of the real cost of the trend. As the study puts it, “in communities where the poverty level is above the national average, the erosion of the property tax base could have severe consequences for local residents.” The property community needs to use resources like this study to better understand how to build and invest in real estate in coastal areas. If they don’t the result could be the loss of a staggering amount of money and an increase in the inequality and poverty that is the antithesis to any advanced society.

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