Climate Change and Multifamily Values: A Warning from Florida
Post-hurricane patterns in Miami and other investor favorites suggest that pricing will suffer as storms increase in frequency and severity.
Richard Sarkis, CEO, Reonomy
According to research cited by the New York Times, as many as 13 million people in the U.S. will be at risk of flooding annually by 2100 on account of rising sea levels, changes in land use and population growth. This means that in more than 500 American communities, 10 percent or more of livable land area will likely experience flooding at least 26 times per year before the century’s end.
These communities include not only hundreds of small coastal towns, but major metropolitan areas along the Gulf Coast and Atlantic Seaboard, as well. And while the economic—and human—costs of widespread inundation are difficult to forecast, the recent aftereffects of catastrophic weather events on real estate in vulnerable areas may give us a glimpse of what’s to come.
Concerning Precedents
Consider, for example, the case of Southeastern Florida. Between October 2 and October 3, 2000, a “precursor disturbance” to Tropical Storm Leslie caused extensive flooding across the region, leading to $950 million of damage (roughly $1.4 billion in 2017 dollars), much of which affected residential properties.
According to Reonomy’s data, the mean sales price of multifamily residential properties in Miami dipped to around $180,000 in the fourth quarter of 2000, a far cry from the $305,000 mark set during the year’s first three quarters. West Palm Beach/Boca Raton saw a similar dip in multifamily property values, with its 2000 Q4 mean sales price falling to $165,000, nearly $100,000 lower than the previous three quarters’ average.
Four years later, South Florida weathered Hurricane Frances and Hurricane Jeanne back to back. The former dumped nearly 16 inches of rain on the region, causing more than $8.3 billion of damage; the latter added 12 inches of rain three weeks later, causing nearly $7 billion of damage.
As a result, the mean sales price of multifamily properties in Miami dropped from just over $600,000 in the third quarter of 2004 to around $515,000 in the fourth quarter of 2004. This trend continued into 2005, when the mean sales price for multifamily properties bottomed out around $450,000 in the first quarter, after which it finally began to recover.
Most recently, Hurricane Irma—the highest-pressure storm to hit Florida since Hurricane Andrew in 1992—caused more than $50 billion of damage across the state. As might be expected, the median sales price for multifamily properties in Miami dropped nearly 11 percent from the third to fourth quarters of 2017. The median multifamily sales price in Fort Lauderdale followed suit, dropping 9 percent during the same interval.
Reimagining Risk Assessment
Ultimately, as catastrophic weather events become more frequent, they will increasingly threaten entire real estate ecosystems in areas like Southeastern Florida. According to one analysis, the U.S. is likely to lose between $66 billion and $106 billion worth of coastal property by 2050. If climate change accelerates—even marginally—an astounding $700 billion of American property could be underwater by 2100.
While these dramatic figures don’t necessarily demand an immediate change of approach—cities like Miami and New York City will continue to be hot real estate markets for the foreseeable future—they do introduce a series of important new factors into real estate professionals’ risk assessment.
Richard Sarkis is CEO and co-founder of Reonomy, a commercial real estate research and data company.
