How Climate Change Will Affect Commercial Real Estate
Michael Moran, Chief Markets Officer (CMO) and Chief Risk & Sustainability Officer of Microshare, a Philadelphia-based smart building data solutions firm, said that as a result of these projected risks, insurers are already raising rates in coastal areas, areas subject to flooding due to intense and sudden rainfall, and in fire-prone regions of the West. Municipal tax rates are also rising.
“Climate mitigation costs money, and that money is derived from taxes,” Moran noted. “Out-of-state owners of multifamily or office complexes are often much easier political targets for such tax hikes, especially in coastal states where raising taxes is akin to heresy — I’m looking at you, Florida and Texas.”
In the Southwest, Moran added, there’s a new focus on drought, which could over time make some communities difficult to maintain — or even make them uninhabitable.
Between tax hikes and rising insurance rates, the net operating income (NOI) of commercial properties — as well as property valuations — will suffer, Moran said.
Currently, the Gulf Coast and Atlantic seaboard are being most affected by climate change due to extreme weather events like flooding and hurricanes. According to Moran, those weather events are making it more difficult to insure certain properties.
“At the Jersey Shore, for instance, all major insurers pulled out of the market after Super Storm Sandy in 2013,” Moran recalled. “That left the state to act as insurer, and this empowers regulators to demand mitigation and changes to properties, and is a very inefficient way to keep property insurance rates down.”
On the other side of the country, the Pacific coast and mountain West face wildfire and drought risk. In the floodplains of the Mississippi, Missouri, Ohio and other major rivers, Moran said, those areas are experiencing 100-year floods every five years now. These catastrophes mean insurance rate and tax increases for commercial property owners.
However, there are actions commercial real estate investors can take to protect themselves and their properties. Moran recommended simple investments like landscaping to absorb excess water, rooftop greenery and solar power, and weatherproofing of housing and infrastructure.
“This costs money but should provide a differentiator that will justify rent premiums,” said Moran.