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Climate change and the coming coastal real estate crash

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It could rival the bursting dot-com and real estate bubbles of 2000 and 2008

Devastation left in the wake of Hurricane Michael is shown from above on October 15, 2018 in Mexico Beach, Florida. The death tolls stands at 18 blamed on Michael, which hit the Florida Panhandle as a Category 4 storm last week with sustained winds of 155 mph.
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Amid the havoc Hurricane Michael caused on blocks of waterfront property in Mexico Beach, Florida, a single home stood out after the storm cleared, a survivor of winds that made buildings “buck like an airplane wing.”

This so-called Sand Palace, a home owned by Russell King and his nephew, Dr. Lebron Lackey, and profiled in the New York Times, has become famous for its resilient reinforced-concrete construction, which allowed it to survive the Category 4 hurricane. While the owners wouldn’t tell reporters how much their home cost, architect Charles A. Gaskin said that the techniques used to make the home less susceptible to storms, such as raising it on stilts and using additional concrete supports, “roughly doubles the cost per square foot.”

The striking image of the Sand Palace standing alone above the wreckage is one of many images communicating the scale of the storm’s impact. Property analysts at CoreLogic estimated that Florida alone will suffer $2 to $3 billion in wind-born property damage from Michael, and potentially $1 billion more in losses from storm surge.

The Sand Palace story also underscores a new reality that’s been slow to dawn on many involved in coastal real estate: Climate change, and the accompanying rise in sea level and storm activity, will require expensive investments and shake the foundations of some of the most expensive land in the country. Like many of the impacts of a warming planet, the serious economic reverberations and permanent damage caused by declining coastal property values are simply not being addressed in an urgent enough manner.

An apartment for rent sign is seen in a flooded street caused by the combination of the lunar orbit which caused seasonal high tides and what many believe is the rising sea levels due to climate change on September 30, 2015 in Fort Lauderdale, Florida.
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A woman on cellphone calls for help at her flooded residence in Lumberton, North Carolina, on September 15, 2018 in the wake of Hurricane Florence. Members of the Cajun Navy came to her rescue.
AFP/Getty Images

“The water always wins”

In 2016, New York Times writer Ian Urbina examined how climate change could “swamp coastal real estate.” At the time, economists warned that the real estate industry wasn’t addressing the issue quickly enough, and that the impact of a coastal property collapse brought on by climate change “could surpass that of the bursting dot-com and real estate bubbles of 2000 and 2008.”

“I don’t see how this town is going to defeat the water,” Brent Dixon, a resident of Miami Beach, told Urbina. “The water always wins.”

The warnings have only become more dire. Since Urbina’s report, increased coastal construction has likely made the problem worse. Orrin H. Pilkey, a Duke professor, noted what he called “urban renewal at the beach,” and the unsustainable building boom densifying areas facing increasing risk.

“Forward thinking is needed to stop coastal urban renewal and save our beaches,” he wrote.

In many ways, real estate will be the canary in the coal mine of climate change. Recent climate reporting has rightfully been focused on the dire warnings contained in last week’s report from the Intergovernmental Panel on Climate Change, which suggested that serious, destabilizing, life-threatening changes are coming to the globe by 2040. For many coastal communities in the United States threatened by hurricanes, a period of rapid change has already arrived.

The federal government has noted a significant rise in billion-dollar weather and climate disasters over the last few years. There’s a point at which the number of unprecedented, monster storms—Harvey in Houston, Florence in the Carolinas, Michael on the Panhandle, and Maria in Puerto Rico—becomes frighteningly commonplace.

The toll these storms takes on our housing stock and infrastructure should be followed by difficult discussions. Should we retreat from threatened areas? Invest in a massive plan for resilient infrastructure? Strengthen building codes? Reform the national flood insurance program, the federal program that underwrites so much reconstruction?

At the very least, we need a serious dialogue at the national level after repeated billion-dollar recovery efforts continue to tax the government as well as the insurance industry. But that conversation has yet to start.

Communities with highest potential flooding-related real estate losses

Name State Homes at risk Value at risk Property tax at risk Population currently housed in at-risk homes
Name State Homes at risk Value at risk Property tax at risk Population currently housed in at-risk homes
Miami Beach FL 12,095 $6,443,424,737 $91,013,636 15,482
Southampton NY 594 $3,632,414,659 $70,466,512 778
Ocean City NJ 7,251 $3,559,834,800 $31,992,269 4,061
Central Coast CA 2,652 $3,515,837,640 $38,029,502 5,887
San Jose CA 2,574 $2,587,275,046 $29,536,278 7,104
San Mateo CA 3,825 $2,126,449,685 $28,542,062 9,716
Miami FL 5,718 $2,115,800,018 $37,261,591 13,037
Long Beach NJ 2,912 $2,027,390,300 $19,946,350 961
Upper Keys FL 3,514 $1,838,699,914 $16,273,796 3,865
Bradenton FL 4,368 $1,837,661,024 $21,225,539 7,600
Key West FL 3,709 $1,675,527,450 $14,684,991 6,491
Hilton Head Island SC 2,716 $1,486,650,600 $13,196,567 3,042
Hempstead NY 4,571 $1,447,384,405 $41,899,956 13,302
Lower Keys FL 3,415 $1,398,112,163 $12,975,389 4,508
Avalon NJ 1,351 $1,339,607,500 $7,309,545 338
Charleston Central SC 1,629 $1,333,885,777 $11,476,441 2,883
Toms River NJ 3,648 $1,317,185,100 $29,650,131 7,551
Kiawah Island-Seabrook Island SC 1,562 $1,315,627,363 $13,056,057 937
Long Beach-Lakewood CA 1,938 $1,299,068,902 $15,610,079 5,136
West Palm Beach FL 771 $1,210,159,069 $17,281,943 1,365
Foley AL 3,422 $1,204,521,095 $5,378,103 3,833
Sea Isle City NJ 2,006 $1,192,216,600 $7,974,321 622
Queens NY 2,735 $1,177,852,265 $9,504,807 7,193
Beach Haven NJ 1,372 $1,091,621,100 $11,634,246 604
Nantucket MA 283 $1,008,239,000 $3,417,931 246
This 2018 chart reflects potential loses by 2045 Union of Concerned Scientists/Zillow

In June, the Union of Concerned Scientists released “Underwater: Rising Seas, Chronic Floods, and the Implications for U.S. Coastal Real Estate,” a detailed analysis of future flood risk that sought to put the true peril of coastal real estate into perspective. The long-term analysis of how increased flooding will depress coastal real estate noted, alarmingly, that most coastal real estate does not factor these risks into current value projections. That’s especially scary because the value of waterlogged land won’t simply bounce back. Everyone from institutional investors to private homeowners will face losses that will drag down the wider economy.

“Underwater” predicts that 300,000 residential and commercial properties will likely face chronic and disruptive flooding by 2045, threatening $135 billion in property damage and forcing 280,000 Americans to adapt or relocate. Florida, which has been battered by hurricanes Michael, Irma, and Maria in just the past two years, will be the state most at risk of this rise in chronic flooding, according to the report. Roughly 64,000 homes—including 12,000 in Miami Beach, a nexus of real estate investment—will face chronic flooding.

If you think U.S. cities struggle with high housing costs now, imagine decades in the future, when wave after wave of climate-displaced Americans arrive searching for work and an affordable place to live.

Slow moving storms like Harvey (2017) and Florence (2018) bring significant flooding to populated areas.

A slow-motion disaster, and a broken flood insurance system

Reducing real estate to dollar amounts and numbers of households can obscure the human cost of this type of climate-caused displacement. Longstanding communities will dissolve. Decades-old businesses will be forced to relocate. And personal homes, purchased after years of saving and sacrifice, may become devalued or destroyed.

The human toll of this slow-motion disaster only highlights how much the National Flood Insurance Program needs to be drastically rewritten to address this problem head on. Right now, the federal program, which is carrying a $20.5 billion-dollar debt due to the strain of repeated billion-dollar storms, functions as a subsidy for bad behavior.

Since the government guarantees payouts in special flood-hazard areas, some homeowners have rebuilt the same second home on slowly sinking coastal property multiple times, knowing they’ll always get bailed out (30,000 properties insured under the program have been labeled “severe repetitive loss properties,” according to U.S. News).

In other cases, homeowners ignore the requirement to buy insurance—and the government does little to enforce the mandate. Over the last decade, there’s actually been a decrease in the number of flood policies nationwide, according to Insurance Journal. Finally, the maps used to determine risk are outdated and, like the real estate industry at large, fail to take into account the accelerating risks of climate change.

The U.S. government, in effect, encourages bad bets and bails out wealthy homeowners, doesn’t fairly enforce mandated insurance purchases that would democratize the risk pool and create a more financially stable system, and does a terrible job capturing risk and appropriately pricing coastal development.

“We have been working for the last couple years to close the insurance gap, but still not near enough people have necessary coverage,” David Maurstad, the current director of the government’s flood insurance program, told reporters during a conference call last month. “We still have a lot of work to do.”

Instead of being an important focus of a policy-driven debate after years of record-setting storms, the program often gets re-approved by Congress at the last minute as storm season applies political pressure. Right at the moment when investors and developers needed to fully understand the costly risks they face, the last Congressional re-approval, in August, contained no reforms of any kind.

This approach does a disservice to lower-income homeowners, especially those in areas of emerging risk. In parts of the Carolinas damaged by Hurricane Florence last month, the Washington Post estimated that only one in 10 homeowners has flood insurance. Without proper insurance, the only compensation comes from the Federal Emergency Management Agency (FEMA), which normally covers just $10,000 in aid. Sen. John Kennedy of Louisiana said the mismanagement of the NFIP means “costs are out of control, and middle-class families have little choice but to just roll the dice” and go without coverage.

Allowing these systemic risks to fester will only make a coastal real estate crash more cataclysmic. As “Underwater” also noted, the waterfront communities facing repeated repair and reconstruction costs from storms will bear an increased burden just as tax revenue from coastal property takes a hit.

The report found that 120 communities will see 20 or more percent of their tax base destroyed, with 30 communities seeing more than half the property tax base at risk. That’s less to spend on roads, emergency responders, and the increasing amount of proactive infrastructure work these areas should be building to adapt.

Water surges again in Wilmington, North Carolina, on September 15, 2018, as the region sees more rain and flooding from Hurricane Florence.

Failing to build the infrastructure America’s coasts really need

In light of the increasing need for resilient infrastructure, the failure of the Trump administration’s infrastructure plan seems even more of a missed opportunity. As the dynamics of crashing coastal real estate values play out in local communities, state and federal support will become more vital. Instead of investing in resilience—strengthening coastal defenses, updating electrical grids, replacing roads and bridges, and other investments that, in an era of more frequent and powerful storms, would likely save money over time—a lack of action means local governments will rebuild in a rush after a storm.

Thankfully, that’s beginning to change. A bill passed by Congress with bipartisan support and recently signed by Trump will tweak the way that disaster relief is dispensed, creating a pre-disaster mitigation fund that will steer more post-disaster assistance to future mitigation and more resilient building. One of the main reasons both Democrats and Republicans have embraced the measure is its promise of increased cost savings.

Representatives repeatedly cited research by the National Institute of Building Sciences, which found that for every $1 spent by the government on mitigation, it saves $6. Imagine the potential savings if this kind of thinking was applied, even in part, to the massive infrastructure plan proposed at the dawn of Trump’s tenure.

“Too much of the U.S.’s response to natural disaster is completely reactionary,” Rob Moore, a senior policy analyst at the Natural Resources Defense Council, told Bloomberg News. “We throw a bunch of money after it happens.”

With coastal real estate facing such a significant threat, the current administration’s climate-change denial is a costly stance to take, a line in the sand that will soon be underwater, regardless of what Trump and others believe. Bureaucratic word games over replacing mentions of climate change with “resilience” hide the true risks and scope of the threat.

The president may feel comfortable downplaying or ignoring the risk of climate change. But it seems contrary to his self-professed real estate acumen and dealmaking ability to not see the risk on the horizon.

It’s especially puzzling when considering the president’s own relationship with waterfront property. At his Trump International Golf Links Doonbeg in Ireland, he applied for permission to build a pair of sea walls, citing global warming and sea rise as reasons for needing the barriers. In addition, Mar-a-Lago is in threat of chronic flooding by the end of the century, according to data from the National Oceanic and Atmospheric Administration.