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Miami Beach, a tourism destination facing extreme coastal real estate risk due to climate change. Few industries will face the reality of rising sea levels head on more than the hotel industry.
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Are waterfront hotels ready for climate change?

On the front lines of rising seas and extreme weather, the hospitality and tourism industry recalculates real estate and insurance risks

Memorial Day weekend ushers in the unofficial start to summer tourism season, and the strong economy suggests this may be an especially great season for the hospitality industry. But, while throngs of vacation travelers head for sunny beachfronts, it’s also the start of the hurricane season, which, as the impacts of climate change continue to accelerate, will become a growing risk to the industry.

As homeowners, businesses, and corporate America adjust to the realities of a world shaped by climate change, coastal real estate faces increasing risk. Hotels have been riding a wave since 2009. According to an analysis by industry data firm STR, RevPAR—a metric that measures revenue per hotel room—has risen for 105 of the last 106 months, and overall occupancy hit a record of 66 percent last year. A Wall Street Journal report finds overcapacity, an “excess of success,” may be one of the hospitality industry’s biggest challenges going forward.

But that risk may be dwarfed by the substantial portfolio of resorts and hotels located in at-risk coastal areas. Few industries will face the reality of rising sea levels more directly than the hotel industry, which has prime assets located on waterfronts across the country and around the world, putting it in the crosshairs of a rising number of extreme weather events.

“[The hotel industry has] to deal with both the physical location of their buildings, customer preference when it comes to visiting an area impacted by climate change, and just the inescapable fact that coastlines will be affected,” says Paula DiPerna, special advisor to CDP North America, an organization that assesses climate and environmental risk for large companies.

Old beachfront hotels in Waikiki lining the Hawaiian coastline. The entirety of Hawaii’s hotel industry would be damaged by a six-foot storm surge, according to a report from STR.
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According to experts interviewed by Curbed, the hotel industry faces a number of specific risks, in addition to the larger crisis facing coastal real estate. Last 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. The report predicted that by 2045, 300,000 residential and commercial properties will likely face chronic and disruptive flooding, threatening $135 billion in property damage and forcing 280,000 Americans to adapt or relocate.

While that paints a scary picture of the future for hoteliers and institutional investors, who typically own many of the properties that make up chains such as Marriott or Hilton, the reality is that a new era of risk is already here. DiPerna says hotels are extremely vulnerable to the rise in extreme weather, perhaps more than any other client-facing industry.

“Climate change is increasing the severity of extreme weather events, from droughts to floods to coastal storms and wildfires, and these disasters are creating more problems for real estate,” says Billy Grayson, head of sustainability for the Urban Land Institute and author of the report “Climate Risk and Real Estate Investment Decision-Making.”

The increasing number of natural disasters accelerated by a changing climate—including the record number of billion-dollar disasters that hit the U.S. in 2017—and the cumulative cost of these disasters are outpacing the insurance industry’s ability to help big owners mitigate these risks, says Grayson. In 2017, insurers paid out a record $135 billion globally for storm damage.

These disasters add unpredictability in an industry with expensive, fixed real estate assets. Rohit Verma, a professor at Cornell University’s SC Johnson College of Business and an expert in hotel sustainability, says the industry is facing a broad challenge of unsustainability, from typhoons and hurricanes to shifting snowfall patterns.

This all means that the hospitality industry needs to prepare itself for greater risk and uncertainty, says Verma. “We need better risk management systems in place, better and more expansive insurance, buildings that can withstand climate risk, and even alternative revenue models when this unpredictable weather wipes out a big part of a hotel’s busy season.”

Jeremiah Johnson, a front desk clerk at the Sleep Inn in Jacksonville, North Carolina, attempts to reattach the front doors of the hotel on September 14, 2018, after the hotel lost power in the evening during Hurricane Florence.
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Why real estate carries a special risk

A growing body of work underscores the dangers facing coastal real estate. In addition to the “Underwater” report, the U.S. government’s most recent National Climate Assessment found that between $66 billion and $106 billion of real estate will be below sea level by 2050, and that within an eighth of a mile of U.S. coastline lie businesses and homes valued at a total of $1.4 trillion.

Many of these real estate-specific reports predict that, before rising waters literally engulf any specific property, the market would place them underwater in a financial sense: The changing number of extreme weather events, rise in seasonal flooding, and increasing damage of storm surge would lead to lower asset value, skyrocketing insurance premiums, and eventually making it challenging, if not impossible, to sell property in the most impacted coastal areas.

Eventually, the theory goes, the combination of rising insurance rates and risk would deter investors, especially the larger institutional ones looking at long-term profit potential. Grayson’s ULI report found that commercial property values in areas affected by the costliest hurricanes decreased by almost 6 percent one year after the storm, and by 10.5 percent two years after. A Harvard study of property in lower-lying areas of Miami-Dade County from last year found that properties exposed to rising sea levels sell at a 7 percent discount compared to similar assets without climate-related risk exposure.

This risk is already moving insurance premiums. According to the ULI report, 69 percent of real estate and hospitality clients had, as of the third quarter of 2018, seen an increase in rates. Numerous insurance sources interviewed by Grayson and his coauthors said that they were uncertain how long insurance coverage will be sufficient for assets in vulnerable locations. One investment manager said that “a plus-4-degree [Celsius] world is not insurable,” citing a particularly devastating level of climate change well within current predictive models.

“I don’t think the insurance market has priced this risk in entirely,” says Grayson. “A savvy investor will underwrite more money into the deal to mitigate the risk, or they’ll price the asset differently, a discount, because they’re worried about the long-term viability of this asset.”

While there’s yet to be an exhaustive look at the hotel industry’s overall exposure to rising sea levels, there’s plenty of evidence suggesting that it’s quite extensive. Four large chains—Hilton, Host Hotels, Hyatt, and Indian Hotels—cite rising sea levels as one of the significant risks they face due to climate change. An analysis from earlier this year by STR found that 31.3 percent of all U.S. hotels are located in low-lying coastal areas, defined as being threatened by a six-foot storm surge. The entirety of Hawaii’s hotel industry faces this risk. While in many locations a six-foot storm surge today would require an incredibly strong storm, as sea levels rise, that rare event will become more commonplace.

Interstate Motor Lodge’s “Welcome to Houston” sign during Hurricane Harvey, Wednesday, August 30, 2017.
Icon Sportswire via Getty Images

The threat may become even more pronounced in areas closer to the equator, where temperatures are rising quicker, and tourism is often a large part of local economies. According to Madhu Rajesh, director of the International Tourism Partnership, increasing temperatures have already changed how guests and tourists interact with areas like the Canary Islands, South Africa, and India. The Caribbean Hotel and Tourism Agency has explicitly discussed the risk of rising water to the future of its industry. According to the World Travel and Tourism Council, the region will become the world’s most at-risk tourist destination between 2025 and 2050. A 2012 study in the Journal of Sustainable Tourism found that more than 250 properties would be partially or fully inundated by a one-meter sea-level rise. Climate change could cost the region over $22 billion by midcentury, or roughly 10 percent of the Caribbean’s current GDP, according to research from the Inter-American Development Bank.

How an industry that helped popularize sustainability needs to redefine the term

The existential threat of sea-level rise is a challenge that requires an industry that has made great strides in promoting and marketing sustainable practices to find new ways to discuss the environment.

In just the last decade, there have been significant shifts in the way hotels discuss sustainability. Stefan Muhle, managing director of the Argonaut in San Francisco and a board member for the city’s Hotel Council, remembers when the idea of “green,” as far as most tourists were concerned, used to be someone sleeping in a yurt.

“People didn’t think you could have a 4- or 5-star experience saving energy,” he says. “Now, it’s a key part of marketing and messaging, and we have hotels all over the city certified as green businesses.”

Many hotel properties, including Vegas casinos, have promoted their resource-saving measures, including cutting down water use and adopting renewable power. But bigger campaigns around the long-term implications of climate change on coastal real estate portfolios haven’t been sorted out, at least in public. This is in part due to the trickiness of highlighting the risk that tourism and tourist activity bring to coastal areas. Selling both escape and responsibility at the same time is a tricky needle to thread, and can make it even harder for hotel marketing teams to connect advanced sustainability measures with preventing the hotel where one is staying from flooding in the long term.

“I doubt that will ever be put to the forefront because it’s such a negative connotation,” says Jan Freitag, senior vice president of STR. “People are still talking about sustainability in terms of waste. ‘Hey, we don’t have plastic straws anymore.’ Those are the sustainability efforts we’re seeing. But you won’t survive the next impactful storm by getting rid of plastic straws.”

The next generation of sustainability for hotels focuses more on hardening assets, building more resilience in the form of on-site renewable power generation, or more raised buildings that can avoid storm surges. As Freitag says, today, hotels promote their pool, since that’s what’s selling a particular location to tourists. Tomorrow, they may be highlighting their on-site generator.

DiPerna says that hotels need to think about elevating buildings, relocating key equipment to higher floors, and spending significant money on projects such as beach restoration to protect coastlines and property.

“My own personal opinion is that the cost of meeting the environmental risk for the hotel industry has to be part of the cost of doing business; they can’t be extra,” she says. “What will be interesting is whether the insurance sector is going to be able to continue to underwrite and pay claims when there are catastrophic events.”

Host Hotels is one of the leading hospitality companies when it comes to adopting sustainability to today’s climate change realities. It controls a portfolio of 93 luxury and upscale hotels, comprising approximately 52,000 rooms. According to Host’s 2018 climate change report, the company factors in climate change risk in every aspect of its strategy, from asset upgrades and management to real estate acquisition, and planned to spend $550 million on green upgrades across its portfolio in 2018. Truly sustainable lodging is viewed as a point of differentiation.

A key example is the recent renovation of the Fairmont Kea Lani, in Maui, Hawaii. Host installed a solar power system to generate 10 percent of the resort’s power, and engaged in multiple retrofitting programs to cut down on power use and swap out laundry equipment to reduce the need to imported gas.

There’s still a long ways to go. According to a recent report by the International Tourism Partnership, the global hotel industry will need to reduce its greenhouse gas emissions, per room, per year by 66 percent from 2010 levels by 2030, and 90 percent by 2050, to meet the goals of the Paris Climate Accords.

A decade of action, and unpredictability

While hotels can plan for risk, like any other industry, there’s only so much they can do without more widespread collective action, on both national and international levels. The push by climate advocates to address the problem in the next decade, while seeking to tackle much more catastrophic scenarios, will also do a lot to determine the relative stability, or lack thereof, of coastal real estate investment.

“If there’s no significant action around climate change in the next decade, then all sectors face risks they can’t even imagine now,” says DiPerna. “The sea-level rise might be higher than projected. It’s already showing our projections are lagging behind reality.”

According to ULI’s Grayson, there may be a “tale of two coasts” as risks increase. The most valuable resources, like Manhattan or South Beach, may be the beneficiaries of sustained civic and private infrastructure investment, to protect valuable property. Miami and Miami Beach have already pledged hundreds of millions of dollars for flood-mitigation efforts. Investors will look at, say, communities, and properties, on the Gulf Coast of Texas and Louisiana, or parts of the Chesapeake Bay in Maryland, and simply see that there isn’t enough real estate value to justify the cost. Certain coastal cities will make the necessary short- and medium-term investments.

“If we don’t get a serious handle on global carbon emissions by 2030, it doesn’t matter how much money you have to invest,” says Grayson. “Long term, all bets are off.”

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