Climate Risk and Real Estate: The Ticking Time Bond

Many popular areas of NYC are extremely vulnerable to rising seas. Many of these areas have been built up in the last decade in spite of ample evidence that these areas would be underwater by the end of the 21st century, if not much sooner.

On September 29th, New York City received as much as eight inches of rain, a new daily record that flooded streets, subway tunnels, and basements with water and flooded headlines with superlatives about the unexpected, record breaking rainfall. While the headlines conveyed surprise, they shouldn’t have. Storms like these are well within the boundaries for the city’s new normal climate. NYC, like much of the planet, will keep getting warmer, wetter, and more climatically unpredictable for the foreseeable future, bringing with it massive implications for real estate markets.

Real estate climate risk is getting some attention, notably in California and Florida, where insurance premiums are soaring and several major insurers are shuttering or no longer taking on new home insurance policies. But these are reactive measures, only dealing with threats after they’ve been realized. Overall, government regulators and the real estate industry are doing little proactive risk mitigation, dealing with climate threats before they’ve been realized. It’s time real estate decisions — where and what type of real estate is built, maintained, and invested in — and valuations start aligning with climate realities before it’s too late.

When the Worst Case is the Case

In 2016, The Regional Planning Authority (RPA) published a report called “Under Water How Sea Level Rise Threatens the Tri-State Region.” As its title suggests, the report surveyed the Tri-State area — the most densely populated area in the US — and its susceptibility to rising sea levels. In one passage about the implications of a six feet of sea level rise, the report says this:

The industrial areas of Sunset Park and the Brooklyn Navy Yard are two major employment centers that face near total inundation. At six feet of sea level rise, both runways and the terminals of LaGuardia airport could become fully inundated….In Manhattan, close to 30,000 residents today live in places that could be permanently flooded in particularly vulnerable neighborhoods such as Harlem, Battery Park City, Hudson Yards and Chelsea, and the Lower East Side and East Village. The Bronx could see flooding in places where over 5,000 of today’s residents live, primarily in Schuylerville, Throgs Neck, Edgewater Park and University and Morris Heights. The east shore communities of Oakwood Beach, Midland Beach, and South Beach account for about 80% of the close to 15,000 Staten Island residents who live in places today that could be permanently flooded.

The six feet figure was presented as a worst case scenario, but as bad luck has it, the worst case is the case. 2023 is on track to be the hottest year in recorded history, part of a heating trend in which the last eight years were the hottest in recorded history. Experts are saying that a 3 degree Celsius increase in global temperatures by the end of the century is likely (1.5 degrees is often considered the upper threshold for safe temperature change). Climate drivers, namely greenhouse gas emissions and oil consumption, are at all time highs and accelerating these heating trends. Even if all GHG emissions stopped immediately — which there is no indication they will, and more indications they’ll increase — the time delay of emission-induced atmospheric warming means temperatures will continue to rise long after emissions subside. Holding out hope for a cooler, stabler climate anytime remotely soon is unscientific and delusional. Similarly, expecting real estate to maintain its value when it’s damaged or becomes uninhabitable due to climate impacts is unrealistic and delusional. It’s time to prepare for the worst. But looking at the real estate development patterns of the last decade makes it seem as if climate change doesn’t exist.

While hardly the country’s only climate imperiled area, NYC’s real estate development is a master class in ignoring real estate climate risk. A prime example of this is Hudson Yards. With its $25 billion price tag, Hudson Yards is the most expensive real estate development in American history. Given its expense, one would think its planners would have put the project in an area that’s safe from rising seas, but Hudson Yard’s low-lying westside location — one called out in the RPA report — is also one of Manhattan’s most vulnerable to flooding. This location could easily render Hudson Yards uninhabitable by the end of the century, if not sooner.

But Hudson Yards is just the tip of NYC’s melting iceberg of real estate climate risk. One city survey reported that between 2010 and 2020, the city’s housing stock grew the most in the low-lying, vulnerable areas specified in the RPA report:

The highest concentrations of housing growth were in transit accessible neighborhoods in Brooklyn, Queens, the Bronx, and portions of Manhattan. Clusters with the most growth were in formerly non-residential neighborhoods rezoned within the last 20 years to allow residential construction, such as Hudson Yards, West Chelsea, and Riverside South, Long Island City, Greenpoint-Williamsburg, and Downtown Brooklyn.

It gets worse. A 2020 rezoning plan made it possible to build high density housing in the Lower East Side of Manhattan, Sunset Park and Gowanus in Brooklyn, and South Staten Island — all climate vulnerable areas mentioned in the RPA report. Gowanus, which experienced major flooding during this last storm and in 2019 and during 2012’s Hurricane Sandy is particularly problematic. The Gowanus Canal is a designated Superfund site, meaning it’s so toxic it must get Federal aid for environmental remediation. Dense real estate + low lying land + rising seas + toxic waste = environmental/economic/social disaster.

The Gowanus neighborhood in Brooklyn, NY has experienced extreme flooding like this image from September, 2023. Gowanus was recently upzoned to allow for more real estate development despite climate risk and toxic runoff from nearby Gowanus Canal. Image via Streetsblog.

NYC may be leading the country in climate recklessness, but it’s got stiff competition from around the country. Basically, every one of the fastest growing US states in recent years — Texas, Florida, Georgia, North and South Carolina, and Arizona — are also the country’s most climate threatened. As rising seas, storm surge, inland flooding, extreme heat, and drought become more frequent and intense, these areas will have little recourse but to depopulate.

Many of the regions that have been built up the most in the last 20 years, particularly in the American South, will likely be too hot, dry, or wet (or some combination) for human habitation. Screenshot via Bloomberg.

The Great Real Estate Climate Correction

Imagine purchasing a home in a climate vulnerable region like south Florida. The home costs $500,000 and you put 20 percent down and finance the balance with a 30-year fixed rate mortgage at 5 percent interest, resulting in a $2,150 monthly payment. Based on 20th century environmental and economic conditions, you assume the house will be usable until you sell it. But novel climate threats mean the past is not a good indicator for the home’s future. Increasingly violent and frequent flooding means that within a couple years of purchasing the home, along with most buildings in its area, becomes uninsurable. The home’s uninsurability causes its value to plummet and flood damage creates an average of $20,000 of repairs every year, which must be paid out-of-pocket due to the lack of insurance. After ten years of living in the house, you’ve spent $258,000 in mortgage payments and $200,000 in repairs, but the home is uninsurable and worthless on the market. In light of these circumstances, you are likely to default on your mortgage rather than make monthly payments for another 20 years on your worthless home. Mortgage defaults like these won’t be limited to private residences and will impact commercial real estate with similar devastation.

Though down from previous highs, the amount of household debt, the majority of which is for home mortgages, is nearly 75 percent the amount of the US GDP.

Nowadays, when a mortgage is originated, the mortgage is sold on secondary markets where it’s bundled and securitized with other, similar debt notes. The bundled, securitized mortgages are called mortgage backed securities (MBS). The commercial version of these securities are commercial mortgage backed securities (CMBS). MBS and CMBS are bought, sold, and traded on bond markets. The value of these securities often represents a major portion of a nation’s GDP. US household debt, which includes mortgages, automotive, student, and credit card debt was 75 percent of the US GDP in Q3 2023, with home mortgages making up 71 percent of the total. These bond markets could implode when several regions simultaneously experience climatic conditions like your flooded, Florida home. Destroyed properties with no or limited insurance could spur mortgage defaults that’ll make 2008 look tame. But unlike 2008, there will be no investors to buy the defaulted properties because they’re underwater or in areas too hot to live in.

The trendlines of climate damage and risk are terrifyingly clear.

A climate-caused mortgage mass default event and consequent bond market collapse is no abstract threat. In 2018, The Union for Concerned Scientists released a report called, Underwater: Rising Seas, Chronic Floods, and the Implications for US Coastal Real Estate (the word “underwater” seems to be a theme with these predictive reports). UCS’s report included a map that merged sea level change projections with property values from Zillow. Among other findings, they found:

More than 300,000 of today’s coastal homes, with a collective market value of about $117.5 billion today, are at risk of chronic inundation in 2045 — a timeframe that falls within the lifespan of a 30-year mortgage issued today. Approximately 14,000 coastal commercial properties, currently assessed at a value of roughly $18.5 billion, are also at risk during that timeframe.

While the USC report focused on the US, rising seas and associated risks aren’t a uniquely American phenomenon. According to the United Nations, around 40 percent of the world’s population lives within 100 kilometers of the coast. A great deal of the real estate supporting these populations will be threatened by rising seas.

And even though coasts represent some of the most climate vulnerable regions, inland regions are also threatened. Extreme heat is especially likely to make many regions too hot for human habitation. Recent years have seen a marked increase in wildfires and heat domes, pockets of stagnant, high pressure atmospheric conditions that are trapping heat in inland North America, Europe, and Asia. Besides being uncomfortable, this heat will accelerate groundwater depletion, ruin crops, and put massive stress on infrastructure, making many areas unlivable.

What Can be Done?

If the aforementioned climate threats are seen as real and likely, a logical, if too infrequently asked question is: what can be done to avoid, prepare for, and/or limit damage? I will not fully answer these questions here, because the answers are nuanced, multifactorial, and don’t lend themselves to oversimplification. Likewise, developing these solutions is what I would ideally get paid for, and I’m disinclined to give any more of my work away for free than I already have. These caveats notwithstanding, here are some high level adaptive strategies for dealing with impending real estate climate risk:

1. Stop developing doomed areas like the ones mentioned above.
2. Stop making climate drivers worse and start organizing real estate and cities to be carbon neutral or sinking.
3. Start building and/or retrofitting structures to withstand climate impacts.
4. Relocate populations to climatic havens.

If you’re a real estate stakeholder and want to discuss further, I’m around and happy to discuss. You can contact me through this link.