The news is full of of stories about the devastating damage climate change is causing to our homes and investment properties. But how can you, as a real estate investor, know what climate change will do to the properties in and around your home and investment area? Although this is a very complex subject, there are generally two ways climate change will affect your properties.
Climate change poses direct and indirect risks to real estate investors
- Direct impacts can include:
- Temperatures – usually this means hotter for longer periods
- Storm systems – hurricanes/cyclones, tornadoes/thunderstorms, winter cold events, etc.
- Water – sea level rise, droughts and inland flooding
- Increased Costs – utilities, insurance, taxes, repairs/maintenance, mitigation.
- Indirect impacts can include:
- Water scarcity or pollution
- Interruptions in other parts of the country that impact your ability to get goods and services
- Disruption of jobs and services for your tenants and yourself
- Transportation interruptions caused by heat, water, fire, etc.
- Migration of tenants, business and service providers to more stable areas
These direct and indirect risks are already at work to varying degrees in different parts of the country. But no one can tell us exactly how this will impact any of us, our investment properties or, indeed, our personal homes. So how do we figure out the risks we will face?
Your primary focus
Ultimately, your primary goal is to do your best to determine your risk tolerance. Research using Google, coupled with specific information detailed at some of the websites linked below, is your best bet for determining the following:
- The likely short-term (transitional) risks for your investment and/or living area.
- The likely longer-term risks for your investment and/or living area.
- What those risks will likely cost your bottom line.
- How you will have to adjust rents and income to compensate for that cost increase.
- Decide whether the adjustments are worth making. Do you want to make the cost, mitigation and income adjustments necessary – in the short-term and/or the long-term – to remain in your current investment area.
Your job is to weigh how much risk you are willing to take. There is going to be climate change risk to your profitability no matter where you live or invest. But everyone has a different level of tolerance for different risk factors
Once you’ve done the research, calculations and soul-searching you have to do to make this decision, you need to jump into the process of either making the necessary adjustments to your current investment property or selling your investment and moving to another area.
No one knows how quickly increasing weather events and long-term climate change will impact any particular region. However, some large data firms are beginning to release information that will help you project these changes in your area. At the end of this article I’ve included links to detailed reports produced by authoritative data analysis companies that will help you create your plan for your specific region.
For now, however, we’ll look at how you can use the information to plan for the future.
Short-term vs long-term planning
In any period of change, I find it helps to keep the long-term and short-term issues in separate buckets, so to speak. Let’s take a common risk that is in the forefront of the news these days.
If you live in a coastal area, there is absolutely no doubt that you will very soon experience flooding and perhaps high winds and storm surges from the complex factors that create sea level rise and more devastating storms. This risk is going to vary depending on where you are. It may surprise you to know that water is rising at different rates in different coastal areas around the world!
This is an example of a near term risk. You may already be experiencing this. You may have decided that, by moving your mechanical plants to upper floors and improving water drainage on your property, you can absorb this risk and its associated costs. You may even know you need to raise your rents by xx% to stay profitable in this new scenario.
In this same coastal area, though, what are the longer term implications? What will frequent storms and flooding do to city infrastructure? Will roads be able to withstand the pressure? Will goods and services continue to flow? Will insurance companies continue to insure these areas? Will FEMA continue to rescue property owners from damage and destruction?
Understand, now, that sea level rise, weather systems and temperatures will change at different rates in different areas. Ultimately, though, in all coastal areas, all these changes will continue to raise costs. They may even impact your tenant base. As local businesses decide it’s too risky or too expensive, they may move to safer ground. If they do that, the workforce will move too and there goes your tenant pool.
And, unless you can work a consulting contract into your budget, you will have to do the bulk of this analysis yourself. The good news is there is a growing body of reporting available to help you make good decisions about what the near- and far-term affects will be. Once you know that, you can decide how you will react.
Historical data doesn’t work any more
As real estate investors we are accustomed to looking at historical facts to predict the future cost of managing a property. How long ago was the roof replaced? How old are the appliances? What trends do my utility costs follow? Do floods, tornadoes, fire or snow create maintenance costs for this property? How often does the city reassess property values? What is the trend of my insurance premiums?
It’s beyond obvious to anyone who has owned property for several years, that all of these questions are changing. Past measures of snow or rain fall may have absolutely no resemblance to current levels. Every cost is changing and universally increasing.
We already see rising utility costs and rapidly rising insurance costs. We frequently see greater costs for repairs from storm damage. In hot climates, roof material doesn’t last as long as it used to. The list goes on.
So how do we adjust for these factors? After all, managing your profits is a balancing act. You put your costs on one side of the scale and rent proceeds on the other and hope it tilts toward profitability.
What are some new ways of gathering information
Climate and weather events are changing so rapidly that long-term predictions are impossible. However, we can project certain trends in the areas where we live and invest to help us track potential cost increases or profitability hits. And there are some hints emerging from some big data companies to help us in that analysis.
Chief among these is 427mt.com, a data company dedicated to measuring the economic impacts of climate change. A lot of their data is available in report and summary form on their website.
A visit to the “Insights” page of the 427 website is enlightening. The page contains downloadable reports with information about how the world’s largest REITs are addressing climate risk (hint: they are selling large portions of portfolios in high-risk locations at a 7% discount.) The site contains a number of informative reports. There are other reports addressing how financial stakeholders can look at climate risks. It’s worth a visit.
Next is the Fourth National Climate Assessment report. The entire report is very dense material, but if you click on the “Chapters” menu link you will find specific information about climate-change-driven risks for each of 10 specific regions of the US.
Again, the report is complex, but you can start by reading the report for your region. It will give you good information about temperature rise, water availability and safety, weather patterns, local industry interruptions, etc.