By Marc Singer, Singer Xenos Schechter Sosler Founding Partner & Advisor
Just because you don’t see it, doesn’t mean it’s not happening. Remember when that was the argument around the now growing impacts of climate change? The reality is, those days are gone, and water routinely rises out of the sewers on hot, sunny days during high tide in Miami Beach. In fact, the city recognizes climate change as a real threat and is spending $500 million to elevate more than 100 miles of roads, install dozens of pumps and more. So not only are we seeing the impacts now, we’re feeling them too.
In general, we used to say that the home is your safest investment. That’s simply not true anymore if you live in South Florida. Coastal real estate prices are likely to flatten or fall due to the fear of climate change and sea level rise. That looming threat has only amplified what we’ve always advised our clients to do, and that is to diversify assets. Think of it as “The Rule of 50 Percent” – meaning, you shouldn’t have more than 50 percent of your total assets in vulnerable real estate.
For example, if you have $2 million total tied to your name, you shouldn’t have a $1.5 million home in Miami Beach, because, bottom line, you shouldn’t expect a home in a vulnerable area like Normandy Shores to rise in value – unless sea level rise ceases, which, is unlikely according to 97 percent of the world’s scientists who all agree that climate change is real and that the planet is warming.
Sure, we realize it’s unlikely many people will sell their home because of this rule and move to higher ground, but it’s a good idea to begin – at the very least – saving your money or expanding investments elsewhere. There are smarter, more proactive decisions one make could instead, like paying off the mortgage and hold off on moving forward with that expensive renovation because you were told it would increase your house’s value. In as little as 5 to 10 years, “The Rule of 50 percent” will evolve to “The Rule of 40 Percent,” as more of the region falls susceptible to climate change.
The implications go well beyond property values, and all it will take is another severe hurricane or flooding event to influence not only how people view the issue at hand, but how our governments react. There are already several changes in the pipeline when it comes to insurance, its cost, and the impact of climate change. In just a few years, Congress could choose to change the way it sets rates for FEMA’s National Flood Insurance Program. The purpose of that will be to reflect more realistic assessments of risk, and, for the first time, sea level rise would be factored into insurance for the program. That means a likely significant rise in flood insurance cost, in return, impacting the overall cost of living along or near the coast.
Even more immediate is the likely increase by FEMA in the number of designated flood zones throughout the region. Mapping is currently underway with initial data expected from the agency soon. The maps are intended to guide flood insurance requirements and control development standards in high-risk areas. So, what does this all mean? Well, more and more homeowners will certainly not be able to use the fact that their home is outside a flood zone as a selling point during a listing. In fact, we may also notice homes selling for less, given the higher carrying costs due to more flood insurance.
Like the general housing market, the impact climate change will have on the commercial market is both real and substantial. If you own commercial property like, say, a rental building, it’s always a good idea to begin reducing your exposure to vulnerable assets over time – nowhere is that truer in the United State than in South Florida, ground zero for climate change. Just to be clear, we aren’t advising against investing in Miami or other coastal cities, but to do it in a way that safeguards your portfolio and limits exposure to vulnerable real estate assets. Explore how opportunities outside the region could benefit your bottom line, where you’re less likely to deal with problems associated with sea level rise.
You have years to lower your risks. But start the process now, and slowly move away from the water so your assets truly become better protected. Because, at the end of the day, isn’t the purpose of developing or owning commercial real estate steady income growth and value increases over time? It only makes sense for owners to assess the environmental resilience of an investment location, especially one where hurricane risk, flooding, and climate change are all so evident. By following our “Rule of 50,” you aren’t simply creating more wiggle room or cushion when you need it most, but taking necessary, preventative measures to truly safeguard the family portfolio.
Check out my recent interview with GlobeSt.com to learn more.