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Article • 06/06/2024

Real Estate at Risk: The Adding Costs of Climate Change

From tornadoes to wildfires, rising sea levels to droughts – severe weather events are increasingly becoming the norm wherever one calls home. Multiple interconnected enterprise risk factors threaten the real estate sector in the wake of natural disasters.

Higher insurance premiums coupled with limited coverage in high-risk areas could destabilize the real estate market and increase homeowners’ financial vulnerability. In addition to fears of impact on health, safety, and livelihood, homeowners grapple with the aftershocks of more limited insurance coverage and higher premiums.

Key Findings:

  1. According to NOAA data, severe climate-related disasters surged by 154% between 2003 and 2022. This has led to a staggering 300% increase in insured losses, as reported by Deloitte. 
  2. Populations are still rising in at-risk locations: Despite the heightened property damage risk, homeowners, unable to afford rising premiums, are opting to relocate to more at-risk locations to avoid increased housing costs.
  3. Three high-impact states: Hawaii, Montana, and Florida, are the most salient in discussions about the impact of climate change and extreme weather events in the real estate sector.
  4. Enterprise risk for key real estate players: Positivity about real estate companies’ financial results is trending downward, with a nearly 58% decrease between Q4 of 2023 and Q1 of 2024.

Heightened Exposure, Vulnerability, and Costs

Over time, the frequency and financial toll of disasters are rising in a convergence of risk factors. These include heightened exposure—the increased value of assets at risk—and vulnerability, which measures the extent of damage caused by the intensity of hazards like wind speed or flood depth. 

Climate change exacerbates these trends by amplifying the frequency of certain extreme events, contributing to the escalation of billion-dollar disasters. This harsh reality confronts millions, with damaging climate-related disasters straining insurers and escalating costs, leaving homeowners to grapple with securing affordable coverage.

How climate events amplify enterprise risk for real estate and insurance providers

Infographic on how climate-related incidents amplify financial and credit enterprise risks for real estate and insurance providers

Climate change-related risks include both immediate threats posed by extreme weather events and climate variability’s long-term and gradual impacts.

These enterprise risk factors affecting the real estate and insurance sector include supply chain disruption, regulatory and legal risks, consumer and investor confidence loss, and shareholder and NGO activism risks.

Insurers are increasing costs and limiting coverage in high-risk areas

Insurers feel the financial strain of climate change fueled by more frequent and severe disasters. Severe climate-related disasters surged 154% between 2003 and 2022, leading to a staggering 300% increase in insured losses

This surge in extreme weather events has prompted insurers to limit coverage in high-risk areas like California and Florida. As insurers implement double-digit rate hikes, it makes it more difficult for homeowners to stay afloat. Reinsurance renewals are expected to determine whether more premium increases are in store for homeowners.

As reported by Axios, State Farm won’t be accepting new applications for property insurance in California “due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”

Homeowners face financial instability with limited options

As premiums skyrocket, homeowners face a tough choice: pay up or go uninsured. Homeowners, unable to afford rising premiums, are opting to relocate to more at-risk locations to avoid increased costs. 

Over half of respondents in a Deloitte survey revealed their coverage had become unaffordable. Premium increases have averaged 11% nationwide and hit disaster-prone states the hardest. This affordability crisis fuels widespread underinsurance concerns, leaving homeowners more vulnerable than ever.

Thus far, homebuyers have been willing to accept the increasing risks of climate change and extreme weather events. In 2021 and 2022, the U.S.’s most flood-prone counties saw a net influx of about 400,000 people, a 103% increase from the previous two years. Counties with the highest wildfire risk experienced 446,000 more people moving in than out, a 51% rise from 2019 to 2020. 

This move to high-risk areas could be another shift caused by the COVID-19 pandemic, as more people looked to be out of cities and into smaller, more affordable destinations with access to nature.

State-by-State Analysis

Figure 2 shows that states with greater prominence in discussions about the impacts of climate change on the real estate market are often those most at risk of experiencing highly impactful natural disasters.

*Peaks in Fig. 2 represent the top 15 states with the highest natural disaster impact scores. The impact score is based on the frequency of natural disasters between 1980 and 2023 and their cost in damaged or lost property.

Hawaii, Montana, and Florida are the most salient in discussions about the impact of climate change, extreme weather events, and the real estate sector. This is unsurprising as hurricanes, warming ocean temperatures, and rising sea levels impact the Florida coast. Last year’s devastating wildfires in Maui brought Hawaii into the conversation. In 2022, Montana experienced a flood that washed away roads and homes in Yellowstone National Park, and the state (among others) is at risk of extreme heat, droughts, wildfires, and flooding.

Natural Disaster Risk is High in Coastal Cities and Growing Urban Areas

The rapid expansion of urban populations increases exposure through higher density or outward growth, altering land use patterns. In many growing metropolitan areas, the absence of urban planning has led to uncontrolled developments in hazardous areas.

Coastal cities, densely populated and with extensive infrastructure vulnerable to flooding and storm surges face significant risk due to increased exposure.

While not the most susceptible, coastal states are among the most salient in discussions about climate change impacts in the real estate sector (Fig. 2). Studies predict a global rise in river flood hazard exposure driven by socioeconomic and climate changes. Rapid growth worsens exposure alongside evolving coastal risks, highlighting the urgent need to address the evolving disasters.

What enterprise risk factors do real estate companies face?

Reputational Damage

Increasing insurers’ costs can complicate the housing crisis and impact the real estate sector’s bottom line. Figure 3 (above) shows that sentiment around the financial results of real estate companies declined by -57.98%.

Insurance Costs & Reduced Availability

Beliefs about climate change risks affect insurance uptake, influencing housing, mortgage, and insurance markets. Insurance availability and perceptions will likely play key roles in shaping the real estate market’s response to climate change. Insurance mitigates mortgage market losses from natural disasters, but rising costs or market failures can depress property values.

Decreased property assets

Disaster risk literature shows property price discounts and valuation impacts from flooding and wildfires vary over time, heavily influenced by information from recent damages or disclosures, leading to equity concerns. Mortgage performance typically suffers post-disaster, although insurance and disaster aid can mitigate this.

How can real estate businesses navigate and adapt to an evolving risk landscape?

The impact of climate change on real estate markets is highly uncertain. NASA reports ongoing sea level rise, more intense heat waves and increasing severe weather events. These factors, in addition to market participants’ discount rates, will determine real estate adaptation strategies

Some areas could manage increased flood risk with low-cost measures like improved drainage. Others may require costly interventions such as elevating structures or strategic retreats. Heavy discounting of future risks may reduce investment in adaptation or relocation

Energy efficiency ratings correlate with higher property prices, though their effect on mortgage performance is debated. But transitioning to carbon neutrality also poses risks to economies dependent on carbon-intensive industries, complicating adaptation strategies.

Estimating long-term climate change impacts on real estate is critical. Though difficult to study, risks like drought and heat stress may be among the most costly and impactful, particularly for disadvantaged communities.

What Now?

Extreme weather events started the shift from ‘extreme’ to ‘expected.’

As climate change reshapes the landscape of home insurance, the need for innovative solutions has never been more urgent. By taking decisive action and fostering collaboration, insurers can weather the storm and pave the way for a more resilient future. 

Signal AI’s Enterprise Risk Management risk intelligence tools enable proactive threat detection, safeguarding businesses from unexpected risks. We offer solutions for reputation & risk professionals to monitor emerging threats and enact more preemptive risk mitigation.

Research Methodology

Using our AI-powered solutions and looking at the top players across various industries in our Signal AI 500 ranking, we conducted an in-depth analysis of the risk landscape across premium content sources.

Real Estate companies: Compass, China Overseas, Vici Properties, Sun Hung Kai, RE/MAX, American Tower, Simon Property Group, Digital Realty.

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