The value of global real estate is enormous, exceeding $217 trillion, 75% of which is homes and residential properties. Given this scale, it’s hard to overstate the importance of real estate to people’s personal fortunes. For many, this is their biggest investment.

Residential real estate markets are increasingly vulnerable to climate change. People are starting to recognize this new reality — and markets are starting to reflect the change.

This shift presents opportunities and risks for developers, lenders, and investors doing business in this market. Understanding these dynamics will help them better address challenges and take advantage of opportunities. Here are three ways to do it:

1. Help municipalities adapt

Climate change makes municipalities increasingly vulnerable to weather shocks — sudden, extreme events such as hurricanes and severe wildfires — that can disrupt a local real estate market, infrastructure, and economy overnight.

It also leaves coastal areas vulnerable to more gradual changes, such as rising sea levels which Zillow says threatens 1.9 million homes. These properties are concentrated in states such as Florida (934,000 units), New Jersey (190,000) and New York (96,000), and in cities such as Boston (17% of units), Honolulu (24%) and Miami (30%) .

Despite the growing risk, municipalities have been slow to adapt. That may be about to change.

Recently, Moody’s announced a change in how it calculates credit ratings for US cities and states by including the potential for weather shocks in determining credit ratings. This will create new opportunities for businesses by forcing local and state governments to accelerate investments in climate change adaptation projects to avoid a credit rating downgrade. Companies should look to take advantage of this opportunity and help cities adapt.

2. Build to be resilient

Homebuyers are very sensitive to sudden threats of personal harm and will modify their buying behavior to avoid them. Extreme wildfires like those in California last year are an example.

Unsurprisingly, wildfires can disrupt local real estate markets. Not only are entire neighborhoods lost, but studies suggest demand for surviving homes near fires is dropping precipitously as people feel less safe to live there. Most homeowners who lose their homes move rather than rebuild. The lack of services, infrastructure and community discourages many potential newcomers from buying, even at a reduced price.

Despite the growing risk, municipalities have been slow to adapt. That may be about to change.

However, reconstruction using a resilient design can help speed recovery. A deadly 1991 wildfire in the hills above Oakland, California, one of the most destructive in state history, provides clues as to how this may be happening. Following this fire, homes were rebuilt based on updated safety codes that required fire-resistant designs, materials, and landscaping. Streets were widened to slow the spread of future fires (and facilitate evacuation in an emergency) and a new fire station was built nearby.

Arguably, these changes have accelerated redevelopment by making homeowners feel safer to buy or rebuild homes, and have created new opportunities for companies to design and build them. Today, “it’s a very desirable neighborhood” with homes selling for a premium of around $1 million to $3 million, said Daniel Stea of ​​Stea Realty Group in Berkeley.

3. Move to higher ground

Homebuyers have always had a love affair with coastal properties along the sea. Today, however, that is starting to change. According to Attom Data Solutions, over the past five years, “home sales in flood-prone coastal areas have grown approximately 25% slower than counties that are not typically flooded.”

One of the main reasons for this change is that it is becoming more and more expensive to live there. Flood insurance premiums rise to reflect real risk, lowering home values ​​by $10,000 for every $500 increase in insurance, according to Wayne Pathman, chairman of the Sea Level Rise Committee. from Miami. Property taxes are rising as communities spend taxpayer dollars to raise roads and improve drainage. Today, homes exposed to sea level rise are selling at a 7% discount to equivalent homes that are not exposed.

Residents are also growing weary of the daily inconveniences caused by high tides that leave streets flooded on clear days and make car insurance more expensive and harder to obtain. Others are weary of dealing with construction crews near their properties reinforcing shorelines against rising seas.

In response, some coastal residents are beginning to swap their homes for higher ones. Some even speculate that Miami’s less affluent neighborhoods on a coastal ridge (15 feet above sea level) are gentrifying because of this migration.

Miami isn’t the only city where people are moving to higher ground. West Coast Hollywood celebrities relocate to the hills above Malibu Beach. In doing so, they’re upending a long-held idea of ​​what makes a great place to live: “The ‘being on the beach’ thing has started to fade,” said Anthony Paradise, real estate agent at Sotheby’s, at Hollywood Reporter. .

Developers should stay ahead of this migration by developing properties in surrounding areas that are more protected from rising seas. Such developments will be more resilient to the impact of climate change and are likely to increase in value as demand for upland housing increases.


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