Will Rising Sea Levels Dampen Investor Appetite?

MIAMI—You may have heard the reports or even read my exclusive interviews on this topic. Rising sea levels in South Florida are a reality.

Indeed, the sea level rise from global climate changes threatens to double damages from flooding in low-lying coastal areas over the next two decades. That, of course, will expose insurers, lenders and property owners exposed to more risk than they'd like to take on.

So says a new CBRE report called “Rising Tides, Increasing Risk: How the Insurance Industry's Response to Climate Change Could Impact Commercial Real Estate Investors.” The report explores how insurers, lenders, and investors are responding to the threat of sea level rise in South Florida, one of the country's most vulnerable regions.

“As sea levels and groundwater levels, rise, that storage capacity becomes extremely limited, leading to a greater risk of flooding during normal storm events,” Howard E. Nelson, an attorney at Bilzin Sumberg Baena Price & Axelrod, tells GlobeSt.com. “Rising sea levels also affects developers' and owners' insurance costs and insurability; insurance could become prohibitively expensive in coastal areas and some projects may be deemed uninsurable.”

According to CBRE, investor appetite for commercial real estate assets in some of the most high-risk US coastal areas—cities like Miami Beach—remains strong, in spite of predictions by the insurance industry that flood-related losses will grow. What's more, most lenders do not require borrowers to buy flood insurance beyond that which is provided through the National Federal Insurance Program (NFIP), which caps coverage at $500,000 for commercial properties.

The result: most owners do not buy excess flood insurance due to its expense. While the NFIP effectively insulates property owners from some of the risk, if another major weather event were to trigger changes to the NFIP, or lenders were to begin requiring supplemental insurance, investors would bear more of the risk.

“Even with its current $500,000 coverage limits, [National Federal Insurance Program] policies could fall short of covering the costs associated with flood damage from a major weather event,” says Quinn Eddins, CBRE Director of Research and Analysis.  “As most commercial property owners have chosen not to purchase supplemental coverage, they are effectively choosing to insure themselves for damages in excess of that amount, exposing themselves to a risk that the insurance industry itself is backing away from. While current property owners appear willing to accept this risk, there may come a day in the future when potential buyers will not be willing to do the same.”

Let's take a look at some of the highlights of CBRE's report:

• Risk Management Solutions and Lloyd's of London analyses indicate that sea level rise could drive a doubling of average annual losses from storm surge for properties in the world's most exposed coastal areas by the 2030s.
• Lenders, in accordance with federal regulations, require any party seeking to finance the purchase of property in a Special Flood Hazard Area (as identified by FEMA) to purchase flood insurance through the National Flood Insurance Program (NFIP).
• In the U.S., private insurers have largely refused to offer flood insurance policies since the 1920s. The high risk of correlated losses and lack of competition in the private insurance market has made private flood policies expensive relative to coverage available from the NFIP.
• To date, more than 21,000 communities, or about 90% of at-risk communities, participate in the NFIP.
• Claims filed with the NFIP following Hurricanes Katrina, Rita and Wilma in 2005, and Sandy in 2012, have put the program $24 billion in debt to the U.S. Treasury as of December 2013.

Want to learn more on this topic? Check out my series of articles from July: The Real Developer Impact of Rising Sea Levels; Will South Florida Soon be Under Water?; Will So-Called King Tide Cost Us Millions?; and How Cities are Mitigating King Tides.