Extreme Weather Could Spell Extreme Risk for Real Estate Investors
This post is part of a series sponsored by SWBC.
Climate change has driven an increase in both the frequency of and severity of extreme weather. At any given time, you can turn on the news and hear of communities suffering from the effects of another flood, tornado, hurricane, or wildfire.
Today, nearly 1/3 of American homeowners (31%) have already experienced damage to their homes resulting from climate disasters. With more destructive storms and fires striking each year, your real estate investor clients are facing increased risk of property damage or the total loss of their investment properties.
This unfortunate development is taking a noticeable toll in the residential real estate investment market, touching every aspect of the industry from rising insurance prices to occupancy challenges during and after disasters, to the decline in popularity of specific regions.
In this article, we’ll explore how the perils of extreme weather impact your clients and offer advice you can share about insuring their investments at a time when natural disasters have become commonplace.
Rising Temperatures Increase Hurricane Risk for Coastal Properties
The ever-increasing temperature of the planet is triggering climate-related incidents that bring with them dangerous levels of wind, rain, and flooding.
A 2-3° rise in air temperature in the Gulf Coast region means the air can hold more moisture than ever before. For example, in 2017, Hurricane Harvey dumped two feet of rain down on the city of Houston in the first 24 hours. Some areas received as much as 60 inches of rain during the storm, and flooding occurred across an area the size of New Jersey.
Rising sea levels have also put cities near the Gulf of Mexico in greater jeopardy during hurricane season. Higher global temperatures have caused polar ice caps to melt in Antarctica, which, in turn, has caused sea levels in areas of the Gulf to swell eight inches in the last 50 years, making flooding that much more likely.
Climatologist have seen an increased number of Atlantic hurricanes over the past two decades. A rise in the frequency of hurricane activity and intensity results in a higher risk of damage to property in the path of these storms.
According to Forbes, “Coastal towns are often hit the hardest, as flooding takes a serious toll on the structural integrity of property, to say nothing of the sea level increase along the coasts due to rising temperatures. Global forecasts show the homes of up to 300 million people falling below the elevation of annual coastal floods by 2050.”
Rising Temperatures and Energy Prices
Unfortunately, rising temperatures can also impact the costs of managing an investment or rental property. According to Forbes, “It’s projected that more tenants will rely on electricity to run fans and HVAC systems to stay cool. The same goes for an increase in water usage. These trends can place a higher burden on the electrical grid and city resources.”
In the middle of a historically hot summer, we’re seeing these costs rise in real time. Energy prices in Q2 2022 rose 41.6%–the steepest rise since April 1980—boosted by a 60% rise in gasoline prices and a 13.7% increase in prices of electricity.
Your real estate investment clients can expect to pay an increased cost for those utilities along with their tenants. The more demand for these resources, the more expensive they become.
To save on increased costs, your clients should consider, making their buildings more energy-efficient by replacing windows and switching to renewable energy, where possible. Even just swapping out incandescent light bulbs for LED alternatives can make a big difference.
Wildfires Increasing in Size, Number, and Frequency
Wildfires are unplanned fires, including lightning-caused fires, unauthorized human-caused fires, and escaped prescribed fire projects. The line of devastation caused by these events is spreading across the country like, well, wildfire.
According to Eos, “Throughout the 2000s, fires increased in number, size, and frequency across the contiguous United States compared with the previous 2 decades, new research has shown. Extreme fires increased primarily in the western and Great Plains regions, while moderate and small fires worsened across the entire country.”
Real estate investors and homeowners in California feel this peril particularly keenly. According to projections by a nonprofit research group reported on in the Los Angeles Times, the number of California properties facing severe wildfire risk is expected to grow sixfold over the next 30 years when considering only the impact of climate change.
Overall, more than half of all properties in the lower 48 states—nearly 80 million—are at some risk of being affected by wildfire, with about 1.9% of properties facing an annual risk of 1% or greater.
Potential Impacts of Extreme Weather on Your Real Estate Investor Clients
Property damage or loss resulting from extreme weather can have a profoundly negative impact on your clients’ bottom line.
Not only are your REI clients facing potentially greater expenses each year, but as these extreme weather events become more common, the properties that are located in these areas will begin to lose their appeal. For real estate investors who have rental properties, tenants don’t want to live in hurricane or wildfire-ridden communities under constant threat of the next natural disaster.
Your clients who want to sell a property in a high-risk area could risk making less of a profit, if not suffering a loss. According to Forbes, “That’s not just speculation anymore; it’s becoming reality. Home prices are seeing dramatic shifts due to climate-related impacts: Areas with an increased rate of damaging events are becoming less attractive, and prices are dropping.”
Although we may still be able to mitigate the worst effects of climate change by taking action, today, the effects we’re already experiencing are changing the real estate investment landscape. It is now more important than ever to arm your REI clients with the insurance resources they need to help protect their investments.
When your clients partner with SWBC for their Real Estate Investor Insurance needs, they’ll gain premier service from a company that has been serving this market for nearly 30 years. We stand by our reputation in providing a consultative approach to address your REI clients’ needs and recognize potential gaps in existing insurance coverage they may already have while keeping cost top of mind. Visit our website to learn more.
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