Real Estate in a Riskier Climate

Challenges, Opportunities and Trends

Mother Nature is very powerful, but also very sensitive. That’s the bad news and worse news about climate change.

A young man sitting in a park overlooking a stadium

Photo courtesy of Volodymyr Hryshchenko

Although average temperatures are climbing by only a fraction of a degree each year, that’s enough to produce increasingly painful consequences in the years ahead.

Floods, wildfires, droughts and heat waves will spread and strengthen. Rising sea levels will inundate many coastal communities. Storms — including hurricanes and tornados — will intensify. Places that were once safe and temperate will become less and less hospitable.

Putting the brakes on climate change is a daunting challenge made twice as hard by the political divide over the main cause of global warming — carbon emissions from human activity or natural cycles. With the situation likely to get worse before it gets better, coping with climate change will be a defining issue in the world of real estate for years to come.

No corner of the real estate industry will escape the fallout from climate change. Insurers, investors, lenders, developers, property owners and regulators all face the physical and financial risks generated by a toastier planet.

“There are trillions of dollars in real estate value at stake here ... and there will be winners and there will be losers,” said Matt Kahn, author and professor of environmental economics at the University of Southern California.

A report from the Mortgage Bankers Association, “The Impact of Climate Change on Housing and Housing Finance,” examines all the dominoes that are likely to fall in areas where climate change amps up its destructive power.

Insurance, for example, won’t just cost more, it may become impossible to find. People will start to default on their mortgages as their homes lose value and they can’t afford to repair or retrofit them. Lenders will begin to raise rates or refuse to make loans in certain areas. Property tax revenues will decline and communities will lose the funding they need to make their infrastructure more resilient.

 All of that raises the specter of the 2008 housing crash. By backing home loans through Fannie Mae and Freddie Mac and providing flood insurance through the National Flood Insurance Program (NFlP), the federal government — and by extension the nation as a whole — is heavily exposed to any pain that climate change inflicts on the housing market.

“Taxpayers sometimes end up on the hook when stakeholders in the housing system face extreme challenges,” notes the report. “It is easy to visualize scenarios where climate change triggers significant increases in taxpayer support for the existing pillars of the housing finance system.”

But for every action there is an equal and opposite reaction. As coastal homes become less desirable because of flooding, high ground becomes more valuable — but also less affordable to the people living in those communities. The result is climate gentrification.

The Center for Climate and Energy Solutions cites Miami as a prime example. Much of the city’s high ground is home to low-income communities of color like Little Haiti. Now those areas are drawing developers and wealthy buyers, which could eventually price out the people who have historically lived there.

That’s not the only way climate change hits lower-income brackets extra hard. They can struggle to afford improvements that make it easier to live with some of the effects of global warming such as rising energy costs.

Global warming drives up energy costs in a number of ways. Extreme drought threatens hydroelectric capacity. Extreme storms ravage electrical grids that must be repaired. Extreme heat increases demand for energy to power air conditioning.

The Federal Housing Administration offers financing assistance through the Energy Efficient Mortgage Program, which lets borrowers stretch their loan if they spend the additional amount on energy-saving improvements such as weatherization, high-performing HVAC systems and solar power.

Fannie Mae has a suite of Green Mortgage Loan products for multifamily properties that benefit borrowers who invest in energy and water efficiencies, including lower interest rates and additional loan proceeds for energy and water efficiency retrofits.

But going green is about more than trimming utility bills. Many people — especially millennials — see sustainability as a way to help fight climate change in the long run by emphasizing clean, efficient and renewable energy sources.

“Consumers in my age bracket want to make a positive impact,” said REALTOR® Ethan Shapiro, founder of Climate Change Realty. “They are aware of the issues and do not want to have a dead planet in 90 years.”

Launched in 2020, Climate Change Realty is a Boulder, Colo., brokerage and a nationwide referral service that donates 50 percent of its revenues to nonprofit organizations dedicated to fighting climate change — a business model that reflects Shapiro’s personal interest in the fight and appeals to the priorities of the next generation of homebuyers.

Serving that generation will require REALTORS® to understand climate change’s increasing influence on the residential real estate market, Shapiro said.

“The ability to know how to make a home energy efficient and market those features is going to be a big thing for REALTORS®,” he said. “Those [homes] are going to be more valuable because they’re going to be more resilient to changes.”

The question when addressing an issue as complex as climate change is where to start. Kahn believes it’s crucial to give the average person access to reliable climate-risk information when making real estate decisions. “Real estate will be better able to adapt to climate change if we can certify which places are high flood risk, low flood risk, high fire risk, low fire risk,” he said.

In the past, environmental threats did not change that much from year to year in most locations. Now those threats are becoming more common and more severe and spreading to places where people never experienced them before.

That’s why Kahn considers it essential to rate climate risk in the same way Moody’s and Standard and Poor’s rate credit risk. If people don’t know how and where global warming will change current conditions, how can they weigh future risks and costs when buying a home or making other real estate investments, he said.

“The most dangerous part of climate change is the unknown unknowns,” Kahn said. “It may never occur to someone that a tornado could someday hit them because of climate change.”

The real estate industry is responding to many consumers for whom climate change is a key factor in the buying and selling process. This comes as 72 percent of Americans say global warming is happening and 65 percent say they are worried about the effects, according to a recent survey from the Yale Program on Climate Change.

“With most people accepting climate change as a fact of life, it makes sense to treat it like other facts that influence how real estate is bought and sold,” said Matthew Eby, founder and executive director of First Street Foundation.

First Street Foundation is a nonprofit research and technology group that is creating online tools that share data about individual climate risks. “We believe no property should be bought or sold without a climate-risk assessment,” Eby said.

First Street started by launching Flood Factor, which calculates specific flood risk over the next 30 years for 142 million properties. Flood Factor is available on the First Street website and through partners like Redfin and

Coming soon is Fire Factor, which will provide similar information about wildfire risk. Tools to assess heat, drought and other global warming perils will follow.

The goal of assessing environmental risks is not to discourage people from moving to places threatened by climate change. Many people can afford and will continue to live in places that are uniquely attractive and will remain popular. The goal is to ensure people have the information they need to make informed decisions, including the growing risks and costs of living in those areas (e.g., insurance rates and heating/cooling costs) and the expense of taking preventive measures to protect your property.

“There are tradeoffs you have to make, but [you] need to make that decision with a full set of data versus unknowingly purchasing a home that has a risk no one has told you about,” Eby said. “And that happens all the time today.”

Preliminary results from research by Kahn and the online real estate company Redfin found that many Redfin users changed their home searches after clicking on the Flood Factor link that appears with every listing. Another app called ClimateCheck provides users information about fire, heat, drought and storms.

“It just goes to show that homebuyers do care about flood risk and if they have more information on it, it will make them behave differently when it comes to searching for a house,” said Daryl Fairweather, chief economist at Redfin.

But awareness about climate change is not translating into action when it comes to where people are moving. “When you look at the aggregate of where people are moving, they’re moving to places that have higher climate risk than the places they’re leaving,” Fairweather said. “I think a lot of that is driven by affordability, income taxes or just wanting to move somewhere warm.”

The question of affordability is a paradox because climate change has the potential to drive the cost of housing — both owning and renting — up as well as down. In places where little can be done to adapt to climate change, shrinking demand may indeed lower prices.

But the opposite may be true in places where people can adapt and where the appeal of the location — near the beach or nestled in the foothills — makes the cost of lifting a home above flood level or guarding against fire with a metal roof worth the investment for those who can afford it.

“The demand for homes will always be there because people need places to live, but demand will be a lot stronger for the homes that are made to be resilient or are naturally resilient,” Fairweather said.

Resilience is an essential theme in commercial real estate as well. “Without a doubt,” said Kevin Dollhopf, a senior global corporate real estate executive who works with Fortune 500 companies. “Most corporate real estate executives are taking these things into active consideration right now. It’s a risk-based world.”

Although the physical threats are the same — floods, wildfires, storms, extreme temperatures — the existential challenges facing the commercial real estate sector are different than those facing individuals in the housing market.

Climate change has created a new set of “filters” through which the commercial real estate industry must process almost all decisions, Dollhopf said.

The environmental, social and governance investing movement (ESG) is one of those filters. The movement is all about steering investors to companies that rate highly on environmental and social responsibility scales. Another is the Climate Pledge. Led by Amazon, the pledge challenges other companies to join Amazon in committing to net-zero-carbon emissions by 2040.

While responding to those initiatives is voluntary, the Securities and Exchange Commission (SEC) recently issued a proposed ruling requiring all publicly traded companies to include standardized assessments of their climate-related risks in their financial reports to the SEC and explain how those risks are expected to affect their business and strategy. Companies that have pledged to shrink their carbon footprint would have to state how they plan to meet their goal and to share relevant data.

“When it comes to the SEC requiring compliance for disclosure and having the metrics in place to disclose exactly your carbon footprint, that makes you enter a whole new realm of how you manage your facilities and lease your facilities and acquire your facilities,” Dollhopf said.

Although private companies would not be subject to the new rules, they still would face pressure to respond based on the changing demographics of consumers. “The millennials and Gen X are all much more environmentally and socially conscious,” Dollhopf said. “If you’re not telling everyone your goals and how you’re addressing climate change ... you may fall out of grace with your customer base.”

The pressure on the commercial real estate industry to both adapt to climate change and fight climate change by reducing carbon footprints results in a long list of tough choices.

On the adaptation side, companies in threatened locations must weigh the costs and benefits of moving to safer locations versus retrofitting existing ones. Either way, the cost to design and construct buildings to withstand natural disasters, consume less energy and utilize green materials is going up and up.

“We have such a substantial installed infrastructure, right now — buildings and systems already in place — the first step has to be ... doing what you can to your existing footprint to [adapt] to issues related to climate change,” Dollhopf said. “It is easier to build more resilient when you construct something new, but you are not going to tear down everything that is already built and installed, so you have to modify your existing structure and systems to meet climate change risk.”

Fighting climate change is full of equally difficult questions. Based on emissions from shipping goods and materials, is it better to be near suppliers or customers? Is the local energy supply dependent on fossil fuels or are renewable sources of energy available? Will extreme temperatures drive exorbitant cooling and heating cost? Is the location prone to flooding and extreme weather events?

“It’s a tremendous amount to consider,” Dollhopf said, “and you’re trying to run a business at the same time.”

One thing is for certain in today’s climate. From large commercial industries to the small business operator, from multifamily complexes to the individual homeowner, climate risk will be a major consideration in the planning, designing, retrofitting, marketing, buying, selling, investing and financing of real estate — bringing with it many challenges, but opportunities as well.

New Challenges for the National Flood Insurance Program

The Federal Emergency Management Agency (FEMA) recently requested public comment on a raft of updates to the National Flood Insurance Program (NFIP), including new minimum requirements in order for communities to participate in the program.

The NATIONAL ASSOCIATION OF REALTORS® (NAR) supports providing incentives for communities to adopt higher building standards in order to avoid future flood damage and costly retrofits. NAR also calls for FEMA to disclose the flood claims history of properties to home buyers and renters as well as owners to provide another data point in addition to existing state disclosure requirements.

However, NAR would not support excluding states from NFIP if they don’t adopt or enforce a standard flood specific disclosure form to be produced by FEMA. The Legal Research Center has documented that all 50 states already require the disclosure of known adverse facts or conditions, including past flood damage, while many states also have existing requirements aimed specifically at flood risks.

While some environmental advocates assert that many existing disclosure requirements are too vague and often result in a “buyers beware” scenario, NAR questions the benefits of a FEMA disclosure form, noting that the agency has not identified any authority, expertise or data to show how such a requirement would discourage development in flood zones, reduce flood damage or improve land management as required by statute. In addition, if flood-prone states without conforming disclosure requirements — such as Florida, New Jersey and South Carolina — were excluded from the NFIP, it would deal a heavy blow to both property owners and taxpayers.

REALTORS® support full transparency of flood risk, including providing accurate flood insurance prices upfront under FEMA’s Risk Rating 2.0. In addition, the NAR recommends that FEMA follow up by moving toward property specific flood maps for all areas of the United States so consumers can make more informed real estate decisions.


About On Common Ground

A free, semi-annual magazine published by NAR, On Common Ground presents a wide range of views on smart growth issues, with the goal of encouraging dialog among REALTORS®, elected officials, and other interested citizens.

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