Grave Climate Realities Do Little To Dissuade Builders Chasing Profits, Population On The Coasts
Trillions of dollars in properties and developments along the coastal U.S. are being threatened by a warming planet, according to a groundbreaking government study released this month.
But to some developers, global warming, rising seas, strengthening storms and their respective surges are still too abstract — or even not really believable — to deter their investments in commercial properties along the coast, where the country’s most valuable real estate still lies. Even those who do agree that the Earth’s climate is changing for the worse see Americans continue to move to coastal cities, people who need places to live, work and spend.
“Nothing's changed for us,” said Songy Highroads CEO David Songy, who owns properties in vulnerable locations in Florida. “We build to code. There's local building codes. Just like if it's in Downtown Atlanta.”
Songy owns two boutique hotels in the Florida Keys — Fischer Inn Resort & Marina and Hadley House Islamorada — both of which were damaged in 2017 when Category 5 Hurricane Irma rampaged through the Keys and up the western coast of Florida. He reopened them after investing $100K per room in total repair and renovations.
Songy, who grew up along the coast in southern Louisiana, has been investing in real estate in coastal areas for 30 years. He said storms are a fact of life, and one that he accepts as a real estate investor and developer.
“We have not noticed evidence of more frequent storms in our markets. The Keys storm last year was the first big one we remember in many years,” he wrote in a follow-up email. “We have no certainty of opinions or facts about climate change, as there are too many variables.”
The U.S. government, in an alarming report released this month, counters that perception. More than 100 scientists from a host of U.S. agencies — including NASA, the State Department, and the departments of commerce, defense, agriculture and energy — concluded that global warming is real and already impacting communities across the country.
Government agencies see real dollars connected to rising sea levels. Between $66B and $106B worth of real estate will be below sea level by 2050, the report found, and $238B to $507B will be below the rising level by 2100. Within an eighth a mile of a U.S. coastline lie $1.4 trillion of businesses and homes.
“Flooding from rising sea levels and storms is likely to destroy, or make unsuitable for use, billions of dollars of property by the middle of this century, with the Atlantic and Gulf coasts facing greater-than-average risk compared to other regions of the country,” the report states.
Still, Songy is among those who are skeptical of the government’s conclusions. Despite warmer-than-average temperatures in recent years, there is a flip side, such as the current November extreme cold weather pattern battering part of the U.S., he said. Climate scientists point out that extreme temperatures, both hot and cold, are the result of humans' effect on the global climate.
Some real estate experts say it is hard to fathom eventual weather scenarios and their impact on cities and communities when their main customer base continues to flock to the most vulnerable areas in droves.
“I don’t think [in] the big real estate companies you have that many climate deniers. Real estate is conservative, but not politically conservative. They’re sort of risk-averse,” the Urban Land Institute’s Center for Sustainability and Economic Performance Executive Director Billy Grayson said. “But [developers] also follow the money and the trends and try to build things where people want to live, work and play, and that's increasingly on the coast.”
The government is predicting sea level rising by anywhere from 1.5 feet to a worst-case scenario of 8 feet by 2100. That could spell financial disaster for real estate investors in the future.
“There is very high confidence that the frequency and extent of tidal flooding is already increasing and will continue to increase with [sea-level rise] and that this flooding threatens the trillion-dollar coastal property market and public infrastructure,” the report reads. “U.S. economic history provides strong evidence that extensive property market losses have the potential to impact businesses, personal wealth and mortgage-related securities. Similarly, historic disaster events such as hurricanes and earthquakes provide a very high level of confidence that impacts to critical transportation and energy networks will harm the economy.”
President Donald Trump, himself a developer of properties in vulnerable places like Downtown Manhattan and Palm Beach, disagrees with his administration’s assessment. He has a long history of denying the existence of climate change and global warming, at one point calling it a hoax perpetrated by the Chinese government in order to make American manufacturing diminutive in comparison.
When asked by reporters about the report last week, he said “I don’t believe it."
Some developers are comfortable with the risks posed by global warming, relying on more stringent development codes in places along the coast, which in many cases account for things like storm surges and resistance to hurricane-force winds.
“We’re very conscious of [climate change], but as far as building on the coast, it’s something we find very appealing,” BH3 co-founder Daniel Lebensohn said.
BH3 has a handful of projects in Miami, including Trump Hollywood, a 41-story, 200-unit luxury condo tower right off the coast on Hollywood Beach, Florida, and Prive Island, a twin 16-story condo project on an 8-acre island off Williams Island in Aventura, Florida.
BH3 co-founder Greg Freedman, a lifelong Florida resident, is a believer in climate change and said the firm builds projects with global warming in mind. At Prive, the island itself is elevated 11 feet above the median high tide, and the first habitable floor is 25 feet above grade, factors that will mitigate against rising storm surges, Freedman said.
“Down in South Florida, [climate change] comes up more as a beach erosion question than, "Is this building going to be underwater in 99 years?'” Lebensohn said. “All of our waterfront properties are substantially set back and have been designed or built at elevations that we are confident will be sustainable for many generations.”
Bridge Commercial Real Estate CEO Jeff Shaw, an Atlanta native, has been investing in office buildings in Florida for the past 15 years, and now has a portfolio of buildings ranging from Jacksonville to Tampa to Miami. In those 15 years, Shaw said he has had to enact emergency storm preparation procedures on his properties 10 times.
It has come with a price: increased operating costs, flood insurance and additional codes that add to development expenses. Still, the concept that storms will only grow more fierce as the globe warms is not enough to deter Bridge from investing in Florida and along the coast.
“For me personally, I track it, I'm interested in it, but I don't think it's made a direct impact on our decisions for investing,” Shaw said. “But at the same time when we're looking at investments, we may be looking at a five-year, 10-year, 15-year investment window. We don't think global warming or anything else is going to influence us buying real estate or anything else in the near future.”
Shaw also said the office buildings he purchases are built to standards that they are able to withstand nature’s onslaught better.
“Most of these buildings are really well built. They’re designed to withstand major changes in climate, major storms,” he said. "I don't think that the storms or the weather is affecting decisions."
Therein lies the disconnect.
For many developers and investors, hold times on a building can range from a few years to a decade. Ownership longer than that does happen, but as real estate morphs from a family business to a global investment class, it is increasingly a rarity.
At the same time, the devastation that can be felt with climate change is spoken of in increments of 50 to 100 years, Grayson said. He asks how developers can really be expected to be concerned about what may happen with a property 100 years from now when their hold time is only 10 years.
“They're going to do what they need to do to harden their assets against the short-term risk, and they're going to count on insurance to protect them from the catastrophic risk,” he said.
Not all developers along the coast are skeptical. Peebles Corp. founder Don Peebles has been active in the Miami market since 1995, having developed two luxury beachside condos with more in the works. The regularly occurring and worsening street flooding as a result of the annual King Tide is all the evidence he needed to convince him the Earth was warming. That has made him hesitate to buy a home on the waterfront in the past.
“We considered several times in Miami either buying a home on the bay side or the ocean side. We looked at Palm Beach County on the water. We ruled it out in part because it looks like they're accidents waiting to happen,” Peebles said. “The reality is that rising sea levels are a significant issue and a big threat to buildings going forward.”
Peebles took that reality into account when developing Royal Palms and The Residences at the Bath Club condos. In both cases, the floors below and at grade are parking walled with what he called “knockout panels.” These are walls that, given a cataclysmic storm surge, are designed to collapse, allowing the water to run through the building without damaging its bone structure. That has yet to happen for him.
Still, he notes, as a baby boomer, global climate change and warming is a difficult juxtaposition when the desire to live a beach lifestyle in the latter years is so compelling and drawing thousands of new residents to the coast every year.
“None of that was a big issue for me growing up,” Peebles said. "So my mind is wired differently, and the only reason I’m more in tuned to it is because I’m a developer."
He said younger generations may think twice about locating along the coast as the impact of global warming becomes more apparent with each passing year.
“These tropical storms and hurricanes, they are wreaking havoc,” he said.
While developers may be slower to react to the reality of climate change, money may be more immediate, Jupiter Intelligence CEO Rich Sorkin said. Jupiter is a company staffed in part by climatologists and other scientists and provides climate change risk assessments for projects and government agencies.
Sorkin said as early as 2020, global investors and insurance giants may start to change their underwriting standards in response to climate changes, viewing flood risks with coastal investments akin to investing in coal-driven projects. He sees an increase in underwriting limits, a rise in risk premiums and even banks and investors prohibiting investments on the riskiest of coastal properties.
Developers will, of course, have to respond by building with greater resilience in mind. If they don’t, Sorkin said, capital backers and insurance companies will force them to do so.
“Smart money is always the first at the door,” Sorkin said. “[Climate change affects] are risk signals [that] are going to adjust to real risk, just like [banks did in] the mortgage crisis.”
Grayson sees three possible scenarios that could push developers to take into account sea level rises beyond a decade: insurance may become increasingly expensive or even impossible to get, institutional investors stop loaning money in high-risk areas, or more stringent federal or state policies move to create a generation of real estate that becomes “functionally obsolete” in a new-climate world.
That already has some institutional and debt investors pushing for more of a focus on climate change, since their holds may be even longer than a developer’s, he said.
“We've seen a lot of our institutional investors starting to send signals to the REITs and to the developers that this is something they want to prioritize,” Grayson said.
Global REIT Heitman is already pushing in this direction, using outside consultants to create a risk-exposure assessment for its real estate investments. When Heitman consults with pension funds or sovereign wealth funds, it is now taking extreme weather events — and their increasing frequency — into account, Grayson said. Heitman is looking to pump more capital into existing properties to help future-proof real estate and cushion its portfolio against obsolescence.
“I think in the next five years, it's going to be much more meaningful part of how [developers] do pro forma for a new development,” Grayson said.
New York developer Arik Kislin has jumped to paradise with a boutique hotel and condo project called Turks Cay Resort & Marina. The project is located on the beaches of Grace Bay in the Turks and Caicos Islands, in the heart of the Caribbean. While the entire Atlantic Ocean has an annual hurricane season, the number of years with double-digit hurricanes have increased since 2000, with the number of major hurricanes also increasing in frequency.
“Is there a change? Undoubtedly. There certainly is a change in the last decade. Frequency and height of surges,” Kislin said. “The 100-year flood has come, what, twice in the last 15 years?”
That has led to more buyers of his $1M-plus units at the project asking about hurricane risk more frequently than he has experienced in the past.
“Being a developer, it's one of the first questions I’m asked,” he said. “I wish the question didn’t exist, as it didn’t 10 years ago. It’s just become more of a conversation piece.”
Kislin said his property is located along the reef side of Grace Day Beach, which helps shield his project somewhat from storm surges. And he, like other developers, relies on international building codes to mitigate the risks from climate change.
Despite the concern that storms will only get worse and waters will rise further, as long as a developer can make a project financially work, they will build along the coast, he said.
“If you're developing, you just do the math,” Kislin said. “Would it discourage a project? No. Would you just scratch your head and make sure you build around it and address it? Yes.”
CORRECTION, DEC. 4, 5:30 P.M. ET: Arik Kislin's project in the Turks and Caicos Islands is called Turks Cay Resort & Marina. An earlier version of the story misidentified the project name. The story has been updated.