Special Report: How Rising Sea Levels Threaten East Coast Commercial Real Estate

Miami: Heads In The Sand As City Booms In Spite Of Climate Risk

The hot, wet state of Florida is often held up as the poster child for climate change and rising sea levels, yet its real estate market has boomed despite the related risks. Prices have risen and investment has poured in, even as the warning drumbeat about the potential downsides related to climate change and rising sea levels have grown steadily louder.

So it is not hard to see why the area’s real estate industry has chosen to ignore the warnings and keep building and investing, even in the areas where the danger is most acute. The science says one thing, but the money says another. The people who use real estate are not changing their behavior as a result of climate, so the industry isn't either.  

You don't have to look hard to find analyses that highlight the particular risk faced by Florida, and its largest city, Miami, when it comes to the impact of climate change. The porous limestone underlying much of Florida makes the state particularly vulnerable to  rising sea levels.

According to analysis organization Climate Central, development is more concentrated in the first few feet above high tide than it is at higher elevations. For almost all other coastal states, the reverse is true.

There are risks everywhere, yet "almost none of this is reflected in prices anywhere in the world," Jupiter Intelligence CEO and co-founder Rich Sorkin told Bisnow. The financial analytics firm in January prepared a report for the banking and insurance industries focused on Miami-Dade County. The title, A Deluge of Risk...and a Looming Crisis, isn't exactly reassuring.

Using data from the National Oceanic and Atmospheric Administration, Jupiter Intelligence found that by 2050, annual flooding in Miami-Dade will double and 61% more properties will be at risk for chronic flooding than are at risk today. That might sound far off, but if you had a child today, that would be happening before they were 30.

The company warned of "far-reaching and potentially catastrophic implications." Home values may tumble at precisely the same time that communities need property tax revenues to spend on resiliency measures — all while businesses face interruptions that cause them to, in turn, make claims to insurers. Miami-Dade County will experience a sevenfold jump in expected losses, from 1.3% to 9.2%."

Sorkin said that the threat to Florida may be manageable "as long as we deal with it in a responsible way — not put our head in the sand, which unfortunately has been the case."

The examples of this aversion to facing the danger are manifest. Former Gov. (and now U.S. Sen.) Rick Scott forbade employees to use the term "climate change." According to the Miami Herald, this year is the first that the Florida Insurance Summit had a panel discussion focused on climate risks, and the National Flood Insurance Program is only now adjusting pricing to better reflect risk beginning in 2021. Floridians hold 35% of those policies. 

The financial services sector is finally starting to get serious about the matter, Sorkin said. "Big financial institutions all see they have a couple years to address this."

Miami: Heads In The Sand As City Booms In Spite Of Climate Risk
Related Group's Park Grove development in Miami.

Another report released in January by McKinsey was even more stark than Jupiter's. It warned that greater understanding of climate risk could make long-duration borrowing unavailable, impact insurance cost and availability, and reduce terminal values. This could trigger capital reallocation and asset repricing. “In Florida, for example, estimates based on past trends suggest that losses from flooding could devalue exposed homes by $30B to $80B, or about 15 to 35 percent, by 2050, all else being equal," the report's authors write.

Homeowners might stop paying their mortgages if property values fall steeply, triggering a more systemic banking crisis, the report warned.

Already, some investors are betting against the mortgage market.

"The market’s failure to integrate climate science with investment analysis has created a mispricing phenomenon that is possibly larger than the mortgage credit bubble of the mid-2000s,” DeltaTerra Capital founder David Burt said.

He should know a thing or two about spotting risk where others have missed it: He is one of the investors featured in Michael Lewis’ book The Big Short, which is about the people who made a killing betting that the subprime mortgage market would collapse during the last boom. He set up DeltaTerra to hedge against still underappreciated climate risks, and one of his first investments is shorting Florida mortgage bonds.  

There are signs that some large global investors are taking the threat of rising sea levels in Florida seriously. In a report earlier this year, giant Dutch pension fund PGGM said an analysis undertaken with insurer Munich Re had identified Florida as having a big concentration of risk related to climate change in its portfolio. It said the analysis would shape its future investment and disposal strategy.

Policymakers are factoring the threat into local regulation as much as possible, in spite of the antipathy toward action that was demonstrated in the rhetoric from the governor’s office.

"Sea-level rise is not a shock; it's a stress," Miami-Dade County Chief Resiliency Officer James Murley said. "We're aware of the problem. It's not going to sneak up on us. ... I think we'll adapt."

Murley said that after Scott refused to acknowledge climate change, leaders in South Florida banded together to tackle the problem themselves. The Southeast Florida Regional Climate Change Compact consolidated data — it predicts the sea could rise another six to 12 inches by 2030 and 14 to 34 inches by 2060 — and laid out steps that agencies and governments can take to start preparing. An initiative called Resilient 305 likens climate change to the space race and lays out how Miami-Dade County, the city of Miami and the city of Miami Beach are getting ready to confront it. 

Miami taxpayers in 2017 agreed to tax themselves, approving a $400M bond with some funds for storm drains and flood pumps, but that is just a drop in the proverbial bucket to meet the financial costs of adaptation. A report by the Center for Climate Integrity found that Florida would need to build 9,243 miles of seawall by 2040, at a cost of $75B.

Murley said that at the county level, sustainability is already factored into every aspect.

"Every time we do a budget, a resilience dividend is written into it," he said.

Billions of dollars have been spent upgrading water and sewer systems and pumps. He said he'd like to see sprawl kept in check and more transit-oriented development, which could in turn get cars off the road.

Miami: Heads In The Sand As City Booms In Spite Of Climate Risk
Former Florida governor, now U.S. senator, Rick Scott forbade employees from using the term "climate change."

But on the whole, the well-publicized risks have not penetrated the consciousness of the real estate sector. People are not changing where they want to live, work and play, and real estate will always cater to the way people behave.  

The state's population has been growing by 900 people per day, a mix of immigrants, refugees from high-tax states, and people moving for the weather or lifestyle. For people fleeing unstable countries, or seeking to get their investments out, Miami represents stability, Murley said. "It's safe compared to many places.” There are schools, hospitals and culture, he said. For people making urgent life decisions, "I don't know if the climate even gets on that scale."

CBRE Executive Vice President Still Hunter said that the real estate industry is simply responding to strong demand. The state is "continually adding population at a clip of 100,000 per year. That's enough to make a fundamentally sound market," he said. "From time to time" investors ask about rising sea levels, and one client — a major institution — is only interested in assets a certain distance from the water, but otherwise, climate change has not been a major detractor.

Office buildings, development sites and Palm Beach estates are still selling for $100M+. At the household level, fishing, boating and beach-going are, for many Floridians, an irresistible draw. "Personally, I'm willing to roll the dice because I love the lifestyle," Hunter said. This is a census year, and new federal data will show whether population trends are holding. 

In a recent interview with Bisnow, Related Group Vice President Jon Paul Perez said: "Of the 6,000 units we sold this cycle, maybe 50 people didn't buy because of climate change, global warming and sea-level rise. All the new buildings that are being built now, the [building] code has already been changed so that your lobby and first level of habitable space is already at a certain level."

So far, he added, "It hasn't hurt us, as far as the buyers' side, people coming to Miami willing to do investments in multifamily and condos."

Chicago-based developer Sterling Bay is building an office project in Miami's Wynwood neighborhood. Asked if climate change was affecting the company's plans, Director of Leasing Michael Lirtzman said, "Yes, but not to a huge degree."

He said they were using hurricane-resistant glass and other window technology to address heat loads. But Sterling Bay aims to get ahead of population trends, which show young people and jobs moving to the Sun Belt and warm-weather, coastal cities. Climate change is something to keep in mind for long-term planning, he said, but it isn't becoming a detriment to coastal cities.

When it comes to dealing with the issues that arise from climate change, Sorkin said that some affluent places, like Malibu or certain Miami enclaves, may have the money and political will to manage problems and adapt, but some municipalities won't have the tax base to meet the challenge and should think about managed retreat. He did not want to name specific towns or neighborhoods before speaking with their leaders. It is one of the many tragedies of climate change that in the scenarios envisaged by scientific data, it is the least wealthy that will be worst affected. That is as true on the East Coast of the U.S., an incredibly wealthy region of the world on a relative basis, as it is in places like Bangladesh.

The idea of a managed retreat from areas of Miami and Florida seems inconceivable as we sit here in 2020, with real estate values rising and investment dollars flooding in. And it is a scenario that is at the very extreme end of the spectrum. But to ignore the problem seems inconceivable too.

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