Yahoo Finance What Is a Climate Change Real Estate Bubble? 5 Things To Know Before Purchasing Property
Although you may have heard the real estate mantra “location, location, location,” it never rings more true than when a climate change risk is involved.
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Joanna Frank, the president and CEO of the Center for Active Design, said that the climate change real estate bubble refers to the millions of properties across the country that are either exposed to extreme weather now or will be in the near future, at which point their valuations will fall drastically.
“It is predicted that in three decades, more than 100 million Americans will live in an ‘extreme heat belt’ where at least one day a year, the heat index temperature will exceed 125,” Frank said. “We talk a lot about climate change prevention, but we are at a point now where we must discuss resilience. The true costs of climate change can only be understood when looking through a public health lens, and going forward, we know that the real estate industry must prioritize the reduction of carbon emissions while adapting our built environment to be resilient to climate change’s many threats to people.”
Keep reading to learn more about the climate change real estate bubble.
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Things To Know Before Purchasing Real Estate
Frank said that while the business of real estate is based on responding to the needs of society, today, the pressing need is how to adequately adapt to climate change.
“Adaptation will not only save untold lives, but also mitigate the most severe financial risks to the industry,” Frank said. “The real estate industry needs to invest in properties that prioritize human health in the face of extreme heat, flood risk and poor air quality, both indoors and out, in order to adequately protect against the possibility of a market failure. Success for the real estate industry over the next decade will be determined by meeting this demand by using evidence-based strategies that have already been demonstrated as effective solutions.
Frank added that the climate change real estate bubble doesn’t have a one-size-fits-all solution.
“We need to understand the unique risk per each specific asset, and then use tailored, evidence-based strategies to address those risks,” she said. “Then, we can measure and quantify the impact those solutions have on the people who live, work and play in those properties.”
Here’s what you should know before purchasing property.
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Analyze the Local Infrastructure
Daniel Rivera, the owner of Proactive Property Management, said you should analyze the local infrastructure’s ability to withstand extreme conditions.
“From my experience managing properties in Northern New Jersey, I’ve seen that areas investing in climate-resilient infrastructure, like stormwater management systems and reinforced construction, tend to offer more stable long-term investments,” he explained. “For instance, properties in Hoboken have seen proactive measures to mitigate flooding risks, making them a more secure investment compared to less prepared nearby areas.”
Be Aware of Local Real Estate Regulations
Rivera said that many locations are starting to implement stricter building codes and disclosure laws regarding climate risks.
“When managing properties, I always advise clients to stay informed about local regulations that might affect property values,” he said. “For example, new zoning laws in Jersey City now require more rigorous flood-proofing standards, which could impact both construction costs and property values. This proactive approach can help investors make more informed, strategic decisions.”
Assess the Climate Risks
Scott Friedson, a multistate licensed public adjuster and CEO of ICRS LLC, said that before purchasing property where climate risks are a concern, you should thoroughly assess the specific climate risks involved.
“For example, if considering a coastal property, scrutinize the frequency and severity of past hurricanes and the area’s storm surge history,” he suggested. “Use tools like FEMA flood maps and local climate projection data. In my experience, inadequate weather-proofing, such as not having storm shutters or proper drainage systems, can lead to devastating losses during severe weather, as seen with clients who faced underpaid claims after property damage from hurricanes and floods.”
Assess the Strategies Used To Mitigate Climate Change Risk
Frank explained that when you’re considering purchasing a property, you should not only be aware of all of the climate risks in the location, such as flooding or extreme heat, but you should also understand how the property and the surrounding community have addressed this risk.
She said, for example, if a property is located in an extreme heat zone, you should question how the building and surrounding neighborhood are able to maximize shade.
“Strategies to mitigate extreme heat include trees and external sun screens, light-colored or green roofs, and native vegetation rather than paved surfaces,” she explained.
Frank added, “According to the US Department of Energy ‘Shading and evapotranspiration (the process by which a plant actively moves and releases water vapor) from trees can reduce surrounding air temperatures as much as 6° F. Because cool air settles near the ground, air temperatures directly under trees can be as much as 25°F cooler than air temperatures above nearby blacktop.'”
Understand the Insurance Landscape
Friedson said that many properties in climate-risk areas have expensive, high-deductible policies, or in some cases, limited coverage.
“During the Texas Freeze of 2021, I dealt with numerous claims where policyholders did not fully understand their coverage limits until it was too late,” he said. “Always review and fully comprehend insurance policies, focusing on exclusions and required preventive measures like weatherization standards as noted in Senate Bill 3. These could significantly impact both the cost and the feasibility of insuring homes in these risk-prone areas.”
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