Probability X Consequence = Risk
A report by the Union of Concerned Citizens and Zillow of projected losses by 2045, of the ‘Communities with the highest potential flooding-related real estate losses’ Miami Beach, is listed #1 with $6,443,424,737, with Miami at #7 with $2,115,800,018 at risk. By 2050 61% more properties in Miami-Dade County will be at risk for chronic flooding than are at risk today, diminishing or destroying home valuations, drastically increasing the needs for resiliency spending by local communities, and causing a rise in building and business interruption claims to insurers.
Within the next ten years, 86% of properties within one Miami-Dade oceanfront community will be at risk from moderate flooding damage, compared to 5% today. By 2050, shortages in affordable insurance coverage and real estate market instability are expected.
Storms are becoming more frequent with more rain and more intensity leading to more expensive damages. South Florida is very susceptible to tropical cyclones and severe storm events. Along with a rapidly growing city and a huge amount of real estate value, puts us at high risk.
NOAA’s ‘Historical Hurricane Tracks’ is a free online tool that allows users to track the paths of historic hurricanes. The site, developed by the NOAA Office for Coastal Management in partnership with NOAA’s National Hurricane Center and National Centers for Environmental Information, offers data and information on coastal county hurricane strikes. The map shown above includes Category 4 and 5 hurricane tracks from 1851-2016 in the East Atlantic ocean basin.
The Saffir-Simpson Hurricane Wind Scale ranks hurricane winds on a scale starting at one and stopping at category 5 with sustained 1-minute average wind speeds of at least 157 mph. The categories are not linear, winds for a category two hurricane span a range of just 15 mph, while winds for a category four storm span a range of 27 mph. Regardless of this non-linearity, a one-category increase in intensity on the scale results in approximately four times more wind damage, according to the National Hurricane Center. The current atmosphere has anywhere from 5 to 8% more water vapor than a generation ago, combined with warmer temperatures that are driving water up from the deep ocean in places where hurricanes typically form, has created the potential for superstorms, with winds that exceed 200 miles per hour on a sustained basis.
Median Estimates of Economic Damage Per Year
As the United States confronts global warming in the decades ahead, not all states will suffer equally. Maine may benefit from milder winters. Florida, by contrast, could face major losses, as deadly heat waves flare-up in the summer, and rising sea levels eat away at valuable coastal properties.
The map below shows median estimates of economic damage per year from 2080 to 2099 under a high-emissions scenario. Damage is calculated as a percentage of county G.D.P., factoring in agriculture, mortality, crime, labor productivity, coastal impacts, and energy demand. Counties with green are projected to see economic benefits. In the chart, the ranges labeled “likely” refer to outcomes with a two-thirds chance of occurring.
Plan for a Billion
The graphic below is a visualization of identified U.S. Billion-dollar disaster events since 1980. Use caution when interpreting any trends based on this graphic for a variety of reasons. For example, inflation has affected our ability to compare costs over time so to reflect this, the graphic also shows events with less than $1 billion in damage at the time of the event, but after adjusting for Consumer Price Index, inflation, now exceeding $1 billion in damages. In 2018, there were 14 separate billion-dollar weather and climate disaster events across the United States, with a total cost of $91 billion. The total cost over the last three years 2016 to 2018 exceeds $450 billion, averaging $150 billion per year. The total cost over the last five years, 2014 to 2018, is approximately $500 billion, averaging $100 billion per year, as indicated by the black line below.
Since 1980, the US has sustained 254 weather and climate disasters where overall damages or costs reached or exceeded one Billion, for a total cost of $1.7 trillion. In 2019, there were 14 weather and climate disaster events with losses exceeding $1 billion each across the United States. These events included 3 flooding events, 8 severe storm events, 2 tropical cyclone events, and 1 wildfire event. From 1980 to 2019 the annual average is 6.5 events (CPI-adjusted); the annual average for the most recent 5 years (2015–2019) is 13.8 events (CPI-adjusted).
In a recent report on climate change and real estate, the Urban Land Institute stated that “this process will be painful for investors who are caught off guard, but those who are prepared have the potential to outperform.” Dutch Investment Giant PGGM owns stakes in 4,000 assets around the world with a total value of $178B, it is the world's twelfth largest owner of real estate. As long-term investors, PGGM applied a data-driven approach in analyzing every individual asset in the portfolio and found that at the individual property level of its portfolio, four out of the top five assets with the highest risk are in Miami. The company is using the data along with traditional metrics to make future investment decisions.
“Ignoring, or underestimating, the actual economic risk posed by moderate flooding is common to other geographies in the U.S. and around the world,” warns Rich Sorkin, co-founder, and CEO of Jupiter Intelligence. “Almost none of this risk is reflected in prices. Most of this dynamic are not yet understood, nor is it implemented into the decision-making of financial institutions.”
Leading by Example
New rules from the Federal Emergency Management Agency require that any public facilities destroyed by a natural disaster be rebuilt stronger, forcing states and municipalities to rebuild outside of flood zones and a safe distance from wildfire-prone vegetation and using durable building materials. The policy aims to address a long-standing criticism — that communities are spending federal disaster aid rebuilding damaged facilities to pre-disaster standards only to have them damaged again. FEMA typically pays 75% of the cost of restoring public buildings and utilities, roads and bridges, and water and sewer systems. The agency requires substantially damaged facilities to be rebuilt, not repaired, and to follow local codes. Numerous studies show that following up-to-date construction codes generates substantial savings over a building's lifetime by increasing its resilience. FEMA's endorsement of dozens of construction codes could encourage states and municipalities to adopt them as their own standards. Critics of the plan say that codes deal with life safety, and not disaster-risk reduction and that many of the Building Codes endorsed by FEMA use the agency’s flood maps, which do not take into account climate change.
South Florida property owners have already taken steps to increase preparedness and are going beyond the minimum building code to achieve discounted insurance rates. These measures include adding freeboard height to the ground level which both reduces flood chances and allows for the floor of the lower level to be raised in the future to match a new street-level, locating mechanical equipment on higher levels, installing pump systems, creating on-site water cisterns, and building flood barriers or planning for the ability to install temporary barriers.
Not all developers plan to hold assets for a long enough time, that they forecast in long term climate effects and build accordingly, essentially passing the risk to the next owner. Resilient development needs to become the norm, not the exception. Future development lies in implementing Public-Private Partnerships, by negotiating for zoning changes like FAR, Density bonuses, setback allowances, height allowances, and parking minimums, in exchange for adding additional resiliency adaptations.
Miami Beach's resiliency efforts have shown an initial increase in values for properties at higher elevations and those located near raised roadways. The climate adaptation planning consultant ICF is combining risk, drainage, and economic modeling to assess the costs and benefits of the City’s investments in its stormwater program. The economic model indicates that home prices increased from 8.6% to 11.5% for each one-foot increase in average parcel elevation, and by 4.9% to 14.1% for each one-foot increase in nearby road elevation.”
Governments large and small rely on the $3.8 trillion municipal bond market for much of their infrastructure work. When officials want to build a highway, a school, a seawall, or an emergency operations center, they often issue bonds to bring in the money needed to complete the project. Investors are repaid with interest over a period that can run for decades or more.
Governments pay higher interest rates on those bonds when their credit ratings are low, firms such as Moody’s Investors Service and Standard & Poor’s Financial Services issue the rating assessments. The conundrum facing the municipal bond market right now is if the market fails to be proactive about future risks it could lead to billions in ill-fated investments in communities at the forefront of climate change, making it more expensive for governments with environmental liabilities to borrow money, but that could prevent them from making the improvements needed to strengthen their infrastructure, and just because a city is likely to be struck by sea-level rise or wildfire doesn’t necessarily mean it will default on its bonds.
Moody’s has been especially vocal about its climate change concerns. The firm has issued numerous papers assessing climate risk, and it purchased a majority stake in Four Twenty Seven, a climate-risk data firm. “We look not just at the vulnerability of state and local governments, but their ability to manage the impact,” said Emily Raimes, a vice president with Moody’s Public Finance Group. “While we’ll be looking at the data on rising sea levels and who may be more vulnerable, we’ll also be looking at what these governments are doing to mitigate the impact.”
Statewide, Florida remains in good shape credit-wise, despite the challenges many of its communities are facing. Ben Watkins, the state’s director of bond finance, said that’s likely to continue, even amid hurricanes and rising sea levels. Even the most devastating hurricane seasons have ended up being a “blip on the radar” in terms of Florida’s credit health, he said. But concern remains for smaller governments within the state.
Insurance Vs. Infrastructure Investment
Risk of losing coverage over medium-term, 5-10 years, is increasingly raising concerns about the profitability of developer strategy in South Florida. For lenders, the prospect of greater-than-foreseen flood damage or storm occurrence within 30-year mortgage windows could cause a risk of systemic failure from a wave of defaults and foreclosures. FEMA Risk Rating 2.0 is coming and will entail a meaningful rate increase for many Florida properties. Institutional capital providers increasingly ask developers to address risks through asset-level mitigation. Investors are also asking what community-scale measures are being put in place, in recognition that assets are not independent of broader risk/resilience patterns.
While many people typically focus on dramatic, 20 to 30-year impacts, the economic consequences of short term risk are also significant. Miami-Dade County as a whole will see a 26% increase in properties affected by moderate flooding from now through 2030 and a 59% rise in properties damaged by extreme floods over the same ten-year period.
The increase in expected damage from flooding comes primarily from routine moderate flooding of up to one foot, driven primarily by sea-level rise. Most of the expected damage from these types of floods will come from a combination of extended or heavy precipitation and “sunny day” flooding in events likely to occur every other year. Severe storms and extreme impacts will cause even greater damage, but not the majority of the economic impacts.
As communities weigh the options for resilience investments across a wide spectrum of choices, each with pros and cons and varying price tags, the data must be at the forefront of the decision-making process. Studies have shown that investments in infrastructure will cost less in the long term, compared to the economic costs and uninsured losses from storm events.
Funding for resilience infrastructure will most likely need to come from a variety of sources. Property Taxes are the City of Miami’s largest part of the budget, totaling $396.4 million in revenues, or about 35% of the city’s general fund revenues, which would most likely be a funding source for resilience infrastructure. The threat from sea rise and climate change poses a threat to property values, and thus also taxes. By taking action to protect property, it increases the property value, as well as the tax base, including a positive reassurance for new development. Not taking action and adding the risk to the insurance markets would lower property value, and thus also revenue for the city. By this logic, resilience improvements have a return on investment simply by preserving property values in the real estate market and therefore preserving tax revenues for the city.
Miami cannot afford to wait to take action. We have the opportunity to implement a holistic strategy that takes into account the intertwined social, economic, and environmental impacts, to not only safeguard our people and city but to act as a leader at the forefront of a changing world.
- Curbed: Coming crisis of coastal flooding: $1 trillion of real estate at risk by 2100
- Source: Hsiang, Kopp, Jina, Rising et al., 2017
- Bisnow, “One Of The World’s Biggest Investors Is Preparing Its $178B Portfolio For Climate Change”
- E&E News “Rebuild stronger or risk losing disaster aid, FEMA orders
- Jupiter Intelligence Banking & Insurance Special Report
- The Guardian, This is the way the world ends: will we soon see category 6 hurricanes?
- RE Miami Beach: The business case for Miami Beach’s resiliency efforts
- PEW: Climate Change Could Make Borrowing Costlier for States and Cities
- Source: NOAA Billion-Dollar Weather and Climate Disasters: Overview
- ULI Water Front Resilience Miami, Florida