Climate impacts to real estate

by Zain Jaffer

Most of the headlines these days are about America’s financial problems with Fed hiked interest rates, its banks, the debt ceiling, office real estate, and other concerns.

Less in the news these days are risks associated with climate change, let’s say for real estate.

But we all know that when the next super cyclone or massive flood hits major portions of America we will again be reminded of nature’s unsparing wrath. Hurricane Katrina brought many Southern cities to their knees and many similar powerful weather disturbances are coming are way in the not so distant future.

Some risks have not really gone away. Tornadoes still hit many states and produce massive damage. Heavy rains and winds from super hurricanes cause property damage and crop damage.

A scientific relationship called the Clausius Clapeyron equation says that as temperature increases, the conversion of liquid water to water vapor increases. This applies particularly to the surface of lakes, seas, oceans, rivers, and other bodies of water. As more water vapor is created, it also traps more heat near that area. If you’ve been scalded by steam, you know that it can carry more heat than just hot air. So these multiple feedback loops supercharge and increase the amount of evaporation that happens. Hence more rain. Larger temperature differences between different areas, let’s say one part of the ocean versus another create rising water vapor and air in a hot area, and a cold front with cold condensing water vapor and air going to the ground. Then the Earth’s rotation creates moving air that slowly becomes a giant hurricane that is miles across.

Insurance actuarial statisticians have to adjust their premiums to reflect whether climate related damage from storms, heavy flooding, high wind, have increased. It adds to everyone’s cost of business. Real estate developments that have evolved to become desirable areas to live in because of cost and standard of living metrics may become nightmarish places with climate and extreme weather damage to life and limb.

We’ve been concentrating on economic and financial damage these past few months as understandably the COVID pandemic and the Fed rate hikes to arrest runaway inflation have changed things significantly. Sure buying a new home or new car may become more expensive. That new real estate development may become unaffordable to fund. You might not get the desired price you want for that home you want to sell.

But these negative impacts are matters of degree. Extreme weather events can cause loss of life and limb. Houses can become totally wiped out. Even if you can rebuild an entire town or city, what happens if these extreme weather events become frequent occurrences. The job you may have right now may disappear. If people really want to stay and live back in an area, they may hunker down for a while until hopefully better and stronger structures, flood projects, roads, are built. Those may take a while.

Some people, like during Hurricane Katrina, have been totally wiped out. For them it becomes better to simply restart life somewhere else, especially if reconstruction will take a while. One day you are living with your family in a comfortable house, working a good job. After an extreme weather event, almost everything might be taken from you.

The current financial situation shouldn’t be dismissed as it makes our mortgages and our wages problematic. But at the back of our minds, let’s not forget that climate and extreme weather impacts may hit us from left field, and instead of becoming once in a hundred year events, may occur more frequently and leave us with significant damage and tragedy.