Climate change and what it means for real estate investors

Climate change has caused a massive uptick in the number of catastrophic weather events in the United States, inflicting more property damages than ever before. Insurance markets have been recalibrating following the elevated number of claims and average premium increases have consistently outpaced inflation for the past several years.

In 2023, there was $92.9 billion in property damage caused by severe weather in the United States. This total only includes the 28 disasters that caused $1 billion plus of damages. In 1980 there were on average 8.5 perilous events a year which caused $1 billion plus in damages. Since 2019, there has been an average of 20.4 perilous events a year, which is an increase of 140%. The massive increase in severe weather-related property damage has shaken up the insurance market over the past several years. 

Since real estate owners face more instances of severe weather on a yearly basis now, there are a multitude of ways in which they should be contemplating what this means for their current portfolio and future acquisitions.

1. Limited Carrier Options: In response to the high number of claims being paid out in states like California or Florida, some companies stopped issuing policies there altogether. They cited the ongoing risk of more catastrophic weather events which resulted in an increased risk profile for them. In turn, both existing owners and investors looking to acquire assets may find it more difficult to find coverage, and as insurers have left the market, premiums may have gone up as well.

2. Climate Related Risk Mitigation: As part of coming to terms with facing more severe weather on a yearly basis, owners may find it beneficial to conduct a climate analysis of their portfolio for any vulnerabilities. As part of that review, they might find climate related capital expenditures that might be required to secure parts of their portfolio.

3. Site Selection Impacted: Investors may need to take climate-based risk into their acquisition criteria. This includes due diligence on the potentially increased cost of insuring the asset, additional capital expenditure needs at the property, while also taking into account the likelihood of climate related damage the property might be exposed to.

4. Returns Impacted or Deals Cancelled: As seen in the graph below, insurance premiums have skyrocketed over since late 2020 and early 2021. Many real estate deals have been killed or had their returns materially altered due to  to the drastic increase of the insurance premium. Investors will need to be wary they do not face sticker shock at closing. 

5. Asset Management: Property owners will need to ensure they have ample policy protection to face the increased risk of weather-related damage. They will also need to be proactive in mitigating risk across their portfolio and implement strategies to minimize rate increases upon renewal or when setting up a new policy.