Diving Into the Impact of Climate Change on Miami’s Multifamily Property Values
Diving Into the Impact of Climate Change on Miami’s Multifamily Property Values
Preliminary research indicates that both large and small apartment investors are aware of risks of natural disasters in Miami
When natural disasters strike, as they often do during the Atlantic hurricane season, wind and storm surges pose some of the greatest threats to human safety and properties on the U.S. East and Gulf Coasts.
The negative economic impacts of these storms have increased significantly in recent years. According to the National Oceanic and Atmosphere Administration, the economic and financial damage from Hurricane Ian in September 2022 reached $112 billion,the third-largest hurricane loss in U.S. history. The Florida Office of Insurance Regulation estimated that the state experienced a combined $14.4 billion in insured losses from Hurricane Ian and November 2022’s Hurricane Nicole.
Climate-related weather events such as hurricanes are not new, but some properties have more physical exposure to natural hazards than others. These risks are often shared among property owners, tenants, insurers, reinsurers and local and federal governments.
What is relatively new is more emerging research to help bridge a better understanding of the financial impacts from climate change and the resulting natural hazards.
For instance, one such discipline focuses on the impact on property values and addresses questions such as whether buyers priced climate risks and natural disasters into the prices they paid. Was the risk exposure already capitalized into the property value? Is there any measurable impact on value that follows a natural disaster? Are those impacts significant and long lasting or are they rather modest and short-lived?
To address these questions, CoreLogic’s research team joined forces with researchers from the real estate investment industry to develop a study[1] titled “The Price Effects of Natural Peril.” This research, which was funded by a grant from the Real Estate Research Institute (RERI), dives into the financial modeling of natural disasters on multifamily apartment properties in the Miami metro area, The researchers recently shared their findings with participants at RERI’s annual research conference in Chicago. Below are a few highlights from the study, with Figure 1 showing tropical cyclone activity in the North Atlantic Ocean over a 170-year period, and Figure 2 showing the annual number of U.S. mainland hurricane landfalls over the past 122 years.
A History of Tropical Cyclones in the North Atlantic: 1851-2021
U.S. Hurricane Landfall Activity: 1900-2022
It is important to remember that storms in the early years before the use of satellite technologies were likely underreported. According to Figure 2, there is no pronounced long-term trend in the annual number of major hurricanes in the mainland U.S. The North Atlantic Basin saw reduced hurricane activity in the 1970s and 1980s, mainly because of aerosols from industrial emissions in North America and Europe.[2] And since 2016, there has not been a single year without a major hurricane landfall or a near miss. Many scientists project that the North Atlantic Basin will have more category 4 and 5 hurricanes because of climate change, as well as future greenhouse gas emissions and energy consumption.
Figure 3 projects Miami’s hurricane hazards under different representative climate scenarios, ranging from the baseline to RCP4.5 and RCP8.5 – where yellow, brown and red shading indicates areas with low, middle and high levels of risk exposure, respectively.
Projections of Miami’s Hurricane Risks Through 2050
The baseline scenario is formed on historical climate research over the past 120 years, while RCP (representative concentration pathway) climate scenarios also factor into projected future carbon-emission scenarios issued by the Intergovernmental Panel on Climate Change. Charts highlight potential risk escalations under various climate-change scenarios.
In addition, the maps underscore that the highest concentration of risk exposure are in coastal areas and in the wetlands of the Everglades west of Miami. Farther-lying inland areas are at lower risk, as many high-risk spots are concentrated about 12 miles (20 kilometers) from the Atlantic.
Distribution of Baseline Annual Damage Ratios from Hurricane Hazards
Among the nearly 500,000 multifamily properties analyzed in the study, the expected average annual damage ratio was 0.7342% with a standard deviation of 0.242%. The average annual damage ratio calculates the expected loss per year in property value caused by hurricane winds and storm surges and is measured as a percentage of the total replacement cost of the property. When compared to the overlaying smooth symmetrical bell-shaped curve in Figure 4, it is notable that there is a much higher concentration of properties at high risk of natural disasters in Miami than at low risk.
Although not shown here, the expected average annual property damage ratio of natural disasters in Miami will rise to 0.935%, with a standard deviation of 0.309% under the RCP4.5 climate scenario, which is based on a projection of reduced carbon emissions by 2050. That number could further rise to 1.138%, with a standard deviation of 0.376% under RCP8.5 if carbon emissions continue to increase exponentially through the rest of this century, with no reduced green technologies or emission regulations.[3]
Of course, one of the bigger questions that the research seeks to answer is whether the property market has calculated these perils’ adverse economic and financial impacts into housing prices. Perhaps owners will be forced to discount prices in anticipation of financial losses from natural disasters. Despite plenty of research that constructs relatively rigorous financial models, it remains a significant challenge to understand natural hazards’ capitalization rates that are independent of other uncontrollable factors that can affect property values.
To that end, the study separated Miami metro multifamily properties into high- and low-risk groups. This methodology was used under the reasoning that if there are any negative impacts on housing price fluctuations, they are more likely to impact properties that have greater exposure to hurricane-related risks, and thus potentially larger financial losses than those with relatively small or modest risk exposures.
The study found evidence of a consistent and modest discount for multifamily properties with high-risk exposure compared with their low-risk counterparts between 2005 and 2022. Research also indicates that large and smaller apartment investors alike are both aware of these catastrophe risks.
The RERI study offers more results and detailed commentary. CoreLogic will share new insights on the subject as they become available, including research on the impacts of hurricanes on single-family homes in South Florida.
[1] The study is a collaboration by Edward F. Pierzak from Nariet and Yanling G. Mayer and Justin M. Brolley from CoreLogic. Not discussed here, they study also examines the impact of earthquake perils on the pricing of multifamily apartments in the Los Angeles metro area.
[2] Rousseau-Rizzi, Raphaël, & Emanuel, K, 2022: Natural and anthropogenic contributions to the hurricane drought of the 1970s–1980s. Nature Communications, 13 (1).
[3] CoreLogic’s Risk Quantification and Engineering (RQE) models calculate property-level average annual damage or loss estimates, as well as annual probability exceedances, such as, 100-year losses. Scenario and average annual damage and losses can be calculated for individual property sites, geographic aggregates and portfolios of residential and commercial properties.
