CBRE
By 2050, U.S. losses from flood damage to commercial real estate (CRE) are likely to average more than $1 billion per year and owners of apartment buildings in low-lying coastal areas could collectively face average annual losses above $190 million, according to a new report from CBRE Group, Inc. Additionally, market disruption following extreme flooding events will likely cost CRE owners additional hundreds of millions of dollars each year.
“American cities are among the most vulnerable in the world to flood loss because, as a wealthy nation, the U.S. has a high overall value of assets in low-lying coastal areas, but we have minimal protective measures in place relative to other wealthy nations in Europe and Asia,” said Quinn Eddins, Director of Research and Analysis, CBRE. “One of the things this study makes evident is that as costly as it may be to build up our flood defense infrastructure, inaction will be far more costly. We also need to rethink land-use policies and building practices that encourage development in high-risk coastal areas.”
The report, “Rising Vulnerability to Floods Risks Devastating Property Losses in U.S. Cities,” authored by Mr. Eddins, draws on a 2013 article in the journal Nature Climate Change authored by Stephane Hallegatte of the World Bank, along with data from the National Flood Insurance Program (NFIP), to develop a clearer picture of how the CRE market in particular will be affected by flooding in coastal cities as a result of population growth, coastal development, climate change and human-induced subsidence. Using New Orleans as a case study, the report illustrates the long-term “market disruption” effect of a major flooding event on one city’s multifamily market.
In addition to property damage, highly destructive flooding events can cause long-lasting disruption to metropolitan populations, economies, and social structures, compounding losses incurred due to physical damage alone. Hurricane Katrina’s impact on the New Orleans apartment market serves as a good example.
“It was years before average apartment rents and revenue recovered to pre-Katrina levels, with apartment owners incurring approximately $234 million in rent losses collectively between 2005 and 2011 as a result of market disruption,” said Mr. Eddins.
Commercial real estate owners can take a number of steps to reduce their exposure to future flood losses including taking flood exposure/losses into account when allocating funds across markets and evaluating potential investments in high-risk areas; installing emergency generators and sump pumps; purchasing supplemental flood insurance coverage; and bearing increasing future flood losses in mind when developing in high-risk areas.