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As Seas Rise, Your Coastal Home In Florida Could Lose Value. One Report Says 15% By 2030

Flooding from an October king tide in Miami Shores fills streets, sidewalks and driveways at its peak. Florida doesn't have flood disclosure laws, so home sellers don't have to tell buyers about previous flooding. TROPIC MOTION
The Florida Channel
Leon County Judge John Cooper on June 30, 2022, in a screen grab from The Florida Channel.

Increasing sea rise is going to water down the value of some of the most coveted and expensive real estate in Florida, and insurance rates will go up too.

That’s the conclusion of a pair of new reports calculating just how much of an impact climate change will have on Florida’s real estate industry.

A report from international consulting giant McKinsey released Thursday found that Florida homes subject to the risk of flooding could lose 5 to 15 percent of their value in the next decade, barring any significant changes to the market in that time. By 2050, that could leap to 15 to 35 percent.

In another Miami-Dade-focused report from Jupiter Intelligence, researchers found that moderate flooding of about a foot will affect nearly double the number of homes by 2050.

The reports tackle a relatively new topic in the financial world, one with big implications for residents in the most vulnerable state in the nation. It’s called climate risk, and it explains all the ways that the warming world will mess with global financial systems.

In McKinsey’s report, Florida was the case study for climate’s impacts on the real estate market.

“The question that we ask is if you look at this ecosystem that exists around real estate now, what happens if you throw in a changing climate? It starts to expose all these vulnerabilities inherent in the system,” said Mekala Krishnan, a senior fellow at the McKinsey Global Institute and co-author of the report. “It’s hard to know how any of these systems will play out.”

For one, the insurance market will have to adapt to the actual cost of insuring properties that now face a much higher likelihood of floods or stronger hurricanes. That means higher premiums for flood and windstorm insurance.

Mortgages may be more expensive to get, once banks realize that a home facing the literal prospect of going underwater isn’t a sound investment.

The repeated floods or storms could make buyers — both global mega investors and regular single-family homeowners — shy away from more vulnerable properties, dropping the value further.

Property values and the taxes associated with buying and selling real estate make up a sizable chunk of state and local budgets. That means these municipalities tasked with protecting their residents from more extreme events will have less money to do so.

Some speculators liken the coming market shift as climate change affects real estate to the mortgage crisis from a decade ago.

On Tuesday, the CEO of $7 trillion dollar asset management company BlackRock said the coming upheaval is “bigger” than the financial crisis. Principle for Responsible Investment, a UN-supported group with more than 500 global asset managers as members, warned of a “response by 2025”.

“We could start seeing the retreat of communities after shock events. We need to think about it because it’s going to be a slow process and we’re starting it now,” said Nidia Martínez, director of climate risk analytics at global risk management and insurance firm Willis Towers Watson.

It’s another sobering report for residents of South Florida, a community consistently pointed to as “ground zero” for the worst effects of climate change.

“I get this question all the time, ‘is South Florida doomed?’ My response is, South Florida is not doomed for a few reasons,” said Rich Sorkin, head of Jupiter Intelligence, the firm behind the Miami-Dade report.

He pointed out that only certain parts of the region are at risk. Coastal communities like Bal Harbour are more likely to lose value than high ground spots like Miami Gardens.

Because foreign investment is such a huge part of the real estate market, some high-end properties may remain more insulated from price changes.

Plus, many South Florida cities are doing their best to slow down the potential disruption by building new sea walls, pumps and raised roads. Miami Beach is investing in stormwater pumps across the island; Miami is reviewing its stormwater system to decide where to direct resources; Surfside is making new development build higher and contribute to a city fund for sea rise issues.

“Parts of South Florida are going to be just fine and parts of South Florida are doomed regardless of the infrastructure, and in some places, infrastructure will make a big difference,” Sorkin said.

Another impact to be factored in: rising insurance premiums as companies adjust their rates to account for sea level rise.

The National Flood Insurance Program, of which Florida holds 35 percent of all policies, is redesigning its rates to better reflect risk in 2021 in a process called Risk Rating 2.0.

“There’s always a price, unless you’re underwater of course. But you really don’t want to get there,” Martínez said.

Her Willis Tower Watson colleague, Senior Director of Disaster Risk Financing Simon Young, is presenting a panel on climate risk at the Florida Insurance Summit on Thursday. It’s the first time the topic has been the subject of a panel discussion at the annual conference. The main focus is on how to get premium prices, which are held down by state statute, high enough to account for real risk.

He predicts lawmakers will stop supporting the artificially low prices once flooding gets more common.

“The alarm bells are starting to go off where they need to,” he said.

Krishnan said the same thing applies to hurricane insurance. The models don’t include the latest science that shows climate change is making hurricanes more intense.

“Anyone who’s relying on their insurance for a proxy for risk 10 to 20 years out is just standing on sand,” said Sorkin. “Standing on sand on top of water.”

Jupiter’s analysis also showed that the expected losses on mortgages in Miami-Dade County could go from 1.24 percent in 2019 to 1.97 percent in 2050. Those numbers may seem tiny, but Sorkin said they represent a potentially big shift for home buyers. The higher that number is, the more a bank will charge for interest on a mortgage.

So how can South Florida avoid a financial crisis from climate risk?

The experts all pointed to the same things: invest in resilient infrastructure, build better and stronger, slowly raise rates for insurance, stop developing in risky areas and get all residents on board for the changes that have to take place.

“Unless a high percentage of voters make this their top priority, it’s very hard for cities, counties and the country to get the money they need to spend to combat this,” Sorkin said.

The larger-scale solution is to slow down the physical effects of climate change by pumping fewer emissions into the atmosphere. That will lessen the longer-term impacts of climate change but will do little for the next few years. Scientists say the immediate environmental changes are baked into the system, a belated response to decades of climate pollution.

“To remove the further build-up of risk beyond what is already locked in, there is this imperative to put fewer emissions into the atmosphere over time,” said Dickon Pinner, the global leader of McKinsey’s sustainability practice and co-author of the report.

This story was produced in partnership with the Florida Climate Reporting Network, a multi-newsroom initiative founded by the Miami Herald, the South Florida Sun Sentinel, The Palm Beach Post, the Orlando Sentinel, WLRN Public Media and the Tampa Bay Times.

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Alex Harris - Miami Herald