Hurricane and Environmental Effects on U.S. Real Estate Markets
Hurricane Dorian was the most intense storm on record to strike the Bahamas. It is considered the worst natural disaster in the country’s history. We asked Josh Sawislak, Former Senior Advisor, White House Council on Environmental Quality, how disasters impact housing development, pricing, and demand.
The first thing to consider is that not all storms are alike. Dorian was a powerful storm. It caused a great deal of destruction in the Bahamas, but it also moved very fast once it made U.S. landfall, moving offshore before it went up into Canada. In 2018, we had Hurricane Michael. That was also an incredibly powerful storm that caused a lot of damage in less populated areas of the Florida panhandle. In 2017, Irma and Maria destroyed much of Puerto Rico and the U.S. Virgin Islands due to high winds and a direct hit. All of these are wind events.
Wind vs. Water
In wind events, most of the damage is structural. We can build to a standard that protects us from most of those impacts. It’s an issue balancing the impact and the cost. There’s a famous picture from Hurricane Michael of a house in Mexico Beach, Florida. Michael wiped out an entire neighborhood, nearly everything is gone, a wasteland. One house is left standing, fully intact. That house was built to a much higher standard than its neighbors. It wasn’t required, but the owner of that house decided that they were going to make it more resilient.
We can do this more across the board. There’s a little town outside of Oklahoma City called Moore that set a tornado-force wind building code standard after they experienced a couple of EF5s, the highest level of tornadoes. Alabama is also adopting the Insurance Institute for Business & Home Safety’s (IBGS) FORTIFIED standard which is designed to make new and existing commercial buildings stronger against severe weather, including hurricanes and high wind. It’s not a requirement, but they’re giving builders an insurance discount if they implement it.
But let’s talk about the other kind of hurricane. Water events.
In 2018 we had Harvey, which was a much different storm, about 50 inches of rain or more in some places. The National Weather Service literally had to pick a new color for their maps because they’d never had to show that much rain before. Hurricane Florence in 2018 was another slow-moving storm in the Carolinas with a lot of flooding. Both Katrina and Hurricane Sandy were water events.
In a water event, the best prevention would be to not build in a hurricane zone at all. Water is tough. As we saw in Houston with Harvey, Katrina, and Sandy, the impacts are longer-term But the best ideas for dealing with water should be economically viable. You need to understand the risk and then “buy down” that risk. It’s enterprise risk management. When you put that together with economic development, you can create value.
For example, New York City is looking at how they can protect lower Manhattan. They plan to raise the shoreline along the southern tip of the island, a project that’s going to cost multiple billion dollars. But, if they push out the edge of the city and create new land that is rentable and they’ll have created revenue which can pay for the project.
The Economics of Weather Events
It’s economics 101. Pricing is affected in the areas where you have demand and scarcity. With Katrina, the damage was incredibly widespread and there was a lot of work needed for recovery. So much so, there was a huge labor shortage. You can bring the materials in, but it’s much harder to bring the labor in because then you must house and feed those people.
We had a tsunami in American Samoa about 10 years ago. It was a logistical nightmare to get things to American Samoa because it’s an island in the middle of the Pacific. You also have situations like 2017 and 2018 where you had so many storms in many different places that the capacity for rebuilding was constrained nationally. So, it can be both. It really depends on what’s going on in the market and the specifics of the storm that you’re dealing with.
Climate change is real. The markets aren’t learning how to price it, which means there’s a lot of opportunity for money to be made or lost if you don’t have a plan. My recommendation is to start thinking about this and incorporate it just like you do any other type of risk. But remember, it’s not just risk, it’s an opportunity as well, and –managed correctly– there’s plenty of money to be made.