Rising Sea Level and the Impact on the Real Estate Market
Image Source: Forward Florida
“Climate change is one of the most pressing issues facing the South Florida commercial and residential real estate market in the next decade. The discussion about the effects of climate change on the real estate market is slowly coming to the forefront of the issues facing our industry. The real estate industry should prepare for a disruption in the market as a result of rising sea levels in the next decade.
Discussions among policymakers have begun to yield some results. A few months ago, the U.S. Army Corps of Engineers began a three-year study to assist Miami-Dade County in finding solutions to minimize the effects of rising sea levels. At the local level the city of Miami, Miami Beach, and Miami-Dade County have taken steps to address the impact to their communities. Despite some preliminary steps by policymakers, we are left to ponder if they are doing enough to address this pressing issue. At a statewide level there seems to be a rising concern that building codes need to be updated to protect coastal properties. The effect of Hurricane Michael on the Florida panhandle in 2018 nudged local authorities to update the building code, including requiring that coastal homes be built at a higher level. Nevertheless the measures so far, appear to be limited to resolving the short-term issue without any plans to address the impact to the community in the next 50 or 100 years.
Notwithstanding the actions by policymakers, it is evident that there will be an impact to the real estate market. Some analysts have already speculated that high-end property values in the coastal areas of Miami Beach have gone down at least 10% in the recent year due to fears over rising sea levels.
Despite predictions about reduced prices, the general market sentiment is that buyers are not yet making their decisions based on the impact of the rising sea level. Accordingly, in the short term, if there is any disruption in the market for coastal properties, it will most likely be due to either increase in insurance costs or limitations on financing from lenders. The flood maps maintained by the National Flood Insurance Program (NFIP) are finally scheduled to be updated in May of this year. The NFIP is also scheduled to redesign its rates in 2021, which will surely lead to an increase in the cost of policies of properties located in low-lying and coastal areas. The inclusion of new areas in the NFIP’s maps along with an increase in the cost of policies would certainly cause a decline or disruption in the demand for properties in these areas. So far there does not seem to be any reaction from the financial sector. Lending institutions continue underwriting thirty-year mortgages without any apparent apprehension over the possibility of declining property values or defaults caused by damage to the assets. Another reason the coastal area market may be affected is the impact of some of the suggested solutions. One of the preliminary suggestions by the Army Corps is to add a storm surge wall along the coastline. It is undisputed that the addition of such a surge wall would certainly affect the property values of the coastal properties. Aside from the aesthetic impact, the involvement of the Army Corps in such a project would undoubtedly be sufficient to raise concerns among buyers and thus have a secondary impact on the buyer’s side of the market. The report on the study from the Army Corps is expected in 2021 along with recommendations. The implementation of the surge wall is just one of the many preliminary suggestions discussed between the Army Corps and the county authorities.
Despite the increase in discussion over this topic, there does not appear to be a market-wide effect on real estate prices. The single-family home market is still robust and active. The market for high-end condominiums is flat, but those effects are most likely ascribed to an over-supply of units given the amount of buildings that have been completed in the past few years. On the development side there is still strong demand for properties on or close to the coastline. Given that developers are responsive to buyer’s demands, there has been virtually no effect on real estate development or on the financing for said developments. It is likely that the effect on financing of real estate developments may never come given that these projects are typically completed in short terms.
The rising sea level is coming slowly, but we may see effects in the market sooner than expected. It is important for all parties involved in the real estate market to consider these factors when planning long-term investment or development strategies. Given the lack of response so far from the buyers, it is crucial for policymakers to step up and develop long-term strategies to ensure that the effects of rising sea on the real estate market are minimized. If the real estate market is affected and the policy side measures are not sufficient to significantly reduce these effects, the local economy could be severely affected.”
Sebastian Jaramillo is a partner at Wolfe Pincavage in Miami. He leads the firm’s real estate practice group and is a board-certified specialist in real estate law. Contact him at sebastian@wolfepincavage.com.