How Climate Change Affects Real Estate Investments

The climate has long been one of the most intimidating factors that buyers have to consider before investing in real estate in a particular area. When investing in a commercial building in California, you want to make sure that it can withstand a 6.0 magnitude earthquake. If you are looking to buy a bungalow in North Carolina, be sure to consider hurricane season June through November. Buying a small rental property in the heart of Nebraska may seem like a great idea, but Tornado Alley may not be the best investment location. These are all things that serious real estate investors will weigh before sinking their funds into a property. However, with climate change becoming more evident in recent years, investors should now consider how the change in the weather may affect their already existing investments.

Physical risks of climate change are those that would come as a result of traumatic weather conditions. Rising sea levels due to persistent rain can cause flooding in coastal areas. Real estate property on or near the coast is more susceptible to flooding and water damage. Another result of severe climate change is rising temperatures in dry environments. Over time, drought from dry weather can cause an unsettlement in the foundation of a building. A more severe result of rising temperatures in dry environments is wildfires that spread quickly and expansively, causing immaculate damage to any structure in the path. Scientists at the NASA Earth Observatory theorize that the rising temperatures of climate change will also increase the ferocity of thunderstorms. Severe thunderstorms come with manifestations like high winds, flash flooding, lightning strikes, and in some cases, even tornados – all of which will greatly threaten the condition of a real estate investment. Ultimately, the increased risk of physical damage to real estate will lead to increased insurance costs to protect the structure against these natural disasters. The greater the risk and the odds of occurrence, the more costly the insurance policies will be to protect the home as it is more likely of an event. In the unfortunate event that a building is physically damaged as a result of Mother Nature’s conquest, the costs to repair the damage can be monumental, even with insurance.     

Aside from a physical increase in temperature around the globe, climate change also comes with transition risks. These are risks that can affect structure over time, not necessarily the result of one bad storm or single event. Transitional risks most affect the cost of your real estate investment. Overall, climate change can eventually cause a dwindle in property values for a number of reasons. Home policies that combat the effects of climate change are not only inflating as the issues become more prevalent, but organizations are imposing regulations to slow the progression of the change. These regulations are costly to investors and required. Expenses like HOA fees, local codes, and state-wide taxes could expect to be augmented.

If the rising cost of maintaining a rental property becomes greater than the profits, the property would then not be worth the investment. Climate change is an inevitable factor that REIT’s should consider in their future real estate endeavors.   

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