From Storms to Codes: Climate Change's Impact on Real Estate

Climate change is no longer a distant concern for real estate investors. It’s a present-day factor reshaping how projects are underwritten, insured, and built. From intensified hurricanes and wildfires to evolving building codes and surging insurance premiums, climate-related risks are now central to development decisions.

Whether you're evaluating a new multifamily project or reassessing an existing portfolio, understanding how climate risk influences underwriting is essential. In this article, we’ll explore how climate-related factors are altering site selection, insurance costs, building requirements, and financial projections.

Site Selection: Climate Risk as a Core Variable

Traditionally, developers prioritized factors like zoning, demographics, and proximity to amenities when selecting sites. Today, climate resilience is equally critical.

Regions prone to wildfires, hurricanes, or flooding, such as California, Florida, and Louisiana, are experiencing increased insurance costs and stricter building codes. In some cases, insurers are withdrawing from these high-risk markets, leaving property owners with limited coverage options.

Moreover, areas previously considered low-risk are now facing unexpected climate events. For instance, flash floods in regions without a history of flooding have caught homeowners and developers off guard, leading to significant financial losses.

Rising Insurance Costs and Coverage Challenges

Insurance premiums are escalating nationwide, with climate change being a significant driver. Between 2021 and 2024, homeowners insurance rates rose by 27% nationally, with even higher increases in high-risk areas.

In states like California and Florida, some insurers have ceased offering coverage altogether, citing unsustainable losses from wildfires and hurricanes. This trend forces property owners to seek coverage from state-affiliated insurers of last resort, often at higher costs and with limited protection.

Developers must factor these rising insurance costs into their financial models, as they can significantly impact project viability and returns.

Evolving Building Codes and Construction Costs

In response to increasing climate risks, many jurisdictions are updating building codes to enhance resilience. For example, Florida's building codes now require structures to withstand higher wind speeds and incorporate fire-resistant materials.

While these measures improve safety and durability, they also lead to higher construction costs. Developers must balance the upfront expenses of meeting stricter codes with the long-term benefits of reduced damage and insurance premiums.

In Alabama, homes built to the Fortified standard, or a set of construction guidelines aimed at increasing resilience, experienced 55-74% fewer insurance claims during Hurricane Sally in 2020.

Financial Modeling: Adjusting for Climate Variables

Climate-related factors are introducing new complexities into financial modeling for real estate projects. Developers must now account for:

● Increased Insurance Premiums: Higher costs can erode profit margins and affect affordability.

● Potential for Stricter Building Codes: Anticipating future code changes can help avoid costly retrofits.

● Market Perception and Demand: Properties in high-risk areas may face reduced demand, affecting occupancy rates and rental income.

Incorporating these variables into pro forma analyses is essential for accurate forecasting and risk assessment.

Risk Mitigation Strategies

To navigate the evolving landscape, developers can adopt several strategies:

● Invest in Resilient Construction: Building to higher standards can reduce damage and insurance costs.

● Diversify Geographic Portfolio: Spreading investments across regions can mitigate localized climate risks.

● Engage with Insurers Early: Collaborating with insurance providers during the planning phase can lead to better coverage terms.

● Stay Informed on Policy Changes: Monitoring legislative developments ensures compliance and readiness for new requirements.

Conclusion

As climate-related challenges intensify, developers must adapt to a new reality where environmental risks are integral to project planning and execution. By proactively addressing these factors through careful site selection, understanding insurance landscapes, adhering to evolving building codes, and adjusting financial expectations, developers can mitigate risks and seize opportunities in a transforming market.

At Makaan Investment Group, we are committed to guiding our partners through these complexities, ensuring that investments are both resilient and profitable. Contact us today to learn how we can help you navigate the evolving real estate landscape.