The impact of Hurricanes on the value of commercial real estate.

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Date: July 2021
From: Business Economics(Vol. 56, Issue 3)
Publisher: Springer
Document Type: Article
Length: 4,800 words
Lexile Measure: 1470L

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Abstract

Commercial real estate investors prefer coastal, gateway, markets for liquidity, demand density, and durable returns. Yet, these areas are more vulnerable to the effects of climate change from more intense and frequent weather events such as hurricanes and typhoons as well as to gradual changes such as sea-level rise. Recognition is growing of the risks that these events pose to investment performance, but little is known about how this risk has impacted property values and returns when an event such as a hurricane occurs. This is the first study to analyze the impact on property values and returns from hurricanes causing the most significant damage by value over the past 30-plus years throughout the nation. Using individual property data from the National Council of Real Estate Investment Fiduciaries database, we find a significant impact on the value and rates of return, after accounting for any additional capital expenditures for repairs, for properties that are in areas impacted by a hurricane, relative to areas that were not impacted by a hurricane. These impacts vary by property type and can last for several years after the hurricane hit land in the area.

Keywords Real estate * Investment * Property risk ? Hurricane * Climate change

1 Introduction

Investor preferences for coastal, gateway, markets mean that many assets held by real estate investors are in cities more vulnerable to the effects of climate change. These effects range from more intense and frequent weather events such as hurricanes and typhoons to gradual changes such as sea-level rise. Recognition is growing of the risks that these events pose to investment performance. Recent weather events caused significant physical damages to properties and infrastructure. In 2017, the year Hurricanes Harvey and Maria hit the United States and storms battered northern and central Europe, insurers paid out a record $135 billion globally for damage caused by storms and natural disasters. This figure does not represent actual damages, which in the United States alone which equaled $307 billion, according to National Oceanic and Atmospheric Administration estimates.

For leading real estate investors and investment managers, the need to understand and develop strategies to address climate-related risks needs to be understood and prioritized.

Yet little is known about how this risk has impacted property values and returns when an event such as a hurricane occurs. The impact extends beyond the direct damage to the property. An increase in the perceived risk of hurricanes can result in a reluctance by institutional investors to add capital to that area, which can lead to a negative impact on property values and returns well after the hurricane to all properties and property types in the area that was impacted by a hurricane. This is the first study to analyze the impact on property values and returns from all the significant hurricanes that occurred over the past 30-plus years throughout the nation. We find that there has been a significant impact on the value and rates of return, after accounting for any additional capital expenditures for...

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Gale Document Number: GALE|A673455234