By ESG Analyst Matthew Redmond
Climate change is fundamentally transforming real estate, influencing where we live, how properties are valued, and the risks of ownership. Rising sea levels, intensifying weather events, and increasing insurance costs make some areas increasingly vulnerable or uninhabitable. As the challenges grow, the real estate industry needs to innovate, adopt sustainable practices, and learn how to build for a more resilient future.
Rising Sea Levels
Rising sea levels are one of the most visible and concerning consequences of climate change for real estate. The Intergovernmental Panel on Climate Change (IPCC) estimates that sea levels will rise by 43 to 84 centimeters by the end of the century, depending on emission levels. While this may not seem significant, many low-lying areas—particularly cities—are highly vulnerable to flooding. Cities like New York, Shanghai, and Mumbai each have over one million residents exposed to coastal flooding. Furthermore, in terms of the cities with the highest value of assets at risk, Miami, New York, and Guangzhou are projected to have over $1 trillion in assets exposed to flooding in the coming decades. Rising sea levels threaten to reduce habitable space and undermine the value of real estate in these areas.
Many cities are investing in infrastructure to mitigate flooding in response to these risks. These projects often include floodwalls and other protective systems with substantial costs. For instance, New York City has approved a $1 billion, 2.4-mile (3.9-kilometer) flood protection system along the east side of Manhattan. However, this project may be just the beginning. In 2023, the Army Corps of Engineers proposed a $52.6 billion project to protect New York City, featuring 50 miles of seawalls from 12 to 20 feet tall.
While this ambitious project is controversial due to its enormous cost and potential impact on the city’s sightlines, it highlights the graveness of adapting to rising sea levels. Without taking significant protective measures, the costs associated with flooding, including property damage, economic disruption, and loss of habitable land, could be far more significant.
Weather Events
There are also high potential risks of property damage associated with weather events related to climate change:
Wildfires
Already resulting in billions of dollars in damage annually, are expected to become more frequent and intense. A U.S. congressional report estimated that wildfires cost the American economy $893 billion, including $147.5 billion in direct property damage and $337.5 billion in diminished real estate values. As climate change accelerates, these costs are projected to rise further.
Tropical cyclones
The strong winds from these storms can tear off roofs and topple power lines, while storm surges and inland flooding can flood or destroy buildings. According to the National Oceanic and Atmospheric Administration (NOAA), the average tropical cyclone already causes $22.8 billion in damages, and this figure is likely to grow with the increasing severity of these events.
Heat-related stress and freeze-thaw cycles
These events can degrade buildings by causing materials to expand and contract repeatedly, leading to cracking and structural weakening over time.
Insurance
As climate risks to real estate grow, so do the associated costs, and insurance premiums are expected to rise significantly. This increase comes from the growing volume and value of insurance claims linked to damage caused by climate change. Homeowners, business owners, and other property owners in high-risk areas will face a difficult choice: pay prohibitively high insurance premiums or risk assuming the costs of property damage out-of-pocket.
An even more troubling development is the possibility of insurance companies simply leaving markets they consider “uninsurable,” where the cost of providing coverage outweighs potential profits. In these cases, property owners may find themselves without any insurance options, leaving them extremely vulnerable.
This is already happening. In 2023, Farmers Insurance exited the Florida market, primarily due to the risks of hurricanes. Similarly, State Farm announced it would not renew thousands of home insurance policies in California, largely because of escalating wildfire risks. Examples such as these demonstrate the growing challenges climate change poses to insurance in real estate.
What can the Real Estate Industry Do?
The real estate industry is entering uncharted territory, as areas, once deemed safe and desirable, are increasingly becoming uninhabitable due to the growing impacts of climate change. Real estate buyers must now carefully consider how to protect their properties against the growing risks posed by climate change.
Recognizing the urgency, the real estate website Zillow has introduced a new feature highlighting the climate risks of properties listed on its platform. Partnering with First Street, a climate-modeling company, Zillow assesses properties based on five risk categories: flooding, wildfire, wind, heat, and air quality. These assessments include 15-to-30-year projections, which align with the typical timeline of a fixed mortgage.
However, this innovation fails to address the root problem: climate change is making an increasing number of properties more vulnerable and, in some cases, uninhabitable. Even as investors retreat from high-risk areas, millions of homes, businesses, agricultural lands, and industrial sites remain at significant risk.
Tackling this crisis requires urgent climate action across all sectors, including real estate. The real estate industry is a major contributor to global carbon emissions, accounting for 40% of total emissions. 70% of this stems from building operations, while 30% comes from construction. As such, the sector holds substantial potential to mitigate emissions and play a pivotal role in combating climate change.
The real estate industry can become more sustainable by adopting high-energy efficiency standards, electrifying building systems, and using carbon-conscious materials like wood. However, these measures alone are insufficient. Decarbonizing the sector will require completely transforming energy systems and industrial processes. Buildings must be heated, cooled, and powered by renewable energy, while construction materials—especially concrete, which contributes 8% of global emissions—must be produced sustainably.
The Future
The relationship between climate change and real estate is both complex and urgent. Rising sea levels, severe weather events, and increasing insurance costs are reshaping the real estate industry, challenging property owners, investors, and communities to adapt. While these risks are significant, they also present opportunities for innovation. By embracing sustainable practices, improving infrastructure, and rethinking how and where we build, the real estate industry can play a crucial role in mitigating the impacts of climate change and creating a more resilient future for generations to come.
References
- 40% of Emissions Come from Real Estate; Here’s How the Sector Can Decarbonize. https://www.unepfi.org/themes/climate-change/40-of-emissions-come-from-real-estate-heres-how-the-sector-can-decarbonize/. Accessed 1 Dec. 2024.
- Cassidy, John. ‘The Home-Insurance Crisis That Won’t End After Hurricane Season’. The New Yorker, 14 Oct. 2024. www.newyorker.com, https://www.newyorker.com/news/the-financial-page/the-home-insurance-crisis-that-wont-end-after-hurricane-season.
- Committee, United States Joint Economic. Climate-Exacerbated Wildfires Cost the U.S. between $394 to $893 Billion Each Year in Economic Costs and Damages – Climate-Exacerbated Wildfires Cost the U.S. between $394 to $893 Billion Each Year in Economic Costs and Damages – United States Joint Economic Committee. https://www.jec.senate.gov/public/index.cfm/democrats/2023/10/climate-exacerbated-wildfires-cost-the-u-s-between-394-to-893-billion-each-year-in-economic-costs-and-damages. Accessed 1 Dec. 2024.
- Nicholls, R. J., et al. (2005). Ranking of the world’s cities most exposed to coastal flooding today and in the future. OECD. https://climate-adapt.eea.europa.eu/en/metadata/publications/ranking-of-the-worlds-cities-to-coastal-flooding/11240357/@@download/file
- ‘Mayor Adams Completes First Section of East Side Coastal Resiliency Project, Taking Steps to Protect’. The Official Website of the City of New York, 17 Oct. 2024, http://www.nyc.gov/office-of-the-mayor/news/772-24/mayor-adams-completes-first-section-east-side-coastal-resiliency-project-taking-steps-to.
- read, J. Arky 4. min. ‘How Zillow’s Climate Change Risks Feature Could Save You Money On Your Next Home’. Yahoo Finance, 17 Nov. 2024, https://finance.yahoo.com/news/zillow-climate-change-risks-feature-170044888.html.
- — ‘How Zillow’s Climate Change Risks Feature Could Save You Money On Your Next Home’. Yahoo Finance, 17 Nov. 2024, https://finance.yahoo.com/news/zillow-climate-change-risks-feature-170044888.html.
- Real Estate Strategy in the Climate Change Era | McKinsey. https://www.mckinsey.com/industries/real-estate/our-insights/climate-risk-and-the-opportunity-for-real-estate. Accessed 1 Dec. 2024.
- Schneider, Benjamin. ‘A New Plan to Save NYC From Flooding Would Be a Disaster—Here’s Why’. Architectural Digest, 26 June 2023, https://www.architecturaldigest.com/story/new-plan-save-nyc-flooding-would-be-disaster-heres-why.
- Srubar, Mark Fischetti, Nick Bockelman, Wil V. ‘Solving Cement’s Massive Carbon Problem’. Scientific American, 1 Feb. 2023, https://www.scientificamerican.com/article/solving-cements-massive-carbon-problem/.