[REN #765] Real Estate Investing and Storm Threats

Picture of waves and storm for Real Estate News for Investors Podcast Episode #765

Storms and fires appear to be more threatening. New reports say, more and more people are in harm’s way because of population growth in high-risk areas. That’s lead to many scary headlines and concerns about potential damage from hurricanes, tornados, flooding, and wildfires. But don’t let that derail your portfolio plans. Being aware of the risks is just the first step in the due diligence you need to do as a real estate investor.

So, here’s the scary part, emergency management officials told the Wall Street Journal that development and population growth in areas prone to natural disasters will lead to more human casualties. (1) As more people migrate to coastal areas in the Southeast, more people will also be at risk of hurricanes. In the West, the risk of wildfire is growing as development pushes further into wildland areas. There’s also concern about an abundance of vegetation from winter rains that could turn into fuel this summer. In the mid-section of the country, tornadoes and floods can wreak havoc, like they have been along the banks of the Missouri and Mississippi Rivers.

Extreme Weather and Fire Conditions

The article says, extreme weather and fire conditions have already cost the nation $457 billion in just the last three years. And the risk is growing for more people. It says, the number of people living in coastal communities along the Atlantic and Gulf Coasts grew by about 8 million from 2000 to 2016. The U.S. Census put the 2016 total at 60 million. There are also millions of newer homes in areas where development is pushing into heavily-wooded fire-risk areas. The Journal says from 1990 to 2010, the nation gained about 13-million homes in these urban-wildland areas, and those homes house an additional 25 million people.

The corporate world is also calculating the anticipated cost of climate change. Risk disclosure company, CDP, put together data from almost 7,000 companies. It says, 80% of them anticipate major climate change impacts from bigger storms, warmer temperatures, and higher costs for greenhouse gas emissions. 215 of those companies are expecting to get walloped. Those companies have a total market capitalization of $17 trillion and are anticipating $1 trillion in damages over the next five years. That’s almost 6% of their value. Most of those companies are in the financial services sector.

The U.S. Forest Service is also warning about catastrophic wildfire risks, like the one that destroyed Paradise, California, last year. The agency says that a billion acres are vulnerable to that kind of fire. Forest Service Chief, Vicki Christiansen, says, wildfires are now a year-round risk. She told NPR, “When you look nationwide there’s not any place that we’re really at a fire season. Fire season is not an appropriate term anymore.” (2)

Her agency is hoping to reduce the risk by thinning forests and clearing brush but work crews are behind schedule due to weather delays and things like the government shutdown in December. It’s expecting to spend about $2.5 billion on fire-fighting efforts this year. That’s almost one $1 billion over budget.

Congress just passed a $19.1 billion disaster aid package, which was also signed by President Trump. The legislation was stalled in Congress for months, mostly due to Republican opposition to funding for Puerto Rico. The relief package will provide money for many areas already hit by natural disasters including wildfire victims in California and hurricane victims in the south and in Puerto Rico.

PG&E was one of the first corporate victims of wildfire destruction. Cal Fire determined that PG&E equipment sparked the deadly Camp Fire in Paradise. 85 people died, and 90% of the homes were destroyed. PG&E was facing billions in liabilities for that fire and others, and filed for Chapter 11 bankruptcy. It’s also working to prevent future wildfire disasters.

As of June 7th, it began a power shutoff program for communities with a high risk of wildfire. According to Construction Dive, it cut power to more than 22,000 customers in five California counties during the first weekend of the program. PG&E says crews surveyed 800 miles of de-energized power lines for weather-related damage, and found several spots that needed repair.

CoreLogic just came out with a report that 7.3 million homes could be affected by a storm surge along the Atlantic and Gulf Coasts. If they all got wiped out, it would cost $1.8 trillion to rebuild. (3)

Invest Wisely and Take Precautions

The climate change threat may be real, and that means there’s a higher risk for damage now than there has been in the past. As real estate investors, we can reduce that risk by taking steps to protect ourselves. As part of the purchase of a property, find one with a lower risk of storms, flooding, fires, and earthquakes, within the same region. If the risk level concerns you, make sure you are insured.

You can also do a few things to the property to reduce the risk. If it’s is located in a high-risk fire zone, trim trees and brush that could feed a fire. If hurricanes are a threat, install hurricane shutters. If there’s a fault nearby, retrofit the foundation.

Take whatever measures you need to take for peace of mind, and financial security. But don’t run in the other direction, and don’t bury your head in the sand. We all need a place to live, and for those who rent, landlords will remain an important part of the housing market – despite the climate change risks.

Links:

(1) Wall Street Journal Article

(2) Wildfire Risk: NPR

(3) Storm Report: CoreLogic

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