Rising sea levels put Miami, New York at greatest risk of severe and extreme flooding in commercial properties

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An earlier version of this article incorrectly mentioned potential damages in the billions. This article has been corrected.

According to a new DBRS Morningstar report, billions of dollars worth of office buildings, shopping centers and apartment buildings in coastal cities across the United States are at risk of major flooding as sea levels rise. mounted.

The ratings agency looked at a snapshot of around 47,000 buildings it monitors in the roughly $670 billion commercial mortgage bond market and found nearly 5,000 were at risk of severe flooding or extreme, given the dramatic pace of climate change in recent decades.

In total, it fixed about $539 billion in mortgage bond trades that the agency considered to be at risk from severe or extreme flooding, leaving only a fraction of the market safe from threat.

“Investors and underwriters no longer have the luxury of simply checking to see if a property is outside FEMA’s 100-year flood zones and verifying that there is evidence of flood insurance,” wrote Kevin Augustyn and his rating team in a new report.

Instead, the team looked at the National Oceanic and Atmospheric Administration’s latest projections for sea level, which indicate an additional rise along the US coast of 10 to 12 inches by 2050, or as much than the total increase measured over the past 100 years.

Flood hazards helped illuminate this map, which shows Miami leading the nation with an estimated $1.1 billion in structural damage at risk due to flooding in offices, retail and multi-family buildings as as sea levels rise, according to the report, which relies on data from Arup and the First Street Foundation.

Miami and New York top the list of cities whose commercial buildings are most at risk from rising sea levels.

Sources: Arup Foundation and First Street

New York had about $582 million in flood damage on the line at similar properties, followed by about $450 million in Pittsburgh, $330 million in Boston, and about $280 million each in Houston and San Francisco. The total value of buildings at risk in these cities would be much higher.

“Although not entirely coastal, Pittsburgh is particularly susceptible to flooding because the city sits at the junction of three rivers,” the report said.

Heavily exposed

Climate change has moved rapidly, as evidenced by the meteoric rise in billion-dollar weather and climate disasters since the 1980s, making historical data “less accurate”, according to the DBRS Morningstar team.

Additionally, commercial property owners can get nationwide flood insurance coverage from the Federal Emergency Management Agency of just $500,000 for a building and $500,000 for building contents, according to the report, even though many key properties in major cities have been financed with hundreds of millions of dollars in mortgage debt. The report says additional cover should be purchased from private insurance markets.

To help investors better understand their potential exposure to sea level rise, the DBRS Morningstar team found 4,704 buildings at risk of extreme and severe flooding (see chart) in the bond trades it evaluate. The following breaks down the exposure by type of operation.

Most commercial mortgage bonds rated by DBRS have some weather-related flood risk.

DBRS Morningstar

While the commercial mortgage bond market finances only a cross-section of buildings nationwide, the DBRS Morningstar report still provides a grim insight into the almost unavoidable flood risks most investors face.

Nor is it the only risk, especially with the adoption of flexible working arrangements. Before the pandemic, lenders often offered investors “single-borrower” commercial mortgage bond deals, in part because they frequently helped finance top property owners looking to build, buy or refinance the hottest office towers. New York dears.

The pandemic has upended that view, with office buildings still only 43% occupancy more than two years into the COVID crisis, according to Kastle Systems’ latest weekly average across 10 cities.

With this backdrop in cities like San Francisco, lenders and investors are increasingly wary of financing office buildings.

See: As Twitter rethinks its footprint in San Francisco, a bigger $9 billion question looms over the city’s office market

Property owners will also face significantly higher borrowing costs as their debt matures, with the benchmark 10-year Treasury rate TMUBMUSD10Y,
3.414%
nearly 3.4% on Tuesday, and with the Federal Reserve set to pull the trigger for another giant rate hike next week in a bid to quell runaway inflation, while risking triggering a potential recession.

Lily: Any doubt that the Fed will raise rates by 75 basis points next week has disappeared after the searing US inflation data

U.S. stocks sagged on Tuesday after August inflation data turned hotter than expected, with the Dow Jones DJIA Industrial Index,
-3.94%
losing nearly 1,300 points, the S&P 500 SPX,
-4.32%
closed down 4.3% and the Nasdaq Composite Index COMP,
-5.16%
5.2% drop. This is the worst daily decline for all three indices since June 11, 2020, according to Dow Jones Market Data.

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