Real Estate’s Elephant in the Room
Severe floods are happening more often and real estate investors need to pay attention. The United States has a heck of a lot of heavily populated coastline that is exposed to rising seas. Even away from the coasts, water damage is one of the quickest and surest ways to ruin a building.
Alliance doesn’t have any properties directly on ocean waterfront, but we do own plenty in flood zones throughout the southern United States, so we’ve been thinking about this problem for a long time. A hurricane, or even heavy rain storm combined with poor road drainage, can be enough to drown a good investment..
That’s why flood risk is one of the core issues the Alliance team considers when we’re evaluating any new investment. To protect our capital, we take careful note of local geography, weather patterns, and drainage infrastructure at our properties. When we see risk factors, we we include the need for property improvements in the deal.
Since Alliance specializes in net lease properties, our tenants are often responsible for buying flood insurance, and we’re diliigent about making sure they keep their policies current. Depending on the circumstances, we often carry a second insurance policy on our own books. But even when the tenants bear the most direct risk, investors are always exposed too. Higher premiums reduce the amount of rent we can charge in a competitive market, and thus they also directly harm the resale value of a property.
Our understanding of “normal” flood risk gives the Alliance team a head start in preparing for real estate investing in an age of rising seas. If we can’t mitigate the risk of damaging floods with property or infrastructure improvements, we won’t invest.
Increased severe flooding is a story that is going to play out over decades, so there’s no need for panic. There is still time to adjust. But wise investors have already started factoring increased risk into their decisions right now. Nobody can say we didn’t see it coming.
