Floods a growing risk to commercial real estate, study finds

More frequent and severe floods spurred by climate change are poised to wreak major damage to commercial real estate in the U.S. over the next 30 years, causing significant economic harm, a new study finds.

Damage to businesses, stores and apartments could increase 25 percent between 2022 and 2052, hitting nearly $17 billion per year within three decades, according to a groundbreaking joint study by commercial engineering firm Arup and the nonprofit First Street Foundation.

But far larger than the direct damage are the spillover impacts as stores close, offices furlough workers and families — who may themselves be working from home — are forced to relocate. These financial impacts are estimated to rise to $63 billion by 2052, a nearly 30 percent increase, as the number of lost business days rises from 3.1 million per year to 4 million.

“Commercial properties are an especially vulnerable point in our economic ecosystem, as damage and closures to these properties has significant direct and indirect impacts on local and regional economies,” Matthew Eby, executive director of First Street Foundation, told The Hill.

These rises come on top of an already heightened flood risk. Next year, about 730,000 retail, office and apartment or condo buildings will face the risk of floods in the continental U.S., according to the report. That is expected to result in $13.5 billion in direct damages and about $50 billion in additional damage.

The study’s findings are available for free for noncommercial use.

As global heating makes the atmosphere warmer and increases its capacity to store moisture, it can create slow-moving juggernauts like 2017’s Hurricane Harvey and this year’s Ida, or storms like the one that dumped 17 inches of rain in Tennessee within 24 hours in August.

The increasing risk from flash floods — like those this year that ripped out the cores of small towns and inundated urban industrial centers in Germany, China and the Pacific Northwest — means that around 8 percent of existing buildings that are currently not at risk will be considered dangerous investments by 2052, the report found.

That 8 percent average belies the fact that both the current risk and growth in damage is far more concentrated in certain areas, like along the Gulf and East coasts as well as with inland pockets along the Appalachian tributaries of the Mississippi River. 

Coastal communities like Texas’s Bay City, Florida’s Cape Coral and Louisiana’s New Orleans face three to nine times the economic damages from flood-shuttered commercial real estate in 2052 as they do today.

On the state level, Louisiana is projected to have the heaviest impacts, with economic damages increasing 190 percent over the next 30 years. It is followed by Florida at 74 percent, Delaware and South Caroline at 48 percent each and Texas at 34 percent.

The report parallels February findings from First Street Foundation that 4.3 million residential homes have “substantial” flood risk and that covering that risk through the National Flood Insurance Program would require rate increases of 4.5 times for 2021 and 7.2 times to cover the risk by 2051.

Though First Street doesn’t make specific policy recommendations, Eby said he hopes the latest report “will guide policymakers in prioritizing investment in areas where exposure to flood risk and local economic impacts are high,” as well as guiding asset managers on which areas and properties are most in need of mitigation. 

“Until we know where the risk is, how severe it is, and how it’s being impacted by a changing climate, we’re powerless to take any steps to protect communities, properties, or individuals,” Eby said. 

The impact of flooding cuts across socioeconomic groups and includes indirect effects that can spread across entire regions, he added, stressing that the findings mean policymakers need to “create policies that are as broad in scope [as the dangers] in order to protect everyone.”