Rising Tides: How Concerned Should Investors Be?
Industry Trends

Rising Tides: How Concerned Should Investors Be?

According to Climate Central, Florida has more than 3.5 million people at risk of coastal flooding due to rising sea levels. This number is expected to rise to 4.6 million by 2050. While South Florida is the poster child for coastal flooding due to global warming, it’s not the only American city experiencing the unwelcome phenomena. Boston, Charleston and San Francisco are just a few of many United States cities to experience so-called “king tides,” or the highest tides of the year.

King or perigean tide flooding occurs once or twice a year, and is caused by the alignment of the increased gravitational pull of the sun and the moon when they’re closest to the Earth. King tide flooding is a natural occurrence but its effects are exacerbated by global warming-induced sea level rise. A few inches make a big difference when it comes to tidal flooding. The flooding tends to be worst in South Florida in September.

“It’s just part of astronomy. It’s not magic; it’s going to happen every year. Global warming heats up the oceans, causing the thermal expansion of the oceans and also melting glaciers, which adds water to the oceans and raises the sea level even further,” says Albert Slap, president of Coast Risk Consulting, a Florida-based company which offers detailed online assessments of a property’s flood risk.

And while coastal flooding due to sea-level rise is also a social and political problem, real estate investors interested in coastal properties need to be informed about its impacts or risk being swamped by dwindling property values.

Some Buyers Concerned; Builders, Not So Much

Despite the national publicity that king tide flooding in South Florida has generated, local Realtors say most buyers don’t seem overly concerned. “I haven’t seen contracts get canceled because of them, but there have occasionally been buyers that decide not to come,” says Nancy Corey, branch manager for the Miami Beach Office of Coldwell Banker Residential Real Estate.

“The buyers in our market are discretionary buyers, and they tend to be smart and well educated, so they will make a decision based on what it is that they want, based on the data that becomes available for them, or sometimes they just want the property. It’s not like anyone is not aware of it, but it may not be a factor of concern for them,” Corey says.

Part of Miami Beach buyers’ lack of concern may come from the city’s robust response to the flooding. The island city has spent more than $400 million to elevate roads and install pumps. “There may be a level of comfort with these buyers knowing that the city is responding to the situation and not acting like it doesn’t exist,” Corey says. “The one on Alton Road, which took a while to complete, used to be a pond and you can drive through it now, so what they’re doing so far is working.”

Builders are very bullish on South Florida real estate. Multimillion-dollar spec homes are being built in Miami Beach, which is pretty much ground zero for seeing the effects of king tide flooding. “Right now on the market on North Bay Road, there are two houses side by side, one asking $25 million and one asking $34 million; another one down the street asking $35 million. Those are spec homes,” says Jill Hertzberg, a Miami Beach Realtor and, along with Jill Eber, half of “The Jills,” sellers of luxury Miami Beach real estate.

Forewarned is Forearmed: What Investors Need to Know

If it’s not already, experts say a new part of a coast investor’s due diligence will be to investigate a property’s susceptibility to king tide flooding, now and in the future. While local investors may be familiar with which areas typically flood, potential investors from thousands of miles away may not, says Slap.

Equating it to a termite inspection, Slap says smart investors can obtain a detailed analysis of a property’s flood risk for $149. Such an assessment could give out-of-state investors peace of mind.

“It’s the buyers that may be transferring from a Midwestern city to a South Florida location that really don’t necessarily know what king tides are, or how the streets may be flooded in their area,” he says.

Larger, commercial investors are interested in more than just whether the property will flood, according to Slap. “They’re interested in a lot of different things—ingress and egress of workers, employees who will be coming to a shopping center, an office building, a FedEx depot, or Hertz rental car—so the larger commercial developers need to cast their eye wider than just the four corners of a property,” he says. A property that doesn’t flood will be less valuable if most of the surrounding businesses do flood many days a year and are therefore harder to access. Slap’s software can also provide potential tidal flood impacts on adjacent properties.

An investor’s level of concern with sea level rise flooding is intimately connected with his or her investing timeline. A rehabber, for example, knows he can sell his house quickly in a hot market so the fact that the property may flood 20 times in a year in 2050 isn’t a concern.

Buy-and-hold investors, on the other hand, need to know the risk to their property and surrounding properties, Slap says. “Individual homeowners need to know the difference that this stuff’s happening every year, and it’s going to get worse and worse every year,” he says. “You’re going to have this weeks at a time. Some areas, like the Florida Keys, already have it weeks at a time.”

Investors who are interested in promising coastal real estate markets don’t need to ignore them entirely, according to Slap. Instead, they need to be strategic about where they put their money. “Perhaps a smart way for the larger investor, or even really a flipper, is to think, ‘How close can I get to the action (meaning the market action) without getting my feet wet?’

“That’s maybe a little bit of a funny way to phrase it, but when you look at the slides of king tide flooding in Hollywood and Fort Lauderdale, and Charleston, and Annapolis, and Savannah—these are hot markets. There’s nothing wrong with these markets.”

Caveat Emptor: To Disclose or Not To Disclose

States regulate whether homeowners or Realtors need to disclose king tide related property damage. According to The New York Times, Florida Realtors face no penalties for noncompliance if they fail to disclose a property is subject to natural hazards, while California, Pennsylvania and Washington require the disclosure of past flooding or susceptibility to future flooding.

In a blog post, South Florida law firm Hackleman, Olive & Judd says both sellers and buyers should consult a real estate attorney to assess what sellers need to disclose and make sure buyers ask the right questions before investing in a property.

Many of the places that are experiencing deleterious effects from king tide flooding are desirable places to invest and live, like South Florida.

“South Florida is attractive to foreigners, it’s attractive to the domestic clients from the U.S. and especially the Northeast,” says Corey. “We get a lot of people from California because the pricing is—as crazy as some of the pricing may appear to people that live here—on a global scale we’re not that expensive compared to maybe a property in Brazil, France and certainly California, New York or Aspen.”

Slap says it’s important for investors to start “talking about those issues instead of burying your head in the sand.” Only then will they know if king tide flooding could turn their promising investment into a nightmare.

The lifestyle coastal living offers ensures people will want to live there, so it appears that rising sea levels and increased king tide flooding are just one more challenge that investors need to face in search of appreciation and positive cash flow.