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Market Extra: Rising sea levels put Miami, New York at biggest risk for severe and extreme flooding at commercial properties

Billions of dollars worth of office buildings, retail centers and apartment buildings in coastal U.S. cities sit in the path of major flooding as sea levels rise, according to a new DBRS Morningstar report.

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

All told, it pegged about $539 billion worth of mortgage bond deals rated by the agency as having some exposure to severe or extreme flooding, leaving only a fraction of the market free of the threat.

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

Instead, the team looked at the National Oceanic and Atmospheric Administration’s latest projections for sea levels, which point to an additional rise along the U.S. coastline of 10 to 12 inches by 2050, or as much as the total rise measured in the past 100 years.

Flood risks helped inform this map, which shows Miami topping the country with an estimated $1.1 billion worth of office, retail and multifamily buildings at risk of structural damages as sea levels rise, according to the report, which relied on data from Arup and the First Street Foundation.

Miami and New York City top the list of cities with commercial buildings most at risk as sea levels rise

Sources: Arup and First Street Foundation

New York had an estimated $582 billion in similar properties at risk, followed by about $450 billion in Pittsburgh, $330 billion in Boston and roughly $280 billion each in Houston and San Francisco.

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

Heavily exposed

Climate change has been rapidly evolving, evidenced by the stunning increase in billion-dollar weather and climate disaster events since the 1980s, which makes historical data “less accurate,” according to the DBRS Morningstar team.

What’s more, commercial property owners can tap national flood insurance coverage from the Federal Emergency Management Agency of only $500,000 for a building and $500,000 for the building’s contents, according to the report, even though many key properties in big cities have been financed with hundreds of millions of dollars in mortgage debt. The report said additional coverage would need to be purchased in the private insurance markets.

To help investors get a better grip on their potential exposure to rising sea levels, the DBRS Morningstar team found 4,704 buildings at risk of extreme and severe flooding (see chart) in bond deals it rates. The following breaks down exposure by deal type.

Most commercial mortgage bonds rated by DBRS carry some risks of climate-related flooding.

DBRS Morningstar

While the commercial mortgage bond market finances only a cross-section of the nation’s buildings, the DBRS Morningstar report still provides a grim snapshot of the near unavoidable flooding risks most investors face.

That also isn’t the only risk, particularly with the embrace of flexible work arrangements. Before the pandemic, lenders often pitched “single-borrower” commercial mortgage bond deals to investors as safe-haven investments, in part because they frequently helped fund top real estate owners looking to build, buy or refinance New York City’s priciest office towers.

The pandemic upended that view, with office buildings still only 43.% occupied more than two years after the onset of the COVID crisis, according to Kastle Systems’ latest 10-city weekly average.

With that backdrop in cities like San Francisco, lenders and investors have grown increasingly wary about financing office buildings.

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

Real estate owners also will face sharply higher borrowing costs when their debts come due, with the benchmark 10-year Treasury rate

near 3.4% on Tuesday, and with the Federal Reserve expected to pull the trigger on another jumbo rate increase next week in a bid to cool rampant inflation, while risking sparking a potential recession.

Read: Any doubt Fed will raise rates by 75 basis points next week is gone after hot U.S. inflation data

U.S. stocks swooned on Tuesday after August inflation data came in hotter than expected, with the Dow Jones Industrial Index

down more than 900 points at last check, the S&P 500

off 3.2% and the Nasdaq Composite Index

tumbling 4%.

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