As climate change continues to shape the real estate landscape, developers and insurers alike are feeling the impact. Stronger building standards, aimed at mitigating risks from wildfires, floods, and sea level rise, may lower the cost of property insurance by reducing risk to insurers. This, in turn, could lead to more competitive premiums and attract additional insurers to the market, benefiting property owners. However, these building standards also influence the broader real estate market, especially regarding project financing and overall affordability.
Recently, insurance costs have become a significant impediment to real estate development financing, particularly for commercial projects in high-risk areas. Premiums are rising, insurers are withdrawing from markets, and gaps in coverage are common. Sometimes, private insurance may be unavailable, forcing developers to explore alternative or costly solutions. Climate-related risks, such as increased wildfires and flooding, are driving these costs higher. As a result, typical insurance benchmarks are being exceeded, making securing affordable financing for new developments more difficult.
Insurance costs are a significant factor in housing affordability, especially in areas prone to natural disasters like coastal zones, wildfire-prone regions, and floodplains. As developers struggle to mitigate against climate risks, these added costs are often passed on to real estate buyers, driving up prices. While some mitigation strategies, such as fire-resistant materials, elevated structures, and improved drainage systems, may help lower long-term costs, the initial expense of implementing these measures is significant.
In the long run, the cost of these strategies is expected to decrease as they become more customary and efficient to implement. However, if climate change intensifies, the market must innovate further to address evolving challenges. Affordability will also be influenced by how governments and communities undertake adaptive measures, such as coastal setbacks, sea walls, and fire mitigation, to confront climate risks.
In California, state and local agencies must consider the potential climate change impacts of development projects as part of their environmental review process under the California Environmental Quality Act (CEQA). Developers may need to adopt specific mitigation measures to minimize and address these climate-related impacts. These regulatory requirements add another layer of complexity and cost to development projects, particularly in high-risk areas.
The insurance industry is also adjusting to these changing conditions. In 2020, the National Association of Insurance Commissioners formed the Climate and Resiliency (EX) Task Force to coordinate efforts addressing climate-related risks and resiliency. States with significant climate risks, such as California and Florida, are experiencing increases in insurance premiums, reduced coverage availability, and even insurer withdrawals from the market. For developers, projects with insurance challenges become less attractive to buyers, further impacting the viability of new developments.
As climate risks grow, developers and insurers are at the forefront of addressing resiliency and sustainability. Stronger building standards can help reduce insurance premiums, but developers must also weigh the costs of these measures against affordability. In natural disaster-prone areas, building costs will likely rise in the short term as mitigation strategies are implemented. In the long term, these measures may become more cost-effective, but the unpredictability of climate change and the magnitude of potential impacts will continue to challenge the real estate and insurance sectors.
