Insurance costs challenge Sun Belt property investors amid rising climate risks

Is it better to inherit property in Miami or Detroit? Florida’s higher home prices make the answer obvious today, but intensifying storms and rising sea levels could complicate matters in the future.

When Parag Khanna heard that his parents were planning to retire in Florida, he intervened. Using geospatial data, he found them an alternative away from the Hurricane Belt and subsequently established a company that analyzes climate risk for neighborhoods across the U.S. “If you want an appreciating asset that is not going to be destroyed by natural disasters, you need to be cautious about geography now,” says the AlphaGeo founder.

This consideration is not common among Americans on the move. Millions of retirees and young families relocate without analyzing how changing weather patterns might affect their homes' future value. Powerful property investors also overlook this factor, despite weather shifts already affecting returns in some states.

America’s population has been growing in the South for decades, accelerating since the pandemic. The South gained 3.9 million people between April 2020 and July 2023, according to U.S. Census Bureau data. Ten of the 15 fastest-growing cities are in Texas or Florida.

Domestic migration drives this shift, motivated by lower housing and living costs and favorable taxes in Florida and Texas attracting wealthy households from New York and California.

Institutional landlords—those owning 1,000 residential units or more—are following these population flows into Sun Belt housing markets. “U.S. households are voting with their feet about where they want to live and investors are watching," said Matt Vance, CBRE’s head of Americas multifamily research.

Investors expect population growth to boost home prices and rents. Though an oversupply of apartments currently limits rent increases, landlords believe southern states have bright long-term prospects due to increased market liquidity.

However, areas with high investor activity face extreme weather risks. Institutional landlords control over a fifth of nonowner-occupied homes in Jacksonville, Fla., according to John Burns Research and Consulting. They also dominate rental markets in Tampa and Orlando. The National Oceanic and Atmospheric Administration reports that 40% of all U.S. hurricanes hit Florida.

Insurers are aware of these risks even if landlords aren't fully considering them yet. Following significant losses from natural disasters—28 events causing over $1 billion each in damage occurred in 2023—the insurance industry has repriced risk significantly. This has led to higher premiums as reinsurers push more risk onto primary providers who then pass it on to consumers.

Other factors contribute as well: rising building costs increase expenses for repairing hurricane or wildfire damage; booming construction increases overall value at risk; local dynamics such as growing lawsuits against insurers drive up premiums further.

Bankrate data shows average homeowner premiums for a $300,000 dwelling rose by 7% nationwide between 2022 and 2024 but increased three times faster than average in states like North Carolina, Florida, and Louisiana—with Nebraska seeing a 48% rise due partly to intense storms.

In parts of California and Florida where private insurers have stopped issuing new policies altogether demand for state-backed schemes has surged; Florida’s Citizens Property Insurance Corp now has 1.25 million policyholders compared with around 440,000 at early-2020 levels.

Professional landlords face similar challenges: costly insurance impacts valuations significantly—with CBRE analysis showing rising premiums reduced multifamily apartment values nationwide by 3.6% since late-2019—and even more so within Florida where values dropped by nearly double that percentage (6.8%).

For major landlords like Blackstone Real Estate Income Trust owning thousands of units within high-risk areas such as Jacksonville & Houston—where valuation drops reached approximately10%—this trend poses considerable concern despite insurance being only around one-eighth total expenses overall & stabilizing somewhat recently within certain states

Optimism regarding stabilized premiums may prove premature however given projections suggesting potential annual hikes up-to one-fifth current rates based-on assessed climate risks particularly affecting regions like Tampa

Owners may offset some costs via tenant rent adjustments—as seen previously within wildfire-prone Californian markets—but less feasible amidst already oversupplied Sunbelt locales

Increasingly volatile cash flows complicate underwriting multifamily deals further still—as noted by Brennen Degner co-founder DB Capital Management citing skyrocketing Denver property-related insurance lowering expected returns reinforcing skepticism towards storm-prone investments elsewhere preferring equivalent safer alternatives

Adding properties within “climate resilient” cities offers another potential hedge yet remains difficult convincing investment committees favoring traditionally stronger economic indicators over less-immediate albeit potentially crucial environmental considerations ultimately prioritizing fundamental criteria including education employment opportunities alongside evolving climatic awareness before committing towards increasingly precarious storm-afflicted regions

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