Flood Costs for Commercial Real Estate Rise
(Published in The EarthSphere Blog, Cover Image: Flooding Montage by WM House; ArcheanArt)
The cost of flooding in the USA is high. We know it, we’ve seen it, and we constantly read about it in the news. A recent survey of flood risk for commercial real estate predicts that 2022 could bring $13.5 billion in structural damages. A price tag that keeps rising in the future. If you add damages to productivity and local economies, the 2022 price tag goes to $50 billion. Climate change drives these insurance costs upward, but the primary risk is not coastal storm-surge damage from hurricanes. Instead, fluvial and pluvial flooding are the culprits.
Different businesses face different kinds of structural risk depending on their buildings and infrastructure. But they all share the common financial risk of lost productivity. During 2022 an estimated 3.1 million days of operational loss is expected. This annual loss of productivity rises to 4 million days over the next 30 years.
Most of us are not commercial real estate owners, so it is easy to dismiss the risk of financial loss as someone else’s problem. But we know from the 2021 supply chain issues that breakdowns in one area often lead to empty shelves in distant cities and towns. We also must grapple with the problem of actual ownership. Large commercial real estate ventures are financed through private partnerships and publicly traded securities, and those investments find their way into America’s 401 (k) plans and pension investment funds. There is a price for everyone to pay.
Flooding in Many Forms
Storm-surge flooding from hurricanes makes headlines every year. The two factors controlling storm surges are atmospheric pressure and wind strength. Atmospheric pressure in the center of a hurricane is lower than on the outer edges. This pressure differential causes water to mound up beneath the eye of the storm. The lower the pressure, the higher the water rises. High winds then drive this mound of water onshore.
However, the recent insurance survey shows the biggest culprits for rising flood costs are fluvial and pluvial flooding. Fluvial flooding in hilly terrains results from streams or rivers flooding out of their banks because they have received too much rainwater and can’t drain it away fast enough. Pluvial flooding, however, is not about water overflowing from the rivers; it is about water trying to get to the rivers. Water on the ground’s surface relies on slopes and gravity to flow. But flatlands are not conducive to this process.
Pluvial flooding occurs when rainwater pools on the ground, unable to drain away. When slopes are low to non-existent, and the rain is too heavy, water accumulates where it falls. You have pluvial flooding when water drains from the flatlands more slowly than it accumulates.
Urban areas are particularly susceptible to pluvial flooding since the abundance of concrete pavement and roofs eliminates the ability of soils to absorb any water. So, water ponds in the lowest neighborhoods. A city like New Orleans, below sea level and surrounded by levees, is akin to a huge punch bowl that fills with water faster than pumping stations can remove it. Likewise, Hurricane Harvey showed that Houston is not much better.
A Warmer Atmosphere Cost More
The insurance business traditionally relied on using records of past events to predict the future. But when the future is significantly different from the past, accurate cost predictions fail, and insurance companies get nervous. There are many ways to describe how climate change is affecting our lives, but one of the most significant factors is heat. In the case of oceans, melting ice sheets and the thermal expansion of ocean water both contribute to sea-level rise. A warmer atmosphere also encourages more tropical storms. But for flood insurance, the key factor is warmer air holds more moisture.
Weather systems can carry more water than in the past, and more water translates into increased flood damage. The ability of the atmosphere to move more water inland from the oceans is a driving factor behind the threat climate change poses to both commercial and private real estate.
An added complication involves the speed at which major weather systems move. One of the net effects of global warming is a slower jet stream as temperature differentials between the Arctic and mid-latitudes decrease. This effect tends to slow the speed of weather systems meaning they have more time to dump heavy rain in a single basin, and more rain equals more flooding.
Related Articles:
Climate change: Increasing the frequency and intensity of flooding (by WM House)
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Other Sources:
Commercial real estate faces near-record costs from flood damage (by Diana Olick; CNBC)