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Are extreme weather events impacting real estate decisions? · UBS Trending

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  over the
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  past few years, we have all seen how extreme weather events
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  can have a devastating impact on people's lives and their property.
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  Insurance rates have steadily risen in some markets
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  as risks of wildfires, hurricanes and floods have increased.
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  And this begs the question are homeowners and investors starting
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  to integrate this risk into their real estate decision making?
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  We're going to break it all down for you right now on UBS trending.
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  How are you going?
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  Welcome to UBS trending I'm Anthony Pastore.
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  Thank you for being with us today.
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  Amantia Muhedini is back in the studio with me.
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  She, of course, is the sustainable
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  and impact investing strategist with the Chief Investment Office.
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  Lovely to see. You. It's great to be here again, Anthony.
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  This is not an easy topic to talk about,
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  especially for those people who have been affected by storms.
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  And it happens all over.
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  I mean, we've had storms
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  here in New York,
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  like Sandy many years ago, and we've had just recent storms
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  that affected a lot of the southeast and including Hurricane
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  Milton and Helene.
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  So first and foremost, the, you know, we have to acknowledge
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  the impact this has had on people's lives.
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  Literally, people have lost their lives in these storms.
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  And and in addition to that, many people have lost property,
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  valuables, even those mementos, photo books, things that are,
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  you know,
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  don't have a value in money,
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  but they have a value in their, you know, emotional state.
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  So acknowledging that, I think what we need to talk about
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  then is the fact that there has been this increase in
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  or seemingly an increase in extreme weather.
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  So
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  when you think about
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  the recent storms, how should we be thinking about them,
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  especially from that sustainable
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  investing lens that you are writing about and doing research on?
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  Yeah, of course. Things, Anthony.
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  And, look, there's two ways in which this conversation
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  is a challenging one to have today.
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  One is what you're you're describing the really the human aspect.
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  I mean, we look at data points,
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  but when you're talking about something like, a hurricane,
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  an extreme weather event,
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  even when we talked about pandemics, not so long ago.
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  That's right.
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  It was it was about human impact.
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  So acknowledging that that's a challenge.
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  A second challenge is that you're for for one,
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  I think for or one of many times
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  I'm coming with perhaps more questions than answers, to you.
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  But we thought it was important
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  from an investment perspective to lay out a conversation,
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  and articulate what are these questions around climate, weather
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  and real estate?
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  So, to get to the data,
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  I mean, what we saw just a couple of months ago, which is crazy,
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  a lot has happened here in the US in the last couple of months
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  was hurricanes.
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  Helene and Milton,
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  which hit the southeastern part
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  of the United States as well as Florida,
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  respectively, in September and October.
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  These were $50 billion storms.
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  The numbers are not accurate,
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  and this is very much an estimate that is reported in the media.
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  But but it will likely end up being around that ballpark
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  in terms of damages.
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  Moody's estimates that the insurable part of that,
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  kind of damage, across these two storms
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  will be, kind of coming with a bill of around $34 billion.
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  That's significant
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  that insurance providers will have to and will be able to cover,
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  which that by itself should be hopefully
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  good news to those who do have coverage right now.
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  What's interesting is
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  these are not just two data points, like two storms.
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  I think people who follow the news open their kind of,
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  you know, daily news or weather app, know that,
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  we see more of these kind of events.
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  And what we're seeing also is an increased impact.
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  So they're becoming more severe and more frequent.
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  The chart is a chart from the, NOAA, which is a government agency
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  that tracks the number of storms that cost more than
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  $1 billion, every year.
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  So $1 billion or more.
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  This is inflation adjusted as a number.
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  And what you see in the trend of the chart is that since the 1980s,
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  both the cumulative total cost has increased and the sheer number
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  of storms, which cost the United States more than $1
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  billion has increased. Right.
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  And so that is in some ways like the chart that is everywhere
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  in the conversation.
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  And it's the kind of black and white data of why
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  these questions are
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  climate are starting to have an economic impact.
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  Yeah.
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  And there are certain parts of this country
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  I won't go into specific,
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  you know, cities
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  or towns where it's really difficult
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  to get insurance in the first place
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  because of how many times
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  a particular area
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  has been hit by subsequent and consecutive storms.
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  Even if you look at, the west coast of Florida, two years ago,
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  there was a major hurricane
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  and some of the people who were just in the process of rebuilding
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  or maybe had just rebuilt their homes,
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  got hit with Milton or Helene again.
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  So it's devastating to see the impact it's had.
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  And then when you look at those sheer numbers in that chart,
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  it really does paint a picture from a data perspective
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  about the increase in the cost of these storms,
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  the impact they're having. They're bigger. They're stronger.
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  I was in Florida when Hurricane Milton hit.
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  Unfortunately, I was stuck there.
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  I couldn't get out.
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  But,
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  it was a category five storm
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  when it was churning in the Gulf of Mexico.
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  It was a massive storm. And, you know, there was some impact there.
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  So I want to just kind of maybe.
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  And by the way,
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  I also wanted to point out to our viewers
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  that we're not just only talking about residential.
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  There's a commercial real estate impact here, too.
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  They're in the same areas. Absolutely.
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  And really we focus this conversation on on residential and really
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  almost kind of asking what our individual home buyers right
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  thinking through.
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  But but you're right.
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  This goes to a kind of institutional,
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  those who own institutional assets, right.
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  Corporates,
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  but also from the kind of investment
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  in commercial real estate perspective. Right.
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  So, you know, the chart that we were just looking at,
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  it kind of just show, you know, the cost,
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  as you said, at least $1 billion.
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  How do we really breakdown this data?
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  Is there anything from your analysis that you can glean from
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  where do we go from here? Yeah.
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  So I'd say, one of the ways in which this chart is
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  both widely used
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  and widely debated,
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  and the question that we've received is, asking, you know,
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  is it really that sort of more storms are happening or is it that,
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  the value of the property that is being hit by
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  storms is just higher?
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  And, I haven't seen any sort of,
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  specific, paper that disentangle that.
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  I think it's very challenging
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  analytically to disentangle that
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  even if there's correlation that we're looking at.
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  I think we have to recognize that a lot.
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  That while we have more severe storms,
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  maybe the way that the wealth and construction has, has moved
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  around the US overlaps with those areas
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  where you have kind of more hurricanes, wildfire, flooding risk
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  and so forth.
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  And so,
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  even if you look at it not as a causal but as a correlation,
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  the end of the matter is that these storms are creating huge
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  economic impact.
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  And so the question is, how is this coming into play
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  in investment decisions?
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  Is it being considered
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  as well as in
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  consumer decisions right from that homebuyer perspective?
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  And that really is an interesting point
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  because, you know, we have seen record House, you know, values
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  what I should say, record amounts or record rising home
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  values over the last decade, two decades.
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  But we are seeing that people are starting to get the signs.
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  One of our producers here in the that works in the studio with us,
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  her mom lives in Gulfport on the west coast of Florida,
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  got hit two years ago, did a little rebuilding, got hit again,
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  and now has decided to not stay in that area
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  because it's too risky.
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  Or at least in her opinion it is.
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  So are you seeing an impact when it comes to folks
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  and their real estate decisions, or, I mean, how is that impacting
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  whether it's home
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  buying in these areas
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  that have become more prone
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  to these storms, even in California, where the wildfires are more,
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  common out on the West Coast?
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  We had seen a shift. What are you seeing?
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  And when it comes to real estate.
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  Yeah. It's tough.
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  I'd say we have very, extremely preliminary thoughts here.
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  And the reason for that is that this is incredibly complex, right?
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  People, have so many things that they're weighing
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  when they're make these decisions on where do they want to live?
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  From schools to taxes to quality of the neighborhood, walkability.
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  And so climate risk is one of those areas.
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  What you're seeing on the chart now
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  is, we looked at Census Bureau data of the number of,
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  kind of the growth rate of new home built in the last three years
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  across state.
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  And by state, and we overlaid that by the cost
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  from floods in the last three years.
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  And you see the chart, there's no clear trend.
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  So on the far
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  right of the chart, there's a few states
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  you have Texas and Florida among them, where, you know,
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  you both have a higher cost and more new construction.
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  Now those two things, again,
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  we're not implying causation here,
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  but it's an interesting thing to observe.
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  If you look at a different data set around population moves, again,
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  populations are increasing
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  in some of these states that are at higher risk. Right.
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  So that for us will be an interesting area of exploration.
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  And worth noting.
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  I'll note a couple things though, in which how
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  maybe some, non individual homebuyer actors are thinking,
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  we have seen three major kind of National insurance players,
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  exit from the kind of property risk insurance
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  market in California
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  and in Florida, citing the increased climate risk.
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  Now, from that insurer perspective, it's a question of
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  are they being they need to be compensated, right.
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  Their premiums really need to go up for them to take on this risk,
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  which for them to have the appetite for it. Right.
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  And the regulators in those states are coming in with legislation
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  that say, no, you cannot charge premiums beyond a certain structure
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  or a certain number, to preserve affordability.
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  And so what you have is insurers pulling out,
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  and the state comes in as a, as kind of a backer of last resort.
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  So the shift of risk from this climate devastation is almost
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  then split between the public, literally
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  the state public money or the individual homeowners
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  who maybe have a challenge with getting a new rate that they can,
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  they can actually afford.
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  So it exacerbates potentially
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  the affordability problem that we have. That's one thing. Right.
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  And then a second thing, that that is worth
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  noting is really just, green shoots, inklings.
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  You're just starting to see some of this data around physical risk.
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  So what parts of the country
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  have a higher probability of being impacted in this way?
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  Floods, wildfires, etc., becoming publicly available?
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  One and two becoming used into modeling.
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  So, Fannie Mae and Freddie Mac, which are national kind of,
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  important agents in this kind of home mortgage liquidity
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  market, have
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  notes
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  that have noted publicly
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  that they're using this data in their modeling.
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  We don't know what impact it will have in their pricing, but
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  it's starting, which makes us interested in the topic.
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  And we think there will be a lot more to come here. Yeah.
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  And you really made
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  a really good point of a couple of minutes ago
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  saying that it is a very complex issue
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  where people decide they want to or need to or have to live.
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  And so there's a lot more that goes into it
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  than just thinking about what your insurance
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  premiums might be,
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  or the risk of a flutter,
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  or a wildfire, or an earthquake, or some natural kind of disaster.
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  So there's there's a lot here.
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  And then obviously,
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  the human side of the story is even more complex.
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  Yeah.
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  And which is why sustainable investing is so complex, right?
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  Because I love to say, oh, this is priced in or it's not.
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  And there's a risk.
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  And so you should look at that asset value drop.
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  But but it's all of these other factors which come into play.
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  Right.
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  Thank you a continuing story clearly as we are.
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  And by the way, as we're sitting here, there's Hurricane Rafael.
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  It doesn't look like it's going to affect the U.S,
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  but it's going over Cuba and into Mexico.
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  So there's every time you open up
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  your weather app, there's some storm that's brewing or potentially
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  could be a massive, you know, issue for wherever it's hitting.
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  And I'll say we focus this in the US is purely a case study.
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  I mean, emerging
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  markets are being hit significantly from these storms,
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  including droughts, actually.
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  So the inverse,
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  in Spain,
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  we had the catastrophic flooding
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  just over the course of this month.
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  So this is a global question.
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  From an impact, the, the way that it will be priced in or not,
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  will will be very local because of all of this complexity,
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  which makes it hard for us as investors.
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  But this is why we're here to kind of do this work
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  and then shoot for it, right? Yeah.
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  And even something
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  like flooding in Spain,
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  it's not something that they're used to in that country.
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  And this is a sort of a new, phenomenon
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  that who knows if it's a one off or it's going to be a continuation
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  or a growing concern.
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  So, as you said, it's
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  you have to really go down to the local level.
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  And even there they have to do more research on why it's happening.
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  And it's it's something that will happen again.
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  So lots of lots of research I'm sure, being done in those areas.
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  I want to thank you so much.
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  Good stuff.
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  And, it's all in the latest, Sustainable investing Perspectives
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  piece, which it can be found,
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  which I'll tell our viewers into tomorrow where to get that.
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  But thanks for having, the time to come and sit with me today.
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  Of course.
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  Very happy to. Come.
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  Thanks to Amantia, Muhedini from the Chief Investment Office,
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  as I was saying.
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  Visit our insights website ubs.com/views for the latest sustainable
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  And as always, if you have any questions
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  or want to talk about this some more,
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  make sure you're connecting with your financial advisor.
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  Until next time, I'm Anthony Pastore.
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  Have a great rest of your day and remember
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  to keep your eyes on what's trending. We'll see you soon.