20:24 28.10.2019

Climate change: the CMBS angle

Source: FT
Climate change: the CMBS angle

Climate change is going to fundamentally change the way we live, and where we live. It is logical then, that asset prices will follow.

While the current focus seems to be shifting towards what impact businesses are having on the environment (the “E” in ESG), it feels like little has been made of what might happen to the trillions in real estate assets that dot our coastlines if sea levels continue to rise.

Which is why we thought this chart from Morgan Stanley we came across Friday, was worth sharing.

It details some $56bn in commercial mortgage-backed securities that are exposed to coastal flooding risk in the US, and it’s not pretty viewing:

New York state ($18.4bn) is the most exposed, followed by California ($8.9bn) and Florida ($8.7bn).

First is that the US’s coastal hubs, where a huge amount of the country’s economic activity takes place, are going to get even more expensive if insurance premiums begin to reflect the added risk of a city suddenly becoming Atlantis. Real estate insurance brokers and underwriters at Lloyd's of London will be happy, those with Malibu holiday homes not so much.

Rising insurance costs may exacerbate the migration flows out of coastal cities into flyover zone, a process that has already begun given the pressure on wages from living costs in hubs like New York and Los Angeles.

While climate change is already political, if these flows continue to strengthen, it will probably play a force in re-shaping political lines in the US. Inversing the colours of the Bloomberg graphic gives you a good idea of what might happen in a, say, 2063 election.

Away from speculative takes, what’s most clear is that a huge amount of sunk capital has serious exposure to flooding risk stateside. Remember, the figures above only reflect the CMBS market, and don’t include the value of the assets themselves, local government infrastructure, and residential real estate. (Real estate values on the US coast have been pinned at around $1.07tn.)

It is often asked why US politicians are blasé about climate change, but we may suggest that will all change if the real estate of their high-profile donors begins to shed value as it slips into the sea. Suddenly, a Green New Deal, perhaps with state-subsidised housing insurance for victims of flooding, may not sound quite so bad.

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