Is it better to inherit property in Miami or Detroit? Florida’s much higher home prices mean the answer is obvious today. But intensifying storms and rising sea levels could make things muddy in the future.
When Parag Khanna heard that his parents were planning to retire in Florida, he staged an Oprah-style intervention. Trawling through reams of data, he found them an alternative away from the Hurricane Belt and subsequently set up a company that uses geospatial data to analyze the climate risk of every neighborhood in 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 thinking isn’t common among Americans on the move. Millions of retirees and young families relocate without doing an intricate analysis of how changing weather patterns might affect the value of their homes in the future. Powerful property investors aren’t paying close attention either, even though weather shifts are already affecting returns in some states.
America’s population has been growing in the South for decades, but has risen especially fast since the pandemic. The South gained an additional 3.9 million people between April 2020 and July 2023, according to U.S. Census Bureau data. Ten of the 15 fastest-growing cities in the U.S. are in Texas or Florida.
The shift is mostly driven by domestic migration, and movers might be motivated by lower housing and living costs. Favorable taxes in Florida and Texas have also lured wealthy households from New York and California.
Institutional landlords, defined as those who own 1,000 residential units or more, are following the population flows and pouring huge sums of cash into Sun Belt housing. “U.S. households are voting with their feet about where they want to live and investors are watching. It would be challenging to ignore these strong growth markets,” said Matt Vance, CBRE’s head of Americas multifamily research.
Investors expect population growth to boost home prices and drive up rents. Although their ability to charge tenants more is limited at the moment because of an oversupply of apartments, landlords think their prospects in southern states are bright in the long run. They also see their Wall Street peers piling into the same cities and are reassured that they will be able to sell assets in an increasingly liquid market.
Yet some of the places where investors are most active look exposed to extreme weather. Institutional landlords control more than a fifth of the nonowner-occupied homes in Jacksonville, Fla., according to John Burns Research and Consulting. These landlords have cornered more than 15% of the rental markets in Tampa and Orlando. According to the National Oceanic and Atmospheric Administration, 40% of all U.S. hurricanes hit Florida, significantly more than any other state.
Even if landlords aren’t thinking about the weather, their insurers are. The insurance industry has undergone a major repricing of risk following a string of heavy losses. In 2023, there were a record 28 natural disasters in the U.S. that caused more than $1 billion of damage each. Steep losses have driven up the cost of catastrophe reinsurance, a form of cover for insurance companies. As reinsurers push more risk onto primary providers, they are unloading it to consumers in the form of higher premiums.
Other factors are at play. Rising building costs make it more expensive to fix properties that have been damaged by hurricanes or wildfires. And as populations swell and construction booms in the stormiest corners of the country, there is simply more value at risk. Local markets have their own dynamics, too—insurance providers argue that the growing number of lawsuits against them in markets such as Florida is driving up premiums.
Average homeowner premiums for a $300,000 dwelling rose by 7% nationwide between 2022 and 2024, Bankrate data shows. But they rose three times faster than the national average in states such as North Carolina, Florida and Louisiana. Homeowners in Nebraska have been walloped with a 48% rise, partly because of more intense and damaging storms.
Insurers have stopped issuing new policies altogether in parts of California and Florida. As private players pull out, demand for state-backed schemes has exploded. Florida’s Citizens Property Insurance Corp. currently has 1.25 million policyholders, up from around 440,000 at the beginning of 2020.
Professional landlords are being hit equally hard and costly insurance is already affecting valuations. Controlling for the impact of interest rate increases and other factors, rising insurance premiums shaved 3.6% off the value of multifamily apartment buildings nationwide since the end of 2019, analysis from CBRE shows. In Florida, insurance costs have knocked 6.8% off the value of apartments.
That is potentially bad news for some of America’s biggest landlords, including Blackstone Real Estate Income Trust, which owns thousands of units in Florida. Rising premiums have hit valuations in Jacksonville and Houston, cities that are particularly popular with corporate landlords, by 9.6% and 11%, respectively.
True, insurance isn’t the biggest cost for property investors, representing around 8% of their overall expenses. And premiums appear to be stabilizing in some states. But it is optimistic to assume that the worst is over and that everything is priced-in now. According to AlphaGeo estimates, landlords in Tampa, for example, could face annual hikes of 20% in the coming decade based on an assessment of climate risks.
Owners can protect returns if they are able to pass these costs on to tenants. A surge in insurance prices in wildfire-prone California hasn’t hit apartment values because landlords were able to raise rents. This hasn’t been the case in oversupplied Sunbelt cities.
Multifamily property deals are also becoming trickier to underwrite as cash flows grow volatile. Brennen Degner, co-founder of multifamily investment firm DB Capital Management, says that skyrocketing insurance costs on one of its Denver properties has significantly lowered returns expectations. The experience reinforced his skepticism of investing in the most stormy states such as Florida. “If I can get the same returns elsewhere, why take the risk?” he says.
One way that landlords could hedge weather risks in high-growth markets such as Miami might be to add properties in “climate resilient” cities to their portfolio. But that will be a tough sell to investment committees: Locations that screen well for climate risk such as Burlington, Vt., Buffalo, N.Y., and Detroit don’t look like obvious winners today.
Access to good schools and job opportunities will always remain top priorities in families’ decisions about where to locate and where investors buy property. But before heading for the stormier parts of the country, they should tune into the weather report.