Anticipating Land Values in a Climate-Stressed World: A Guide for Homebuilders and Developers
For decades, the most stable dataset in any country has been the price of an acre of land — and in most places, it has steadily moved up and to the right. Yet the past is a poor guide to the future. This is because climate change, demographic shifts, remote work, economic insecurity, high interest rates, industrial policies, emerging regulations and many other cross-cutting and often contradictory trends are introducing significant volatility in what was once a predictable market. To accurately forecast location performance in such a complex future, land bankers, homebuilders, developers and other land interests will need to revisit basic assumptions about supply and demand fundamentals. This will be nothing like the GFC.
Climate analytics are an essential part of accurately modeling where people and investment will shift in the coming years. Capital, insurers and regulators are creating the conditions for a resetting of how we underwrite land and plan for tomorrow. With billions of livelihoods threatened by climate upheaval, homebuilders will need to build in climate-resilient locations that are less prone to disruption and boast adequate resources. The search for “climate havens” will trigger what will be a decades-long relocation of America’s demographic, infrastructural, and economic footprint. Savvy land players should therefore leverage predictive analytics to anticipate this demand and capitalize today on mispriced assets in resilient geographies. As the voice in Field of Dreams (1989) whispers to Kevin Costner, “If you build it, they will come.”
Climate risk and resilience indicators should become an integral extension to traditional market analysis, signaling the livability and desirability of a particular location. Places exhibiting high climate stress and low resilience will be the least desirable, while those exhibiting low climate stress and high resilience will be most desirable as they provide inhabitants with an improved quality of life. A recent Redfin survey[1] indicated that 62% of respondents who plan to buy or sell a home in the next year are “reluctant to relocate to a place at risk of natural disasters, extreme temperatures and/or rising sea levels.” In a competitive land buying, land development and homebuilding market, winners will leverage climate data to better understand where the next generation of homebuyers will choose to live.
Moreover, recent U.S. federal funding for climate mitigation and adaptation efforts — including the Inflation Reduction Act (IRA), Bipartisan Infrastructure Bill, and CHIPS Act — are stimulating an industrial renaissance that will accelerate growth within certain markets. The footprint of these federal funds will boost economic multiplier effects across the country. An overlay of regions undergoing an economic revival while also enjoying relative climate resilience can guide builders towards zones poised to outperform in the coming decade.
Master planned communities can be a key locus for harnessing climate data to plan for resilience beyond basic asset hardening. Since master planners are responsible for developing every element within a neighborhood — including roads, sewers, and power grids — they should leverage climate data to inform design decisions.
For example, Hurricane Ian devastated most of the southwest coast of Florida in 2022. However, there was one notable exception, Babcock Ranch, a master planned community that emerged unscathed from the storm. Its resilience can be attributed to insightful planning and design. Among other measures, the developers chose a location that was 20 miles inland and 30 feet above sea level to adapt to frequent storm surges in the region. Additionally, the developers buried the power lines underground to protect them from wind, designed drainage systems that complemented the natural flow of rainwater over the land, and installed a large solar farm with battery storage infrastructure so that the community never lost power.
The success of Babcock Ranch underscores the importance of community resilience — marked by high energy reliability and quality infrastructure — to help manage extreme weather disruptions and offset its location impact.
Developers of the budding build-to-rent sector have good reason to embrace climate resilience and adaptation strategies since they retain ownership of the property post-development. The decisions they make, ranging from site selection to resilient community planning, have a direct and material impact on future profitability in terms of both income and value appreciation.
Most notably, extreme weather causes billions of dollars of damage to the real estate industry each year, with insurable losses only covering a fraction of the total. Selecting a climate resilient location can therefore keep operating expenses like repair and maintenance within a tighter and more predictable band.
Secondly, because losses from property damage have quadrupled over the past decade, the cost of insurance has soared to unprecedented levels. Although insurance has increased nationwide, premium increases are the most significant in climate vulnerable states such as Florida and Texas. As a result, owners are forced to either defer maintenance, cut other expenses, or raise rents to cover higher insurance costs. Moreover, because insurance is adjusted on a yearly basis, the compounded cost of rate hikes can put substantial pressure on net operating income, a key valuation metric for the industry.
CONCLUSION
For land buyers, developers, and homebuilders, climate analytics provides an opportunity to pinpoint the most promising locations for land banking and real estate development based on hundreds of variables that are not captured in traditional market analysis.
To learn more about how you can confidently invest in the world’s most precious asset — resilient geography — visit our website at www.climatealpha.ai.
[1] https://www.redfin.com/news/homes-climate-change-migration-survey-2022/
