Building in the flood plain, even as it changes - by Daniel Calano

Daniel Calano, Prospectus, LLC

It’s the beginning of fall, and miraculously no hurricanes have hit our New England shores. Summer real estate discussions always touch on the uncertain conditions of storms and related insurance, particularly regarding the coastal flood plain. This year, the take away was a key broker residential marketing phrase “fabulous water views, not located in flood plain.” While there have been no hurricanes here, there have been many inland floods in Texas, Mississippi, South Carolina, West Virginia and most recently once again Louisiana, not to mention France and England. These areas experienced devastating rainfall induced flooding, which resulted in billions of dollars in economic losses. It seems everyone is almost fully, or at least better, educated on the issue of big storms and the attendant risks of ownership.

As a quick primer, flood insurance has been around as subsidized insurance since 1968 with the creation of the National Flood Insurance Program. The cap on such flood insurance has been typically $250,000, with the potential for private insurers adding to that, at much higher costs. As a result of the subsidy, it is reported that the Federal Emergency Management Agency (FEMA) has added over one trillion dollars of losses to our federal budget and taxpayer, the ultimate insurer. As a result of those excess costs, Congress passed the Biggert-Waters Flood Insurance Reform Act in 2012, which goal was to bring insurance rate closer to costs, in other words reducing subsidy. Two years ago, I wrote about the impacts of this law, and the ensuing complaints from homeowners of rate hikes. In some cases, hikes grew to over 500%.  Nonetheless, the act was an important step in bringing reality to the understandable excitement of building your house on the waterfront. Most presumed that people would be discouraged from building, or at least aware of and willing to absorb the extra costs. However, in March 2014, congress rescinded many of the rate increases called for by the 2012 Act. They created a new law which reduced some of the rate increases. Specifically, the 2014 law prevents any policyholder from seeing an annual rate increase exceeding 18%. In short, congress backed off some of the “reality” measures.

As a result of some of the Federal flip-flopping, others stepped in to add some certainty. For example, Florida enacted a law to encourage private companies to offer flood insurance at several different levels of protection and cost. Other insurers tried more market derived approaches, effectively securitizing insurance costs and profits in parts of the public markets. In another arena, engineering type companies started providing a service to refine flood plain mapping by FEMA, which in many cases was done with far less precision than could be done today.

What does all this mean to those of us in real estate? What’s changed from a few years ago? To me, it suggests continued uncertainty. It is very difficult to predict where the costs of insurance will end up. Some insurance companies will make greater forays into the insurance market, but others will pull up stakes completely. While there undoubtedly will continue to be subsidies, pressure to prohibit building in high impact areas will continue. Climate change will most likely become a more accepted belief. In fact, climate change debate has mostly disappeared from the talking points of politicians, with most giving it at least a nod to its possibilities. Even the military is considering the likelihood of its negative impact on U.S. defense.

Bottom line is that buyers, builders, insurance companies, and legislators are all much more aware of the issues. With that many players in the discussion, there can be many permutations of affecting policies. My sense is that if the big storms continue, and become bigger as climate change believers say, the trend will be to higher insurance costs and more restriction. Although it may be discouraging in the short term to real estate participants, we will all adjust, and in the long run, such focus will improve certainty, and overall conditions.

Daniel Calano, CRE, is the managing partner and principal of Prospectus, LLC, Cambridge, Mass.