I recently became a member of the Urban Land Institute, inspired by its excellent set of case studies Returns on Resilience: The Business Case and driven by a question I thought their real estate-related members might answer: Why are developers still betting on Miami and Malibu.
The irascible John McNellis, author of the ULI book “Making it in Real Estate” and president of McNellis Partners LLC, provided a great answer: “Dude.”
As he described the pros and cons and highs and lows of deal-making, he relayed the woes of a colleague who unloaded a Malibu development before it was ripe based on terms from his financiers. The developer was frustrated, McNelis said, “since you know, Malibu could gain more and more value like the pyramids at Giza.”
At the Q&A, I saw my chance to address this whip smart development industry player:
“Sir, you mentioned the potential for really long-term value growth in Malibu properties. But in our lifetime and surely that of our children, that property actually will be under water- due to sea level rise. Why do thoughtful developers continue to invest in Miami and Malibu even as the physical risks from climate change mount and the imposition on the property owners in harm’s way, as well as the U.S. taxpayer, grows apace?”
His response, in effect: I knew a guy whose property had flooded numerous times and I said to him, “Dude, why don’t you raise It 10 feet or something.’ He continued: “It is a shame….that we use public insurance for beach properties where we know they’re going to be flooded. We should give them one bite at this apple. If it floods once, here is the money. But then no more, no more insurance.”
It’s great he knew what I was talking about, and his answer was interesting: Essentially, elevate property to accommodate the rising tide and change our National Flood Insurance Program to one-and-done. But that it was so easy.
He ended his formal remarks with a helpful reminder that successful developers always calculate the NTM, “Net to Me.” Ten deals can deliver for instance a basket of five gains, three break-evens and two losses. But the key is to always ask in any deal mix not what will be the profit, but what will be the “Net to Me.” That’s true of most partnerships, mine included, but it doesn’t stack up for climate resilience.
Even as the memories of this season’s three hurricanes and devastating fires persist, neither climate change nor extreme weather were mentioned once from the mainstage on ULI’s Fall meeting’s first day. Granted, the ULI magazine editor closed her letter to the conference edition with condolences, and a discussion session about urban reliance was well attended. Still I have an initial answer to my question: Developers are not (yet) paying much heed to climate risk….
As we poured out of the session, I converged with several in the audience who were shaking their heads at my question and saying, “It’s not going to happen – development will go where the money is.” I wondered, “If beach property could not get mortgages because the insurance industry wouldn’t insure coastal storm risks any more, would that do it?” They just laughed, looking out the window at LA’s skyscrapers built perilously close to the San Andreas fault and challenging each other to guess how much profit each floor could generate.