August was a busy month for natural disasters. A series of wildfires broke out in Hawaii in the early part of the month. One blaze unleashed disaster on the island of Maui, destroying the historic city of Lahaina. The death total is 115, while hundreds are unaccounted for. The Maui wildfire was the deadliest in the United States in more than a century.

At the other end of the United States, Hurricane Idalia made landfall in Florida’s Big Bend region at Category 3 strength on August 30. The storm brought flooding and wind damage throughout much of the area before churning through Georgia and the Carolinas.

Natural disasters like these aren’t going away. As such, Marcus & Millichap’s John Chang cautioned that investors need to start calculating the potential costs of these disasters as part of their real estate due diligence activities. In a recently released video, “How Natural Disasters Impact CRE Investors,” Chang told the story of a Los Angeles real estate investor making seismic retrofits to his properties to mitigate earthquake risk. “An important realization captured his attention,” Chang said. “He was just one natural disaster away from effectively being knocked out of business. Virtually all of his real estate was in one metro, a metro prone to earthquakes.”

A lot of other investors are in the same boat.

Sobering Numbers

As mentioned above, natural disasters aren’t going away. They’ve increased over the past two decades. According to Chang’s numbers:

• During the last three years, the United States experienced an average of 20 disasters annually; the price tag was more than $1 billion

• During much of the 2010s, the U.S. experienced 12.8 natural disaster events, on average

• During the 2000s, the U.S. experienced an average of 6.7 natural disaster events

Furthermore, natural disasters in the U.S. in 2022 generated about $175 billion in damage. Chang said that the vast majority of that damage impacted real estate, adding that “there are specific areas of the country that are more susceptible to natural disasters. In addition to hurricanes, wildfires and flooding have been on the rise.

Natural Disaster Impacts

Chang explained that natural disasters pose two different challenges for CRE investors.

• Lost Revenue: There’s dealing with repairs and cleaning up costs. “Even though repairs and lost revenue may be covered by insurance, the damages will still cost investors time and a period of shorter cash flow,” Chang said.

• Higher Insurance Rates: Chang indicated that homeowners insurance rates have increased by more than 12% within the last year. Furthermore, “in some markets, real estate insurance has gone up by 40%, 50% or even 60% in the last year,” Chang said.

Diversification as a Solution

Getting back to the Los Angeles real estate investor, Chang pointed out that geographic diversification can potentially mitigate this issue. “The investor who’s not geographically diversified could have their short-term cash flow driven to zero by just one natural disaster,” Chang said.

Additionally, investors must analyze more than the economic and business drivers when buying a particular property. Chang suggested they should “consider natural disaster risk and insurance cost” as well.