Up and In? What Climate Change May Mean for CRE Investing

John Greenman

(Hay una versión en español de este artículo aquí.)

In the investing world there is the wry saying that “you can be late, and you can be early”. Timing is crucial, in other words. Given rapid climate change, in commercial real estate these days, it may be best to be early.

Severe climate events are occurring more and more often, as can be seen in the two storms that have taken down Houston’s electrical grid twice in a period of 60 days so far this year. And high temperatures are breaking records every day in Phoenix and Las Vegas this summer. Yet people keep moving to places like the Southwest, coastal Florida, and Houston anyway.

Why?

Well, in those regions, jobs have been more plentiful, taxes lower, and housing cheaper than in other areas of the country. All sound reasons. But to expect that life will be grand in these locations requires critically that one assume a reliable electrical supply for air conditioning—an assumption that, increasingly, looks questionable. People eventually will tire of having to suffer in high heat and humidity while waiting for the power to come back on and, along the East and Gulf Coasts, having property damage to repair and fallen trees to clear.

To where will people relocate?

Increasingly, the answer being suggested in real estate investment circles is “Up and In,” meaning from the coasts and desert to the Upper Midwest, the region bordering the Great Lakes. This region has a stable climate (if the location is north of the tornado belt that runs through the central and lower Midwest) and abundant water supply (20% of the world’s fresh water is in the Great Lakes, 10% in Lake Superior alone). In addition, its housing is generally affordable compared with the housing on the coasts.

Chicago, which has a central location within the region, great transit infrastructure, and robust educational and cultural assets (along with one of the world’s great skylines), should be a logical winner here. And longtime residents note that the winters are getting milder due to climate change.  But Chicago suffers from high taxes, high crime, and bad traffic. So the metro areas more likely to attract Sunbelt “returnees” might well be Great Lakes locales like Detroit, Cleveland, Milwaukee, and Buffalo. Also Minneapolis and Pittsburgh: neither is right on a Great Lake, but both are close to one. Also attractive may be medium-sized cities such as Madison, Wisconsin, and Grand Rapids, Michigan.

In short, we may be looking at a climate-inspired revival of the Rust Belt.

If such a shift in population does take off, it will mark a historic reversal of the strong pattern of migration from North and East to South and West observed since the 1960s.

Real estate values won’t change overnight, but eventually market forces will apply as they always do, and, over time, the ensuing property revaluations could prove significant.

In the short run, I recommend at the very least looking more skeptically at new investment opportunities in that long-time darling of CRE investors, the Sun Belt.

To quote the economist Herb Stein, “If something cannot go on forever, it will stop.”

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