Related Group of Florida is one of South Florida’s largest luxury real estate developers, with over 100 million square feet developed in the region since 1979.[i] With upwards of 30 projects[ii] totaling $10.7 billion in assets under development, Related Group proves that the boom in real estate in South Florida is as strong as ever, with ~11,000 condos across over 100 buildings currently under construction in Miami-Dade, Broward and Palm Beach counties[iii]. In an area marked by development excess, Related emerges as the leader – it has been estimated that 1 in 4 high-rise dwellers in Miami lives in a Related building[iv].
Southern Florida has long been subject to a boom and bust real estate market. Miami Beach, for example, is one of the most populated barrier islands in the world thanks to decades of development that have established the city as a top destination for tourists seeking a luxurious beach experience. Unfortunately, the city also happens to be one of the lowest lying municipalities in the country, and the situation is not much better for the broader Miami-Dade County, 60% of which sits less than 6 feet below sea level.[v]
BOOM? BUST? THAT’S JUST THE SOUND OF THE LEVEES BREAKING.
As climate change progresses, these low-lying areas will increasingly be subject to rising sea levels and more frequent – and powerful – storm surges. Given Related Group’s focus on the South Florida region, there are several risks to their business model from rising sea levels related to climate change:
- Asset Risk – Related Group’s significant real estate holdings is at risk of severe physical damage as sea levels rise. The New York Times has estimated that with just the 5 foot increase in sea levels predicted over the next 100-300 years, 94% of Miami Beach will sit underwater[vi].
- Insurance risk – Insurers are already aware of the increasing risks to shoreline property damage and will continue to raise premiums for high-risk property in areas like Miami.
- Credit risk – The availability of financing may dry up for real estate investors like Related Group as institutional investors deem projects too risky[vii].
- Demand risk – Retail buyers are becoming more aware of the imminent threat that climate change poses, and as this trend increases demand is likely to dry up among that population. In its place, Related has come to rely more on foreign investors who view climate change risks relative to other political economic risks in their home countries.
COWBOYS DRAWN TO A GOLD RUSH
Related Group’s CEO recognizes the impact of climate change on new development, but he also acknowledges the particular psychology that makes for a good real estate developer in the first place: “We are an industry with a lot of cowboys. Real estate developers seem to be the most optimistic of people.”[viii]
And in truth they have reason to be optimistic. Miami-Dade county, whose tax revenue comes disproportionately from property taxes, has expressed a willingness to invest significantly into capital improvement projects aimed at mitigating risks to property from rising sea levels[ix]. The public sector sinks or swims with the local property market in Miami, and Related has done a good job of forming strong relationships with government.
OPPORTUNITY IN ADAPTING?
Development in Miami will continue to be hugely profitable – until it’s not. Related can take a few steps to adapt to the future state of the world:
- Diversify beyond South Florida – While challenged by their relationship with the Related Companies’ presence in the rest of the US, the Related Group has of late been extending their relationships into Latin America to lessen their portfolio’s exposure.
- Create sustainable communities in high-lying areas near Miami – Environmental refugees will need to be housed in safer locations.
- Build amphibiously – Luxury development will take on new meaning as buildings on Miami Beach change their car parks over to yacht docks.
None of these solutions, though, present the same profitability that Miami Beach development has allowed for. It will take long-term, community-based thinking to make the leap.
[vii] “Where we see some headwinds is in the capital markets,” said Ezra Katz, CEO of Aztec Group Inc. in Miami, citing regulatory pressure on commercial banks to limit their exposure to real estate loan losses. “I think you’re going to see some serious setbacks in construction lending … by regulated banks.” http://therealdeal.com/miami/2016/09/27/jorge-perez-expect-residential-development-in-miami-to-slow-not-stop/
[ix] “The Sea Level Rise Task Force recommends accelerating the adaptation planning process by seeking and formally selecting the engineering and other relevant expertise needed to develop the robust capital plan, vetting the elements (i.e., flood protection, salinity structures, pump stations, road and bridge designs, etc., just to name a few possibilities) as well as what measurable indicators will trigger timely sequencing.” http://www.miamidade.gov/planning/library/reports/sea-level-rise-final-report.pdf