Resilience is multifaceted; resilience is land use; resilience matters for commercial real estate.
Editor’s note: Michael Rodriguez is the leader of market research and insights at CBRE Mid-Atlantic and visiting research director at Smart Growth America. This June, he participated in a ULI Advisory Services panel to advise the city of Miami and the Miami Downtown Development Authority on its waterfront resilience efforts.
Together with nine other expert panelists from across the country and ULI professional staff, I hunkered down for a week to develop some recommendations for how Miami can improve its resilience now and in the future. Our recommendations, presented at Miami’s historic City Hall, included developing a living shoreline demonstration project and, in the long run, using transit-oriented development (TOD) on higher ground. We also presented ideas on how to finance and implement the plans. The Miami Herald included a summary of our work; a video of the whole presentation is available here.
Although I grew up in Miami, I now live in the Washington, D.C., area and have been thinking about what I learned in my hometown last week and how those lessons apply to the real estate market.
I learned that true resilience is multifaceted and deals with issues beyond the physical threats from climate change and rising sea levels. We panelists came to value (and recommend) the importance of land use as a resilience strategy. Finally, resilience is something the commercial real estate industry has to consider head-on in any market.
Resilience Is Multifaceted
It is said that Miami is a city built on the bay, and the bay wants it back. The city faces threats from hurricanes, frequent “king tides,” and forecasts of a 2.5-foot (0.8 m) sea level rise by 2060. Whereas many people approach the subject of resilience with a mind-set that it is about climate change, sea-level rise, flooding, and heat islands, I came away with a strong appreciation that it is much more. Yes, resilience is all those things, but the approach to create a truly resilient city goes far beyond addressing the physical threats it faces.
By collectively interviewing over 80 experts in the city, panelists learned the importance of economic resilience. Housing affordability in Miami is under threat—home sale prices have increased 36 percent since 2012, compared with 16 percent for apartment rents—making homeownership further out of reach for many Miamians. That is not to discount the problems of rents either, which are far outpacing the wages in an economy that depends heavily on retail, food and beverage, hospitality, and tourism jobs.
On the flip side, the city has a booming condominium market that helps prop up its property tax base, but many units are owned by absent foreign owners and speculators: some buildings are fully sold but are effectively 50 to 75 percent empty on any given day, according to some of our interviews. As a result, these condos have not served as housing stock for local residents. It is fair to say that many of these upscale waterfront condo units are purely commoditized for speculation and the safe harbor of foreign capital.
Resilience is also about social resilience. As told to our panel, Miami is one of the cities facing what some are calling “climate gentrification”—pressure from development occurring in higher-elevation areas away from the water and less prone to climate-related damage. This includes neighborhoods in parts of Little Havana and Allapattah, both of which have economically vulnerable communities.
Though many cities do not face the same degree of climate risk as Miami yet, they are beginning to understand that they are susceptible to broader economic and social risks of flooding and other environmental vulnerabilities. For example, housing affordability in growing economies is a particularly common problem. Cities are initiating active housing strategies and appropriate zoning strategies to ensure the long-term stability of the local housing market.
Resilience Is Land Use
When Henry Flagler led construction of a railroad to Miami—the beginning of the city as we know it today—he built the railroad on the higher ground along the Miami Rock Ridge. From the outset, Miami was defined by its waterfront and its railroad.
Our panel found that a return to TOD furthers resilience because 1) it would facilitate long-term development in areas less vulnerable to flooding and other weather-related risks, and 2) building in a smart-growth manner with a TOD mind-set is a more sustainable form of urban development that reduces auto dependence and the per-capita carbon footprint.
Spurring development along these areas does pose the risk of displacement, as do many rezoning efforts. One option the panel considered was transfer of development rights for existing homeowners to develop in low-risk areas, along with TOD-based upzoning, allowing small existing property owners to benefit from becoming small-scale developers themselves.
Land use and TOD influence resilience because they reduce dependence on the unsustainable growth of highway congestion, and ultimately enable residents to live, work, and play in areas without being dependent on an automobile. A good way to focus on pedestrians through resilience, after all, is not just to protect them from wading through flooding, but to give them a comfortable environment to walk in even on nice days.
The panel found that there is about $800 million of commercial real estate (office, retail, apartments) within a half mile (0.8 km) of Miami’s bayfront and riverfront areas—an area that the panel learned also accounts for 75 percent of the city’s jobs. This $800 million is, in fact, a very low estimate because it does not include hotels or the ubiquitous condos; the actual number would be much, much higher.
We learned some of the long-term climate-related risks to commercial real estate. In the long run, if risks were accurately priced into asset prices and raised cap rates by 1 percent, Miami could lose up to $40 million in property tax revenue from the $800 million of commercial real estate assets alone. Other financial risks include the insurance market eventually adjusting to fully risk-based pricing (that is, eliminating subsidization), and banks becoming hesitant to extend loans to areas prone to flood damage.
Think of it this way: a “500-year flood” is becoming more common—and the 500-year flood actually means a 6 percent chance of major or total loss of the asset over a 30-year mortgage or investment period. As an investor, how would you account for that very real risk?
Our recommendations included that the city should develop project prioritization programs and use risk-based financial tools to understand where it might best divert its limited resources. And we noted how such analysis can also justify partnership with the private sector. Everyone has an incentive to stay dry.
Again, all communities might not be as vulnerable to hurricanes and severe flooding as Miami is, but the water-related risks from river flooding and rainfall flood events are very real in many cities.
Resilience investment efforts should be risk based and performance oriented and should consider the improvements to public and private infrastructure and all the co-benefits. We all benefit from a more resilient city, and both the public and private sectors have roles to play to strengthen the viability of our urban space.
Ultimately, I learned resilience involves so much more than just thinking about one risk and one type of mitigation. Miami and similar cities around the world need to consider their long-term resilience from a physical, economic, and social aspect.
I, for one, hope the commercial real estate industry will talk about this much more.
MICHAEL RODRIGEZ is the leader, market research and insights, at CBRE Mid-Atlantic, and visiting research director at Smart Growth America.