Should investors heed the canary in the coal mine?
The future of long-term lending looks pretty cloudy for the Sunshine State.
At a recent investment conference in New York, Spencer Glendon, a senior fellow at the Woods Hole Research Center and a former partner and director of investment research at Wellington Management, laid out a dire prediction for Florida.
“No one should be lending for 30 years in most of Florida,” he said. “During that time frame, insurance will disappear and terminal values” – future resale income – “will shrink. I tell my parents that it’s fine to rent in Florida, but it’s insane to own or to lend.”
Climate change has already begun to wreak havoc in Florida, with warmer water, wetter air, and elevated sea levels leading to stronger and more frequent hurricanes. In spite of the fact that these storms are causing billions of dollars in damage annually, investors don't seem to be taking these warnings to heart.
Glendon said that the Florida economy can be expected to “go to hell” if investors continue to buy up long-dated debt and finance real estate decades into the future. Things could start to unravel when banks or home buyers begin to worry that annual insurance policies in parts of the state will become prohibitively expensive, or disappear completely, Glendon said. That could put the housing market on shaky ground and cause a big dent in property tax revenue, leaving Florida without an obvious way to pay for repairing and replacing infrastructure. Without that, he said, Florida will be no better off than Puerto Rico, which is still struggling to recover from 2017’s Hurricane Maria.
“I hope this is clear,” he said. “Civilization is built on climate stability. We are now accelerating into instability. Do your models reflect that?”
Although the risks of climate change have begun to pop up in prospectuses and credit-analysis, those warnings have had little effect on trends in local municipal-bond and mortgage markets. Miami Beach successfully raised a $162 million bond offering, with a 20-year maturity pricing at the same yield as a similar April offering by Charlotte, N.C., an inland city with much less climate risk. Both issues had the same call provisions, coupons and ratings from Moody’s and S&P. Before that offering, Miami Beach told potential investors that officials are “keenly aware of the risk from hurricanes and sea-level rise.”
Similar warnings are starting to reverberate among other financial institutions. BlackRock recently published an explanation of how climate-risk has become a necessary assessment in understanding shifting levels of risk and value.
The report concludes that 58% of U.S. metropolitan areas will face climate-related damages amounting to 1% or more of GDP by 2060-2080, and that “a rising share of muni bond issuance over time will likely come from regions facing economic losses from rising average temperatures and related events.”
Even if investors are aware of the climate-caused risks in Florida, they may be less important than other concerns, such as generating tax-free income from a property. Investors are used to taking calculated risks, but climate change could become riskier for lending in Florida sooner rather than later.
