Where Climate is Changing Real Estate First: 3 Cities Leading the Shift

Devastating fires, floods, and hurricanes have plagued several regions of the U.S. in the past year. This week on The Breakdown, we explore the impact of climate risks on real estate in three U.S. cities that have recently faced extreme-weather events and other climate impacts. We cover the growing home insurance crisis, the impact on property valuations, and what we can learn from responses to climate risks in these cities so far.

The New Reality of Climate Risk in Real Estate

Climate risk is becoming increasingly ubiquitous, touching every industry, sector, and trade. While its long-term effects will be felt across the U.S., certain regions and cities are already facing a more concentrated share of the threat. And nowhere is this fact more visible than in real estate.

For real estate investors, climate risks are varied and multifold. Physical risks like coastal and inland flooding, hurricanes, wildfires, and other environmental stressors introduce obvious risks for stakeholders in the areas where they occur. Many markets are already seeing rising insurance costs, property devaluation, and market unpredictability due to these threats. Just ask any landlord or homeowner in California, easily the most natural disaster-prone state in the past two decades.

Beyond extreme weather, climate-focused policies and discourse are reshaping how key players—owners, buyers, tenants, lenders, and governments—make decisions. For example, carbon taxes and stricter energy codes may drive up operating costs for investors, while mandatory emissions reporting might push landlords to retrofit older properties, raising rents or shrinking profit margins. In response, buyers could favor areas with looser regulations, while investors may pivot to eco-friendly upgrades to attract more climate-conscious tenants. Those who fail to adapt to this ever-changing landscape could face growing consequences.

According to the 2023 UN Environment Programme Finance Initiative (UNEP FI) report Climate Risks in the Real Estate Sector, the largest physical and transition risks for the real estate sector in the coming years include the following:

Transition Risks	Physical Risks
Increasing regulation and policy pressure	Sea level rise and coastal flooding
Indirect emissions costs	Inland flooding
Investor sentiment change	Wildfires
Reputational risks	Subsidence, heat, and water stress

What does this mean for the average real estate investor? Depending on where your properties are located, you might be looking at higher rates of property damage from natural disasters, mortgage default and prepayment risk, house price risk, and climate migration in the coming years. How you respond to these changes could make or break your portfolio.

Some investors are already responding. In this article, we’ll look at three such case studies—cities where real estate investors are already having to contend with climate-related risks. We’ll discuss their stories, implications for other regions, and what we can learn from these early attempts to navigate a new landscape (sometimes quite literally) for real estate investing.

Los Angeles, California: Insurance Fallout after the Eaton and Palisades Fires

In January of this year, the Eaton and Palisades wildfires near Los Angeles, California destroyed tens of thousands of properties and billions of dollars' worth of infrastructure. It could be one of the most expensive natural disasters both the region and the U.S. have ever seen.

According to U.S. Geological Survey Data (USGS), the fires burned more than 40,000 acres and 12,300 structures across the area. The Palisades fire alone burned almost 24,000 acres in Pacific Palisades and Malibu. The Eaton fire burned 14,000. It’s clear why the USGS describes this catastrophic climate event “among the most destructive wildfires in California history.” The damage to homes, lives, and livelihoods is evident to anyone who watched the news after the fires. But for real estate investors, the fires have made another concern top of mind: soaring home insurance rates.

All in all, the estimated economic damage of these wildfires approached $250 billion. Insurance companies weren't prepared for this level of destruction. In fact, according to Harvard Business Review, wildfires weren’t even considered a major threat by many insurance companies until 2016. Data from ValuePenguin shows that the U.S. experienced an increase of over 10,000 wildfires between 2021 and 2022 alone. It’s clear that the risk has increased even more in recent years, prompting insurance companies to consider damage from wildfires as a more common peril.

Insurance rates, particularly in California, follow the same trend. The state’s premiums are expected to rise over 20% this year, more than double the national average. In February, State Farm requested an emergency rate increase by an average of 22% for California homeowners, while Mercury General, the fifth largest home insurer in California, increased its homeowner policies 12% on average in late March.

Even a FAIR plan, the “last-resort homeowners insurance” for property owners struggling to get wildfire coverage on the open market, can be expensive and difficult to obtain. Some insurers have even left California due to wildfire risk. All of this puts increasing pressure on homeowners, buyers, and investors in California. New buyers will struggle to get properly insured in the future, and even when they can, their rates will be increasingly unaffordable. As an investor, higher insurance premiums will put pressure on your bottom line, forcing you to rethink your cashflow strategy or cut expenses in other areas.

There is some pushback against these rate increases. In California, Insurance Commissioner Ricardo Lara ultimately rejected the State Farm rate increase, commenting in a February press release,“The burden is on State Farm to show why this is needed now.” Even so, the insurance crisis seems to be gaining momentum as more wildfires and other climate events occur. Lara acknowledges the gravity of taking the crisis seriously:

“All Californians know from the past 10 years that the risks of wildfire are real and growing. We have experienced first-hand the ravages of a changing climate. We are clear-eyed about the work needed to protect our communities. Our decisions must be guided by transparent data and an honest reckoning with the challenges we all face together.”

What does all this mean for real estate investors? Well, in certain affected cities and regions, “good deals” are going to be fewer to come by as insurance rates topple the delicate equation of expenses, rents, and mortgages that many investors have used to make purchase decisions in the past. A recent report from Private Equity Real Estate (PERE) News pointedly stated that rising insurance premiums are literally “killing deals in real estate.” Environmental catastrophes like the Eaton and Palisades fires disrupt in-progress deals and destroy potential cash flow as buildings are demolished. They also make the multifamily sales process longer and more complicated as insurance underwriting becomes more and more nuanced. By 2030, the average monthly home insurance rates could be as high as $4,890 per building, according to a 2024 Deloitte report.

It’s safe to say that insurance is going to be a deciding factor in states expecting more severe weather in the next five years.

Responses to Insurance Hikes

Not everyone is quite as pessimistic about the impact of these hikes. Some states are taking action to prevent insurance costs from overwhelming homeowners. In wildfire-prone Colorado, for instance, a bill has been introduced to require insurance companies to include wildfire-resilient investments into insurance underwriting and pricing. The aim is to lower premiums and prioritize safer fire prevention and floodplain management. A similar bill was proposed in California.

Another potential solution is to implement more climate-resilient zoning standards to prevent long-term damage from disasters like wildfires. If cities, buildings, and the laws regulating them are designed in such a way to reduce the spread of a fire once it starts, its residents and their investments may be better protected in the long run.

Some real estate investors in high-risk areas are taking matters into their own hands. For example, many commercial landlords in these areas are now more interested in net leases than they were before, due to the ability to transfer some of the risk of their investment to the tenant renting the space. Landlords who don't want to make other moves will have to pass on these costs to their tenants. However, whether this strategy will be sustainable is yet to be seen.

The true impact of these insurance hikes in Los Angeles and in other regions where wildfires are common will remain a prevalent topic. More and more homeowners and investors will be forced to navigate this situation.

Sarasota, Florida: Fluctuating Property Values after Milton

In early October of last year, less than two weeks after Hurricane Helene hit the Big Bend region, a new tropical cyclone, Milton, was brewing with destructive potential. By October 9th, Milton had reached the Florida coast.

What followed was 24 hours of category five destruction. Hurricane Milton ripped through east central Florida, destroying homes, businesses, and landscaping. Evacuations commenced as nearly 20 confirmed tornadoes roamed the region and winds over 155 mph took out trees and power lines.

When it was all over, Milton was named “the most intense Atlantic hurricane ever recorded over the Gulf of Mexico,” tying only with 2005’s Hurricane Rita. It was also 2024's strongest tropical cyclone worldwide. The total estimated cost of damage was $34.3 billion.

For real estate investors in the region, there is one especially concerning outcome of the disaster: property value fluctuation.

In the immediate aftermath of a hurricane, property values in high-damage areas are expected to temporarily decline. This is typical. But in Florida, the fear for many investors was that previously high-value, beach-front properties would lose their value due to increased long-term risks for the region. Higher-risk properties also lead to higher insurance costs, which sets the bar higher in terms of where cashflow and purchase price need to be for an incoming buyer. Insurance impacts what investors buy, where they buy it, and how much they’ll pay for it. Sellers in coastal towns that once saw consistent demand may find it more difficult to convince buyers that these properties are worth the risk in the future.

No where was this truer than in Sarasota, FL, which took a direct hit from Milton. The hurricane was immediately followed by a real estate transaction slowdown in Sarasota, as buyers and sellers adopted a “wait-and-see" approach while damage was assessed. This slowdown added to an already existing trend of depreciation in Suncoast cities like Sarasota due to entirely independent factors, namely unsustainable price growth, affordability fatigue, and economic uncertainty. In fact, home values in Sarasota County (as well as Charlotte and Manatee counties) were among the most depreciated nationwide between February of 2024 and February of 2025, experiencing a 7% decline over this period according to the Zillow Home Value Index.

Initially, long-term devaluation following Milton was not expected to last. For example, Realtor.com predicted that home prices in the hardest-hit areas might eventually rise, especially Sarasota’s keys. This prediction was based on the fact that wealthy buyers tend to capitalize on large-scale hurricane damage by buying, which causes housing prices to inflate for up to three years post-hurricane, according to a 2023 study on the post-hurricane housing market in Florida. More potential buyers combined with reduced supply after destruction can cause a temporary rise in prices.

However, recent data actually shows a continuation of these downward trends. As of April 2025, median prices for homes and condos in Sarasota and Manatee counties were still down, as they had been since April of last year.

As you can probably tell by now, the big picture here is one of uncertainty. Florida’s coastal real estate markets, including Sarasota, are already facing market challenges: the affordability crisis, economic questions, compounding home insurance and property tax increases, and rising condo HOA fees, to name a few. But now, natural disasters are adding to this uncertainty—hurricanes introduce unforeseeable fluctuations, which make the post-storm Florida markets overall much harder to predict.

Responses to Property Value Fluctuation

For some investors, Florida might be a “lost cause.” Especially for those who haven’t yet tapped into the coastal Floridian market, a higher rate of hurricanes and the associated risks and uncertainty they bring might turn them away forever.

But not everyone is deterred—there is still demand for waterfront properties in Florida, especially among investors who want to focus more on rebuilding projects. Waterfront buyers are willing to take on some risk in order to achieve the lifestyle or attract tenants who still want that. But the risk is there, and they’re factoring it in.

The Florida market in general is still strong, with plenty of buyer demand. Florida built 77,000 new properties in high-risk flood areas over the past six years. While many investors look at sky-high insurance costs and increasing climate risks and ultimately decide to focus their attention and funds elsewhere, the baseline demand for real estate in Florida is simply always high. Instead of fleeing the Suncoast market entirely, many owners are implementing protective upgrades, like impact-resistant windows and better roofing. Florida has also implemented new building codes, which mandate better enforcement for Florida properties. These policies are mitigating fears of some developers and lenders.

Ultimately, wealthy buyers and investors aren’t leaving Florida anytime soon. This phenomenon even has a name—“climate gentrification.” Those who are most likely to leave Florida are its less affluent residents, not new buyers. As Slate Magazine aptly wrote last year:

“To the extent that these storms will push anyone from Florida, it will not be the people with the means to go, but people without the means to stay.”

Denver, Colorado: Climate and CapEx

Meanwhile, landlords in Denver, Colorado face a very different kind of climate question—not wildfires or hurricanes, but policy.

Colorado has proposed and passed a number of climate policies at the state and municipal levels in recent years. In 2021, Denver passed the “Energize Denver Building Performance Policy,” which went into effect in 2023. It requires owners of large buildings to get “extensive energy audits” and propose “plans to reduce energy use and carbon output against a 2021 benchmark,” with a goal of a 30% cut to energy use intensity by 2030 and net zero on carbon from building energy in 2040, according to a Colorado Sun article. Buildings between 5,000 and 24,999 square feet are required to meet lighting or renewable energy requirements, while buildings 25,000 square feet or larger have to submit annual benchmarking data and meet even more specific efficiency requirements based on building type.

Nearby, Boulder voted to implement a climate tax collected on utility bills in 2022, which raises $6.5 million every year to fund local climate initiatives. This policy has been successful with regards to its goal, reducing greenhouse gas emissions by 24% compared to 2018.

However, as landlords in these cities well know, paying for the upgrades, audits, and renovations required to comply with these policies can quickly eat into profits. The financial feasibility of new builds is a concern as well. Policies for new construction focus on lowering the carbon footprint of development projects: For example, the Climate Initiatives Department in Boulder has made a push for low carbon building materials. Traditional materials like concrete and steel have a large carbon footprint, but climate-friendly alternatives like cross-laminated timber and recycled materials often need to be shipped from farther away, increasing prices and decreasing the whole purpose of the policy as transporting the materials has its own carbon footprint.

The bottom line? It’s expensive and inconvenient for landlords to comply with these policies. But the problems these policies are trying to solve are real and significant, and they could have even more expensive implications for property owners down the road. Property owners in Denver are pushing for practical solutions that can protect investor interests and remain as environmentally conscious as possible.

Responses to Increasing Climate Regulations

Practical approaches are what local Colorado property owners want, and they’re speaking up about it. Denver landlords protested against the city’s greenhouse gas rules last year, arguing that the policy did not account for the scope of the capital expenditures required. After a coalition of businesses and property owners sued the state followed by negotiations, the city government eased the timelines called for by the law.

In Colorado and elsewhere, many are wondering if there’s a convergent path for sustainability and economic feasibility. Some landlords are hoping for policies that incentivize energy audits and standards but don’t mandate them, allowing for a more gradual market adjustment. If there is a higher demand for energy-efficient buildings and homes in the future, renters and buyers who want them will pay more for them, potentially making the CapEx investment less catastrophic for owners.

Another solution used in Boulder is to keep these policies flexible for owners. The city uses a “point system” whereby there are various ways to meet the regulatory requirements (e.g., installing a ground source heat pump or battery storage for solar). This makes it possible for landlords to choose projects that make sense for their buildings and markets without taking on an immediate and substantial financial burden.

Weathering Climate Risks in Your Portfolio

Hopefully these three case studies have demonstrated the depth and breadth of issues currently caused by climate risks across the U.S. Whether it’s insurance premiums, property value fluctuations, regulatory policies, or something else entirely, it’s likely that most investors will encounter some type of climate risk relevant to their portfolios in the coming years. Navigating these risks will undoubtedly be the focus of discourse and decision-making looking ahead.

While we can’t give general advice for tackling such a broad challenge, staying up to date on current happenings—new policies, data following natural disasters, etc.—will give you the best idea of which approaches to climate risks are working and which aren’t. Many more cities will make this list in the future—if we learn from their responses, we can better identify innovative policies that support both the environment and the real estate industry.