If you’ve been reading the BiggerPockets Blog for any length of time now, you’ll have noticed that the Midwest has often been named as one of the best places to invest in real estate right now. It offers reasonable home and rental prices and stable job markets in major cities. The result is a buoyant housing market that has so far avoided the post-pandemic slump seen in other areas.
But what if we told you that, while all this is true, the Midwest is also the most at-risk area for flood damage over the next 20 years—with all the related consequences: abandoned communities, dropping house prices, and rising insurance costs that will make homes less attractive for both buyers and investors?
The Midwest: An Upcoming Flood Zone
Unfortunately, according to the latest cutting-edge research from the climate risk-focused nonprofit First Street Foundation, it’s all true. The Midwest has the highest projected share of what the foundation is calling Future Climate Abandonment Areas—areas that will see population declines over the period between 2023 and 2053 because of increasing damage from floods.
How can we trust this new research? It’s highly detailed, and it’s based on real data from flood risk assessments performed on real homes. Instead of making sweeping statements about the most at-risk states (Florida and Texas are well known to be at huge risk of regular flooding), the researchers adopted what they’re calling a ‘‘granular’’ approach, assessing communities county by county and even block by block. ‘‘Climate risk is a house-by-house issue, not a state-by-state issue,’’ the report says.
This method of projecting where Climate Abandonment Areas will be clustered offers a great advantage because flood risk can vary significantly within small areas. Quite simply, even within a single city, there will be areas that are far more prone to flooding than others. It can even come down to one block of houses being at a greater risk than another.
Looking at the map First Street provides as part of its report, high-risk areas are dotted throughout the country rather than covering whole states uniformly. However, it’s clear that the Midwest will experience climate-related relocations and property abandonment disproportionately over the next 20 years.
The areas most at risk for these changes are located in Illinois, Michigan, Indiana, and Ohio. The cities projected to have the highest rate of growth of climate abandonment areas are Minneapolis (Hennepin and Ramsay counties), Indianapolis (Marion County), and Milwaukee.
What the research doesn’t mean is that these areas will suffer some kind of disaster movie-style exodus. As the report explains, ‘‘While many areas in these states are projected to decline in population with high flood risk, other areas of the state may see growth as populations redistribute to avoid risk.’’
As the researchers emphasize, most research into migration patterns tends to focus on dramatic interstate migrations, e.g., from New York City to Florida. In reality, that’s not how the majority of Americans move. Most people move very locally, not just within their state but within their local county. These localized moves are driven by ‘‘individual preferences to remain close to their families, support networks, local labor market, and familiarity with the local housing market.’’
In other words, people may be pushed to leave their homes if they keep flooding, but they will tend to go to the next town over rather than across the country.
Make Sure to Do Your Due Diligence
The First Street report drives home the importance of real estate investors doing thorough local research. Investing in low-flood risk areas should become best practice for anyone serious about investing in the Midwest. It could make a difference between investing in a community that will have a healthy housing market in a decade or two and one with an ailing housing market with low property values and unattractively high flood insurance premiums.
In fact, a recent study has shown a direct correlation between increased flood risk and declining property values. Add to that the already existing problems with population declines in some areas of the Midwest, and the flood risk becomes a tipping point.
The fact is that many people don’t want to move away from their homes—until they feel that there is no alternative. Communities that are already on the brink because of other issues (e.g., a lack of jobs) are more likely to empty out when the climate change risk is added to the equation.
Philip Mulder, a professor at the risk and insurance department of the University of Wisconsin-Madison, explained the difference between the Midwest and somewhere like, say, Miami, in an interview with Fortune. Mulder points out that Miami is also at high risk of flooding, but it’s still a place with a vibrant economy, with many people still wanting to move there despite the flood risk, ‘‘whereas in the Midwest, you may see there’s not the same reason for people to be there. So flood risks become sort of a tipping point that pushes people out of communities.’’
Real estate investors who are looking at the Midwest should assess multiple risk factors when selecting a location to invest in. While flood risk on its own may not automatically make a place unsuitable for real estate investing, this factor, plus an existing population decline and a stagnant or declining local economy, almost certainly does.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.