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FEMA develops new risk assessment Method as flooding becomes major threat to commercial real estaTE

Flooding has been found to be the most pressing of climate threats for US an UK CRE decision-makers. FEMA (an organization that oversees the federal response to disasters) established a new way to calculate flood insurance premiums on October 1st, known as Risk Rating 2.0.

Risk Rating 2.0 is different from the former National Flood Insurance Program (NFIP) because it Evaluates risk to individual properties based on flood frequency in the area, distance to a source of water, and the cost to rebuild; instead focusing solely on outdated fixed flood zone maps.

This system is expected to generate fairer premiums based on a more accurate evaluation of flood risk. In practice, this will result in higher costs incurred by owners of properties vulnerable to flooding. For instance, the Washington Post reported that a handful of owners of expensive seaside properties will suffer an increase in costs of as much as $12K per year.

Commercial real estate owners are those that will be primarily affected by this change, as the NFIP will continue to be used by residential property owners. This is largely due to the fact that the NFIP covers up to $500K in damages, but this is not a sufficient amount funds to repair bigger commercial properties in the event of a climate disaster. Thus, commercial real estate owners must purchase private flood insurance.

The extent to which flooding is a risk to CRE is reflected in an investigation conducted by the

Risky Business Project, which estimated that if global warming continues at its current pace, between $66 and $106 billions worth of existing seaside property will be submerged by 2050. However, it is not only coastal properties that are at risk for flooding. In fact, a decreasing number of places are actually considered to be completely safe, with inland flooding incidents being currently on the rise.

First Street Foundation research has revealed that over 20% of US key infrastructure- including airports, health centers, police and power stations amongst others- will be vulnerable to flooding over the following 30 years. In light of this information, there is a pressing need for more accurate and widespread climate intelligence to inform development decisions of both small and larger real state owners.

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