Large swaths of New York City lost power due to Hurricane Sandy in October 2012.
A week and three days after Hurricane Sandy flooded Lower Manhattan, killed dozens of New Yorkers and caused billions of dollars in economic losses, the city's commercial real estate leaders gathered in a gilded Midtown hotel ballroom to assess the damage outside. As workers labored to restore power downtown, the executives recounted tenants endangered, a doorman still missing and skyscraper flood gates overwhelmed.
The executives — including the CEOs of major city property owners SL Green Realty Corp., Vornado Realty Trust and Related Cos. LP — differed on the particulars of what lay ahead, but they agreed that the industry and local governments would have to make a dramatic commitment to hardening the city against future storms. Six years later, the city is planning its next steps. But it faces a changing climate in which rising sea levels, combined with more frequent and intense large storms, are expected to threaten the center of the U.S. financial world and billions of dollars' worth of real estate.
In Lower Manhattan, the Federal Emergency Management Agency's projected 100-year flood plain for the year 2050 — the area that FEMA says will be inundated in a flood having a 1% chance of occurring in a given year, as of that point — is vaster than both the current official 100-year flood plain and the still-larger area that flooded during Sandy. Among many other properties, the area includes the headquarters of both Goldman Sachs Group Inc. and Citigroup Inc. and two sprawling apartment complexes owned by Blackstone Group LP — Stuyvesant Town and Peter Cooper Village.
Floods once considered unusually large are becoming much more common as a result of climate change. Storm surges of 7.4 feet at Manhattan's lower tip — still short of Sandy's 9.2-foot surge — were about a once-in-500-years event in the years before 1800, said Andra Garner, a climate scientist at Rutgers University. The Industrial Revolution brought an increase in carbon emissions, and with that, the incidence of storm surges increased. By the latter part of the 20th century, the average period between similar storm surges had shrunk to an average of every 25 years. By about 2030 to 2045, Garner said in an email, such a surge could occur an average of every five years.
As a real estate market, New York is one of a handful of top-tier destinations for global capital, where wealthy families and institutions, including pension and sovereign wealth funds, invest their money under the assumption that long-term risks are low. Yet it is also a chain of islands that will face greater relative sea-level rise than the global average as a result of geological factors and ice-melting patterns, Garner said in a 2017 paper published in a National Academy of Sciences journal.
The risks to coastal cities, in general, are expected to increase: According to a 2013 World Bank analysis, average annual global flood loss stood at about $6 billion in 2005 and will rise to $60 billion in 2050, even assuming that localities invest in adaptations. New York, which had the third-highest flood risk in the world among large cities in 2005, would see its economic average annual loss more than triple, to $2.06 billion, by 2050.
According to S&P Global Market Intelligence data, the assessed value of commercial real estate properties within the 2050 100-year flood plain in Lower Manhattan is $12.92 billion. However, based on recent property transactions, the assessed values likely represent a fraction of current market values.
Some resilience experts believe New York is better-positioned than most other global and U.S. cities to cope with the effects of climate change, if only because so many wealthy companies and individuals have so much invested in its continued survival.
"They have the world's financial markets hosted there: It wouldn't take much in terms of contribution from any of the financial institutions and investors who are based in Manhattan," said Emilie Mazzacurati, founder and CEO of Four Twenty Seven, a market intelligence firm focusing on the economic risks of climate change. "They can snap their fingers, and here's enough money."
Still, she added, "You're talking massive amounts, in terms of the buildup that would be required."
Sandy crippled much of Manhattan for days, killing 43 people and causing at least $19 billion of damage across New York City. The area at risk of flooding in similar future storms includes Brookfield Property Partners LP's Brookfield Place complex, the former World Financial Center. The Lower Manhattan towers contain the headquarters of American Express Co. and offices leased by Bank of America Merrill Lynch, RBC Capital Markets and Time Inc.
Farther north in the flood zone are RXR Realty LLC and Blackstone's Starrett-Lehigh Building at 601 W. 26th St., and Chelsea Market, an office and retail property that Alphabet Inc.'s Google LLC bought in 2018 for $2.4 billion. The owners of 60 Hudson St. in Tribeca, a colocation center, call the property the Northeast's premier telecommunications hub, with more than 100 domestic and global telecom companies among its tenants.
Blackstone, Citi and Brookfield
The city government expects work on its East Side Coastal Resiliency Project, intended to protect areas along the East River including Stuyvesant Town and Peter Cooper Village with a series of berms, gates and flood walls, to begin in 2020. The project is scheduled for completion in time for the 2023 hurricane season. A separate long-term study of Lower Manhattan should be completed soon, Jainey Bavishi, director of the city's Office of Recovery and Resiliency, said in an interview.
Bavishi said the city is taking a "multi-hazard approach" to protect against sea-level rise, storm surges, increased precipitation and extreme heat as a result of climate change. The lower tip of Manhattan presents a unique challenge because there is limited real estate available to build coastal flood protections, Bavishi said.
"Resilience is not an outcome, it's an ongoing process," she said. "So we're going to continue to stay up to date on the latest projections and science, and we will continue to make investments to make the city as prepared and resilient as possible." Nevertheless, Bavishi maintained that the city is safer than it was during Sandy, in part because of stronger building codes, hardened infrastructure, an improved emergency preparedness plan and better flood-risk communications.
Stéphane Hallegatte, a lead economist in the climate change group at the World Bank, said in an interview that the pace of New York's progress is typical among large cities, which often take decades to complete flood protection systems. The city's challenge will be to maintain momentum, Hallegatte said.
"To do big investments, you need awareness of the population, you need a consensus that this is something that needs to happen," Hallegatte said. "And so a lot of that relies on feeling the threat. After a big event, you have these windows of opportunity where it's very easy to build coalitions to invest significant amounts. These conditions don't last forever."
A series of choices
Garner, the climate scientist, said the results of her research on sea-level rise and storm surge indicate that there is a "very serious" need for infrastructure development.
"We are likely already committed to sea-level rise that would impact these kinds of increases in flood risk," she wrote in an email. That said, she added, "It's very important to note that, if we as a society begin taking action now to reduce emissions and limit future warming, we may very well be able to avoid the worst-case scenarios and limit future increases in flood risk."
For property investors seeking to make decisions based on an uncertain future, there is early research — albeit not focused on New York City — showing a small but growing differential between real estate properties that are exposed to future floods and sea level rise and those that are not, Mazzacurati said. Asset manager Heitman LLC and the Urban Land Institute, along with contributors from the insurance and engineering sectors, are working with Four Twenty Seven on a project to study the issue further.
While the recent years' bull market has pumped up valuations of all properties, the gap will widen as more property owners try to sell their buildings in an environment where the effects of climate change are more obvious, Mazzacurati argued. Hallegatte, at the World Bank, said the effect of climate risk on New York City real estate valuations is difficult to isolate, largely because there are no other comparable U.S. cities. Both Hallegatte and Mazzacurati said the city's uniqueness may protect it, up to a point.
"There is this assumption that is present in many of the big cities of the world that these cities are too big to fail, that something will happen, and some investments will arrive," Hallegatte said. "And it's right. Nobody thinks that Manhattan is a place, except in Hollywood movies, that is in danger of disappearing. Whatever needs to be invested in the end will be invested."
That is little comfort, of course, for cities in poorer countries, or U.S. cities with less to spend on preparation, or even less central neighborhoods of New York City. And such an outcome will require agonizing policy choices, Hallegatte said.
"If you're doing a cost-benefit analysis to decide where you will invest your public resources, your analysis will tell you to invest in the richest places, because this is where the highest value is," Hallegatte said. "It means using taxes to protect rich people. Whether things go like that or differently is a political choice, and we cannot really guess what is going to happen."