We get it. Weather isn’t the world’s most interesting conversation topic. But today, we’re putting on our dad hats, because — as mundane as it may sound — weather is eventually going to be a top-of-mind consideration for most real estate investors.
Like, say, when this happens:
From acquisitions to operations to liquidation, weather is one of the many considerations investors need to think about. Let’s break down four ways that the weather can impact real estate investors.
1. “Location, location, weather”
The old property-value saying really is true: location dramatically affects pricing, tenant demand, costs, rents, and virtually every other metric relevant to investor returns.
Weather can impact investors in the same way, attracting tenants to locations known for endless, sunny, 70-degree afternoons and discouraging tenants from moving to locales known for formidable, extreme, or rainy weather. After all, Miami is popular (and expensive) for a reason.
Prospective investors should consider how the intersection of weather and location can impact tenant demand. A luxury vacation rental might perform well on the California coast, but not so well on a rainy midwestern lake.
(Incidentally, one reason we know Pittsburgh real estate is so incredible is that people don’t exactly move here for the weather!)
2. Seasonality, demand, and pricing
Fun fact: over 40% of home sales in the United States occur during May, June, July, and August. Meanwhile, both volume and price cool off as autumn rolls into winter.
Similarly, many renters move during the late summer and early autumn, tracking with academic calendars and work schedules.It’s no surprise that rent increases — following demand increases — tend to be concentrated during the warmer months.
Anticipating increased demand during warmer months — and reduced demand during cooler months — could help investors adjust pricing to keep pace with the market.
3. Amenities and Utilities
A multifamily building in Dallas won’t be identical to a multifamily building in Kennebunkport. The need for and cost of amenities like A/C, heating, and snow removal impacts up-front capital expenditures, operating cost over time, and the utility bills tenants receive.
Similarly, property owners operating in locales renowned for their sunny days may want to capitalize on weather trends by installing attractive amenities like patios, porches, balconies, or decks.
On the other side of that coin, property owners with buildings in areas with high risk for flooding, tornados, hurricanes, or wildfires may install features that preemptively harden their buildings against disaster. In some cases, building codes even require these features. Hurricane clips, air filters, and waterproofing can be expensive — but in some regions, they’re necessary for protecting tenants and your investment.
4. CapEx Risk
Unfortunately, protective measures don’t always work perfectly.
According to the NOAA, “The U.S. has sustained 298 weather and climate disasters since 1980 where overall damages/costs reached or exceeded $1 billion . . . The total cost of these 298 events exceeds $1.975 trillion.”
Accordingly, investors operating buildings located in regions with a higher risk of natural disasters may want to adjust their maintenance budgets and emergency funds, and acquire disaster insurance.
For investors with lower risk tolerances, the enhanced expense and uncertainty associated with operating in more-extreme weather could be deal-breakers.
Either way, an accurate evaluation of CapEx risk is a critical stage of the diligence process, and in some locations, weather is a critical part of that assessment.
Can we add something about the amount Birgo spent on snow removal in 2020? Not sure if we want to publicize this information but it could be an interesting tidbit that makes this article more relevant to us.
Real estate is a complex business, especially for residential investors. Virtually everything that could affect the way people live and work is an important consideration — even something as mundane as the weather.
For investors in some climates, weather may never be more than a passing consideration. But, tenant satisfaction goes hand-in-hand with strong returns, and even in mild climates, thoughtful touches like awnings, energy-efficient air conditioning, or well-insulated windows can be well worth the capital. If extreme weather is a possibility for your building, preemptive measures are always a good call.
After all, a hurricane is a bit more visible than cap rate compression.