The 'hidden' variable in valuation: Is your property worth less than you think?

On the surface, a property’s value seems straight forward. It's determined by square footage, location, recent sales in the area, and local economic conditions. Lenders, investors, and homeowners have relied on these traditional metrics for decades. But this valuation model is fundamentally incomplete. It's like judging a house by its curb appeal without looking at the foundation.

A powerful and rapidly escalating variable is at play, silently eroding asset values across the country: physical environmental risk. This is the “hidden” factor that traditional appraisals simply cannot capture, and it's threatening the integrity of entire portfolios.

This isn't a theoretical problem; it’s a tangible financial reality. The question is no longer if environmental risk will affect your assets, but by how much. And whether you have the intelligence to see the full picture.

Why traditional valuation fails

For decades, environmental risk management has been a largely backward-looking discipline. It relied heavily on historical data and broad-stroke models, such as FEMA flood maps, which are valuable but increasingly insufficient in our rapidly changing world. This traditional approach has three critical limitations:

• Lagging indicators: Historical data tells us what has happened, not what will happen. In an era where "100-year floods" occur every five years and wildfires are no longer confined to specific regions, past performance is not a reliable predictor of future risk. This is a point the U.S. government has publicly acknowledged, declaring environmental change an “emerging and increasing threat to the global financial system and economy.”
• Interdependent and compounding risks: Traditional models often treat natural hazards as isolated events. In reality, they are interconnected in a dangerous cycle. The recent fires in Los Angeles, for example, followed two years of wet winters that encouraged the vegetation growth that became wildfire fuel. Now, the burned areas lack the vegetation to absorb water, making them more vulnerable to flood; a deadly cycle that is repeating itself across California.
• Data gaps: Traditional methods struggle to process vast amounts of data from disparate sources, leaving crucial insights fragmented. The Federal Reserve Bank recently questioned six of the top U.S. banks about their preparedness for physical environmental risk, highlighting existing gaps in banks’ ability to quantify real estate exposure and insurance risk management information.

These limitations highlight a fundamental gap: the need for a system that can not only understand the present but also predict the future with greater precision and integrate diverse data sources into a cohesive, actionable framework. This is where AI-powered analytics step in.

Uncovering the hidden variable

At Cotality, we believe that you can't manage what you can't measure. The hidden variable in valuation is unpriced risk, and our mission is to make that risk visible, quantifiable, and manageable. We do this with Artificial Intelligence (AI), which allows us to deliver "Intelligence beyond bounds"; seeing patterns invisible to the human eye, predicting future scenarios, and integrating complex data points into actionable insights, such as:

• The unprecedented threat of wildfire and flood: The interdependence of risks in California is a clear illustration of the hidden variable. This cycle has left the state's major metropolitan areas facing significant, growing flood risk. In Los Angeles, 762,000 homes are impacted by flood risk, in San Diego it’s 231,000, and in San Francisco it's 65,000. Between 2030 and 2050, the flood risk scores for these homes will worsen significantly.
• Escalating costs and market devaluation: The market is already starting to price in this compounding risk. While home price growth remains below 2% nationally, traditionally high-risk markets in the Sun Belt have seen notable declines, with Florida, Texas, Hawaii, and Washington D.C. all reporting negative home price growth in May 2025. This is a direct market correction for unpriced risk, showing how quickly the hidden variable can manifest in a portfolio. This is also evident in rising costs, with average annual expenses for insurance and property taxes jumping by 70% in Florida since 2020.
• The WUI and the tripling of fire size: Traditional risk models often fail to account for the unique vulnerabilities of the Wildland-Urban Interface (WUI), which is home to approximately 45 million U.S. residences and is the source of most wildfire ignitions. The average fire size has tripled over the past 30 years, and our analysis shows a similar trend in risk exposure. In the Los Angeles-Long Beach-Anaheim metro area, the Reconstruction Cost Value (RCV) for high-risk homes rose from $71 billion in 2019 to $143 billion in 2024. This trend is not unique to California, with major fires in Colorado and the million-acre Smokehouse Creek Fire in Texas demonstrating the growing scale of the threat.
• Unpredictable events don't respect outdated maps: The Central Texas flash floods in July 2025, a 1,000-year rainfall event, caused $1.1 billion in damage to residential buildings, devastating communities. A crucial finding from our analysis: even properties outside the 500-year floodplain suffered heavy losses. This underscores the complete inadequacy of relying on outdated flood maps to assess risk and reveals the need for advanced, address-level insights that can predict risks in areas previously considered "safe."

Our platform goes beyond a simple, high-level overview. It provides hyper-local, address-level insights that account for microclimates, local topography, building characteristics, and more, revealing the true physical risk profile of a property. This is where we uncover the hidden variable and how we give our clients the power to see around every corner.

Actionable intelligence for every stakeholder

In a world where environmental risk is the hidden variable, the ability to see around every corner is no longer a luxury; it’s a necessity. Cotality's data empowers every stakeholder to do just that, protecting their bottom line and unlocking new opportunities.

• ‍For federal and state governments: The U.S. government has recognized the urgency, with the White House inviting experts like Cotality’s own Dr. Howard Botts and Pete Carroll to help with macroeconomic forecasting. Dr. Botts noted that Cotality was “the only climate risk modeling company invited,” a testament to our ability to provide the consistent, granular data needed to address a problem of this scale. This shows how our data can support large-scale government initiatives to manage the growing threat.
• For lenders and financial institutions: Our Composite Risk Score (CRS), which combines over 20 detailed risk measures into a single metric, allows lenders to instantly and precisely assess a property’s resilience. By using this score, they can avoid underwriting risky loans and accurately price risk, ensuring the long-term health of their portfolio. This is the kind of forward-looking data the Federal Reserve is asking for.
• For real estate investors: In a market where the environment is a devaluing threat, data becomes a competitive advantage. The ability to see beyond the high-level noise and identify a resilient property in a vulnerable area can unlock a powerful opportunity. Our 30-year projections and Intergovernmental Panel on Climate Change (IPCC)’s climate scenarios empower investors to spot undervalued assets and build a portfolio that is both profitable and future-proof.
• For corporations and urban planners: Corporations can use our data for smarter site selection and more resilient supply chain management. Our insights help urban planners build stronger, more adaptable communities from the ground up, as seen in the UK's "Parity Project," which aims to retrofit 37 million homes to create a more resilient housing ecosystem. The data provides a shared blueprint for collaboration, ensuring that the next generation of infrastructure is built on a foundation of foresight.

The proactive path

The traditional valuation model is broken. The hidden variable of environmental risk is already influencing markets and eroding asset value, and ignoring it is no longer an option. The businesses that will thrive in the coming decade are those that move from a reactive posture to a proactive, data-driven strategy.

The evidence is clear, from the unprecedented wildfire data to the negative home price growth in high-risk metros. The future belongs to those who embrace the intelligence needed to navigate this new landscape. Cotality provides the tools to do just that. Our AI-powered platform, with its hyper-local granularity, predictive foresight, and comprehensive data integration, empowers you to see the full picture.

By making the hidden visible, we help you protect your bottom line, gain a competitive edge, and ensure your assets are valued for what they are truly worth. Join us to learn more about how to turn environmental challenges into opportunities at https://www.cotality.com/resources/webinars/making-the-shift.‍