Los Angeles Area Wildfires – Valuation Will Play A Key Role In Rebuilding Efforts

The Los Angeles area wildfires are having a devastating effect on people and property. The potential financial impact is staggering with thousands of structures destroyed or damaged and preliminary loss estimates in the tens of billions of dollars. With a long road ahead, attention is turning towards recovery and rebuilding.

One thing that people can agree on is that there are still many unknowns related to the total amount of damage, the extent that insurance will cover losses, potential litigation ahead, timing of the rebuilding and how much government funding will go into rebuilding efforts. However, with all of the uncertainty, valuation will be a focal point in the recovery and rebuilding process, including insurance claims, land feasibility studies, redevelopment, lawsuits, and more.

More than 40,000 acres have been burned and 12,300+ structures have been destroyed in the Eaton, Palisades and Hurst fires, according to the California Department of Forestry and Fire Protection. This latest natural disaster highlights extreme weather events that have been increasing in frequency and severity over the past decade, including hurricanes, flooding, wind, drought, winter storms and wildfires.

In 2024, there were 27 weather-related disaster events in the US that produced losses exceeding $1 billion. Hurricane Milton, which hit in October, was the single most costly event last year with more than $60 billion in damage, and the property damage caused by the Los Angeles wildfires in January are expected to put more pressure on risk mitigation and rising insurance costs.

Challenges and opportunities ahead

Altus conducted an analysis of commercial and multifamily properties potentially impacted by the California wildfires, finding that 146 commercial and multifamily properties fell within the extent of burned area according to the National Interagency Fire Center as of January 16, 2025.

Combined, the buildings span more than 2 million square feet of space across a variety of property types, including office, retail stores, neighborhood retail centers and mixed-use, among others. The majority of properties – just over half – were multifamily structures. And on average, structures were built in the mid-1950s, which suggests there is an opportunity to rebuild more modern, resilient, and higher value structures.

The common theme across history is that even after devastating natural disasters, communities do rebuild and those impacted areas once again thrive. That has been the case in major global events such as Hurricanes Katrina and Andrew in the US, the 2004 earthquake and tsunami in Indonesia, and the 2019-2020 wildfires in Australia, among others.

One of the biggest challenges is that it is still early days in the recovery, especially with fires still burning, and there are a lot of unknowns on variables that will impact valuation. From an investor’s perspective, key questions are whether to invest in this market or not, and if so, at what price and at what timing? What is clear is that there is a lot of analysis that needs to be done, and a lot of opportunity ahead because of the capital expected to come into the market.

Figure 3 – Potentially impacted commercial and multifamily properties in Pacific Palisades

Assessing values for insurance

Property valuation plays an important role in recovery and rebuilding from a number of different perspectives, including a key starting point – determining replacement value for insurance claims. According to Morningstar DBRS, the Los Angeles area wildfires have caused record property damage with insured losses that could reach more than $30 billion.

In the case of fire, and other natural disasters, claims are based on replacement value or cost to rebuild versus market value or appraised value. Reimbursement will also separate the structure from the land value. So, even if an apartment building might have an appraised value of $10 million, the cost to replace the structure might only be valued at $5 million. Some businesses also will need to assess damages related to the value of business interruption.

One unknown in calculating replacement cost is that there will likely be an inflation factor based on supply and demand for materials and labor. However, that demand won’t come all at once. It’s going to be a phased process over time that starts with clean-up and restoring things like power and water and getting the money to rebuild. In addition, there is likely to be a gap in the insured portion and the uninsured portion. The question is how much that gap will be.

Feasibility analysis

As the recovery gets underway, valuation also can help in feasibility analysis. If a property owner needs to rebuild their retail center, is that still the highest and best use for that location? Instead of a retail center, an owner may decide to build a mixed-use property with a residential component to serve the housing demand in that area. A feasibility analysis could also influence rezoning in some of the impacted areas.

In real estate, the key is always location, location, location, and one of the factors that will drive future land and property value in the Los Angeles-area fires is the prime coastal location. However, a challenging question in the feasibility analysis is determining the value of the land with the surrounding services that also are gone.

Furthermore, there will likely be litigation with these impacts and damages. Valuation also will play a critical role in determining the impacts of the damages.

Ripples effects on property owners

Property owners that are in the Los Angeles area are likely to feel some short-term ripple effects on property value, with both winners and losers. Thousands of people have been displaced, and it will take years for people to rebuild and return. That disruption will drive increased demand for rental housing in an already tight market, which will likely benefit multifamily owners near impacted areas with stronger valuations. The rebuilding effort also will bring more people to the area in terms of workers, who in turn will drive demand for housing and supporting services.

Given the size of displacement, there is already a material near-term impact on demand for housing both North and South of LA, with hotels reporting significant increases in occupancy rates and some reaching near full capacity due to the displacement demand from the fires.

On the flipside, retail and service businesses tend to follow the rooftops. For businesses that were operating in impacted areas, such as the nail salon, coffee shop, or yoga studio, the population they serve has moved elsewhere. Commercial properties that service those tenants may see a decline in demand and a corresponding dip in values until the impacted areas stabilize.

What will future values look like?

Risks related to climate-related extreme weather events are moving more to the forefront for the commercial real estate industry. Specific to California, people know that fire risk is there, the question is what lessons were learned from the devastating fires and what steps can be taken to mitigate fire risk going forward.

The government will certainly need to take a leadership role, but the commercial real estate industry also will play an important part in the rebuilding effort. From a valuation perspective, that means assisting with feasibility, economic analysis and zoning studies. There also are opportunities to look at things such as changes in urban planning, the use of fire-resistant building materials and new building standards to improve resiliency in risk-prone areas.

As history has shown, the area impacted by the Los Angeles fires will come back, but the timing and path of that recovery will depend on many different factors and involve public and private stakeholders working together.