Regime shift from grasslands to shrub-dominated landscapes occur worldwide driven by altered land-use and climate change, affecting landscape function, biodiversity, and productivity. Warming winter temperatures are a main driver of expansion of the native, evergreen shrub, Morella cerifera, in coastal landscapes. Shrub establishment in these habitats alters microclimate, but little is known about seasonal differences and microclimate variance. We assessed influence of shrubs on microclimate variance, community composition, and community physiological functioning across three vegetation zones: grass, transitional, and shrub in a coastal grassland. Using a novel application of a time-series analysis, we interpret microclimatic variance modification and elucidate mechanisms of shrub encroachment at the Virginia Coast Reserve, Long-Term Ecological Research site. As shrub thickets form, diversity is reduced with little grass/forb cover, while transpiration and annual productivity increase. Shrub thickets significantly reduced temperature variance with a positive influence of one day on the next in maximum air, minimum air, and maximum ground temperature. We also show that microclimatic temperature moderation reduces summer extreme temperatures in transition areas, even before coalescence into full thickets. Encroachment of Morella cerifera on the Virginia barrier islands is driven by reduced local exposure to cold temperatures and enhanced by abiotic microclimatic modification and biotic physiological functioning. This shift in plant community composition from grassland to shrub thicket alters the role of barrier islands in productivity and can have impacts on the natural resilience of the islands.