Climate Risk Gaining Prominence in Real Estate Investment Decisions

Real estate investors take many factors into consideration when looking to enter a new market or acquire a new asset, and environmental, social and governance (ESG) elements, including climate risk, are gaining importance in their investment decisions, panelists noted at the 2018 ULI Fall Meeting in Boston.

Taking a Closer Look at Building Resiliency

Developers and investors’ initial approach to sustainability efforts were to focus on green building and improving the energy efficiency of their assets. Today, the industry is starting to recognize the importance of taking a more critical look at their buildings’ resiliency, and considering the climate risks of the market in which their assets are located, noted panelist Mary Ludgin, Managing Director & Head of Global Research at Heitman.

“Your building could be future-proofed but the building next to you could be at risk,” she said, noting that the infrastructure around your assets is just as important as your own buildings’ resilience.

How susceptible an asset is to actual and potential risks is already beginning to be factored into residential market pricing, and the impact on commercial properties could be even greater, according to a report by ULI and Heitman. The report noted that more than $130 billion of U.S. institutional real estate is located in metros that rank in the top 10% for exposure to sea-level rise.

Need for Increased Awareness of Climate Risk

Being mindful of and preparing for climate risks is also beneficial to real estate investors in order to avoid additional expenses, including increased insurance, maintenance, and operations costs, as well as a potential decrease in property value, the report noted. However, interviews conducted by ULI and Heitman with institutional investors, managers and consultants showed that while the industry is growing in its awareness of climate risks that could impact real estate investment, there’s a lack of a standardized response.

Investors typically assess the financial impacts of climate risk by evaluating immediate shocks, such as extreme weather events, but the industry needs to improve how it analyzes long-term impacts and plans for those scenarios, noted panelist Lisa Dickson, Associate Principal & Director of Resilience for the Americas at Arup.

“Cumulative impacts will cost more than sudden shocks so we need to start looking at more than just immediate events,” she said.

Ludgin added that unlike a decade ago, real estate investors are beginning to think about climate risks as they underwrite assets and identify the costs associated with them. They’re ultimately finding that some assets will be better prepared for these events than others.

She predicted that climate risk will be the next disruptor of the real estate industry, as more stakeholders create strategies to address the potential impacts. According to the ULI-Heitman report, some strategies already being implemented include:

• Assessing portfolios’ susceptibility to current and future climate risks by analyzing the data in-house or hiring climate data analytics specialists.
• Identifying ways to reduce resource use and review high-level physical risk assessments during due diligence. Some investment managers are using more advanced tools to assess the magnitude of the portfolio’s exposure to these risks.
• Exploring how climate mitigation strategies, such as seawalls and increased elevation, can be incorporated into properties to improve their resiliency.
• Working with insurance partners to anticipate rising premiums due to climate risks and to understand the opportunities for mitigation.
• Evaluating market risk by assessing a municipality’s preparedness for climate events.