Real Estate Investors Want to Know What Cities Are Doing About Climate Risks

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After an increase in wildfires, storms and other natural disasters, many cities have begun both short and long-term planning for infrastructure that will blunt the effects of climate change. Their current property values could be at stake as well. 

Real estate investors and developers are increasingly considering climate risk factors when deciding where to buy or build, according to a report this month from the Urban Land Institute, an organization that promotes the responsible use of land. This has also meant looking at how prepared local governments are to face such events, according to the study, which was conducted with Heitman Institutional Realty Partners.  The researchers interviewed firms including BlackRock Inc., CBRE Global Investors, Credit Suisse Group AG, Goldman Sachs Group Inc., Moody’s Corp. and Morgan Stanley on how they are considering climate risk. 

Investors “are looking beyond the individual asset and assessing a city’s preparedness for climate change, but the models and metrics they need are still in their infancy,” ULI Chief Executive Officer Ed Walter said in a statement.

The real estate investment firms interviewed agreed that the industry’s valuation currently lags behind the recognition of climate risk, according to the report. It’s become difficult to ignore the increasing the frequency and intensity of weather events that result in droughts, floods, tsunamis, wildfires, heat waves and landslides. Worldwide, 40 natural disaster events last year each resulted in at least $1 billion in near-term, direct losses, according to research from the insurance company AON that was cited in the ULI report. Global losses from extreme weather events from 2010 to 2020 reached more than $3 trillion.

The growing concern among real estate professionals is shared by many in the broader investment community as well.  In July, nonprofits, pension funds and other investors representing almost $1 trillion in assets sent aletter to the Federal Reserve and other government agencies asking them to take action on the climate crisis. The letter argued that climate change is posing a systemic threat to financial markets and the economy. 

The ULI report found that real estate investors consider the following, or would like to, when assessing the market for physical risks, or those directly related to specific weather events:  

  • Total population and percent of population at risk
  • Total geographic area or total percentage of a geographic area of a city at risk
  • Total or percentage of real estate value at risk
  • Potential for a peak relating to weather or natural disaster event to disrupt core business area
  • Existence of core business and residential areas with reduced vulnerability

The research also identified another category called transition risks, or broader risks associated with climate change policy and the push toward low carbon economy. But traditional models for real estate investors don’t take into account these complexities and aren’t designed to measure the longer term effects climate change can have on a city’s infrastructure or economy. 

“Due diligence screens must incorporate the accelerating risks posed by climate change, fiscal policy constraints, and critical infrastructure investment, repair and replacement,” Heitman Chief Executive Officer Maury Tognarelli said in a statement. “The data management and business intelligence tools required to assist investors in making decisions about these factors continue to evolve.” 

Cities will need to show real estate professionals that they are financially secure, prepared for an emergency, investing in infrastructure and making commitments to energy efficiency and science-based decision-making, according to the report.

This is true especially in coastal cities, where sea levels continue to rise. According to a 2018 study from the University of Colorado at Boulder and Pennsylvania State University, real estate properties that were exposed to sea-level rise are now selling at a 7% discount than similar but more-protected properties just as close to the water. The First Street Foundation’s FloodFactor tool showed in 2018 that eight states along the Eastern Seaboard have lost a total of $14.1 billion in home values in coastal areas because of sea-level-rise flooding since 2005.

The report cited the example of Singapore, which has announced a commitment of S$100 billion ($73 billion dollars) over 100 years to prepare the nation for worst-case flood levels brought on by further global warming. Future investment models being developed by the real estate industry will likely be rewarding such long-term planning.

— With assistance by Marie Patino

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