Report: Climate Change Could Severely Impact Real Estate Investments

Measuring Climate Risk in Real Estate Portfolios

Report: Climate Change Could Severely Impact Real Estate Investments

  • As a long-term asset class with fixed asset locations, private real estate may be especially vulnerable to both physical and transition risks from climate change.
  • Real estate portfolios may be exposed to a variety of physical risks that could impact values. Our analysis found that different potential risks may require different mitigation strategies.
  • As the world moves towards a low-carbon economy, transition risk may also play an increasingly important role with investors facing potential costs from emission-reduction requirements.

Many assets investors own can only figuratively be underwater when a company becomes insolvent or a stock loses all its value. But for real estate, with long-life fixed assets, there is — literally — a real possibility a building might one day be underwater because of climate change.

Given this, investors in real estate may benefit from a better understanding of potential physical and transition risks.

Using the MSCI Real Estate Climate Value-at-Risk (Climate VaR) model we demonstrate how the nature and magnitude of physical risks may differ across assets and portfolios; and highlight the importance of considering transition risk.1

The Different Types of Climate Risk

In general, climate risk considerations in real estate can be divided into two categories, physical risk and transition risk (also known as regulatory risk). Physical risks are related to the damage to buildings from extreme weather events caused by climate change.

These changing weather patterns could cause both chronic (steady long-term) and acute (severe short-term) effects that can vary depending on geographic location and could increase the costs faced by investors. Transition risks could arise from efforts to address climate change and the transition to a low-carbon economy.

They are the carbon intensity of the assets and estimate the potential costs of meeting carbon-reduction targets.

Both physical and transition risk can be assessed under different scenarios.

When combined they can provide an estimate of how much of the capital value in a real estate portfolio may be at risk due to climate change.

However, investors may still need to drill down into the specific hazard exposures and how financially significant any associated costs could be to fully understand the investment implications of climate risk.

Not all Physical Risks are the Same

We used the MSCI Real Estate Climate VaR model and a sample of 671 assets from the MSCI U.S. Annual Property Index to evaluate two particularly impactful physical risks: Coastal flooding and tropical storms.

All the assets sampled were from either the New York City, North New Jersey, Long Island (NY, NNJ, LI) metropolitan area or the Miami-Fort Lauderdale-Pompano Beach (South Florida) metropolitan area.

Each were run under the model’s default assumptions.2

The results suggested that, for this sample of institutionally owned assets, the total Climate VaR due to coastal flooding was lower than for tropical storms in both regions.

However, there was some difference in the relative size of these two types of physical risks. In this sample, the Climate VaR from coastal flooding was lower in South Florida than in NY, NNJ, LI (-0.7% vs. -1.

3%), but the Climate VaR from tropical storm exposure was higher (-5.3% vs. -4.0%).

The Magnitude and Relative Importance of Physical Risks can Differ

Source: MSCI Real Estate Climate Value-at-Risk model run on a sample of assets from the MSCI U.S. Annual Property Index. Index data as of December 2019 and model run as of July 3, 2020.

Another distinction was how the different physical risks were distributed across the asset sample.

For coastal flooding, we observed that only a handful of assets with the highest exposure were responsible for nearly all (91%) of the estimated Climate VaR.

By contrast, the Climate VaR caused by exposure to tropical storms was more evenly distributed across the sample, as illustrated in the chart below.

Physical Climate Risks may not be Evenly Spread Across all Assets

Source: MSCI Real Estate Climate Value-at-Risk model run on a sample of assets from the MSCI U.S. Annual Property Index. Index data as of December 2019 and model run as of July 3, 2020.

This is unsurprising given that there can be considerable variation in the elevation of individual assets even within a relatively small geographic area, and this can largely drive how much coastal flooding risk they are exposed to.

The relatively small number of assets that are exposed, however, typically suffer significant damage, leading to a more substantial contribution to total portfolio risk. By contrast, tropical storms affect broader areas more uniformly, so the potential damage is generally more evenly distributed. This illustrates how mitigation strategies may vary by risk type.

For instance, careful asset selection may be a way to minimize coastal flooding risk, but market allocation strategies may help as a way to address risk from tropical storm exposure.

Transition Risk may also be a Consideration

While there may be a temptation to focus on physical risks for real assets, transition risk may play an increasingly important role as well.

As the world moves towards a low-carbon economy, there are several potential emissions pathways available, with the required emissions reduction for each pathway being inversely proportional to the amount of warming. For example, limiting warming to 1.

5 degrees Celsius would require more drastic cuts than a 2 degrees Celsius scenario which would in turn require more cuts than a 3 degrees Celsius scenario.

To illustrate how transition risks may vary, we used the same sample of assets to estimate transition VaR under different scenarios. As we expected, the more aggressive reduction requirements under a 1.

5 degrees Celsius scenario resulted in the highest VaR at 4.0%, but even under a 2 degrees Celsius scenario, up to 1.

4% of the value in these assets was estimated to be at risk from transition costs, according to our model.

Transition VaR for the Asset Sample Under Different Scenarios

Source: MSCI Real Estate Climate Value-at-Risk model run on a sample of assets from the MSCI U.S. Annual Property Index. Index data as of December 2019 and model run as of July 3, 2020.

Irrespective of what pathway is taken, assets and portfolios with higher carbon intensity could face greater reduction requirements over the coming decades, potentially translating into higher transition costs. When those costs are compared to an asset’s value per square meter, it becomes clear that some assets may also be better positioned to absorb those costs.

Given real estate’s long-term nature and fixed locations, the asset class may be particularly vulnerable to climate change. By evaluating their real estate portfolios in terms of different physical risks as well as under different transition-risk scenarios, investors may be able to build a more complete picture of their exposure.

1The MSCI Real Estate Climate VaR model provides a framework for investors (investment managers, asset owners, banks and insurers) to improve portfolio performance, risk management, regulatory reporting and progress towards broader sustainability goals. Developed by MSCI’s Climate Risk Center in Zurich, the framework is closely aligned to the G20’s Financial Stability Board’s Taskforce on Climate-Related Disclosures (TCFD).

2More information on the model can be found in the MSCI Real Estate Climate Value-at-Risk (Climate VaR) Methodology document.

Further Reading

Climate Risk in Private Real Estate Portfolios: What’s the Exposure?

MSCI Real Estate Climate Value-at-Risk (Climate VaR) Methodology

Managing Climate Risk in Investment Portfolios


Should climate change dictate where you buy a house? | Mortgage Rates, Mortgage News and Strategy

Report: Climate Change Could Severely Impact Real Estate Investments

It’s no longer possible to ignore the effects of climate change.

With wildfires, hurricanes, and other disasters threatening homes — especially along the coasts — it’s an issue at the forefront for homeowners.

But there’s still some uncertainty about home buying and climate change.

Are weather patterns still a secondary consideration? Or is it time to pick up and move to a safer region altogether?

Naturally, the answer will be different for everyone. But knowing the facts can help you make a more informed decision about where to buy.

We looked into the most- and least-at-risk areas to buy a house in the era of climate change and asked real estate experts for their advice.

Here’s what we learned.

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Where is climate change already impacting real estate?

A recent Redfin survey showed that most Americans are thinking about climate change when they decide to buy or sell a house. But some are much more worried about its impact than others.

The highest concentrations of home buyers and sellers “very concerned” about the environment were in:

  • Houston, TX (58%)
  • New York City, NY (47%)
  • Miami, FL (46%)
  • Austin, TX (44%)
  • Los Angeles, CA (43%)
  • San Francisco, CA (41%)
  • South Carolina (40%)

This shouldn’t come as a surprise. Most areas where people are “very concerned” are more vulnerable to the effects of climate change.

Climate change map: Natural disasters in the U.S. over 100 years

This map from the McHarg Center’s Atlas for a Green New Deal shows where some of the most severe environmental disasters have struck the U.S. in the past century.

Source: The McHarg Center

As The McHarg Center says, “With climate change, the number, frequency, and intensity of these events is ly to increase.”

So it makes sense that home buyers and sellers in those areas are considering climate change at the forefront.

But as its effects become more widespread, more home buyers will have to make climate change a primary consideration.

Climate change map: U.S. environmental risks by region

Climate change will impact each area of the U.S. differently.

Though it’s hard to answer the question of how much each region will be affected, scientists have a good idea of how climate change will strike.

Wildfires Earthquakes Floods Hurricanes

Source: The McHarg Center

A second map from The McHarg Center shows how different parts of the U.S. are ly to be affected by climate change; from wildfires to earthquakes, floods, and hurricanes.

Some homeowners have already felt its impacts, especially those affected by wildfires on the West Coast and hurricanes in the Southeast.

But so far, it hasn’t been enough to make most home buyers retreat to higher ground.

Homeowners are worried, but not moving yet

Nearly three in four home buyers and sellers say the intensity or frequency of natural disasters impacts their choice about where and whether to sell or purchase a home.

In fact, only 10% of home buyers said climate change doesn’t affect their decision-making process whatsoever.

Source: Redfin

But those worries haven’t led major changes to home prices or buying habits.

In the report, Redfin chief economist Daryl Fairweather said:

“Climate change is important to house hunters, but when it actually comes time to decide where to buy a home, it’s outweighed by other factors that feel more immediate, affordability and access to jobs.”

“Climate change… [is] outweighed by other factors that feel more immediate, affordability and access to jobs.” –Daryl Fairweather, Chief Economist, Redfin

“Environmental changes may be factoring into their thought processes, but not yet into their actions,” Fairweather continues.

But the effects of climate change are getting notably stronger each year, with wildfires, hurricanes, and warmer temperatures taking a bigger toll on the U.S.

With that in mind, do you need to think more seriously about climate change when you buy a house? Would it be worth even moving to a new city or state?

Home buying tips in the time of climate change

Of course, not everyone will make a home buying decision climate change.

Many people love the area they live in, and are willing to adapt rather than move.

But if you’re in a particularly at-risk area (say, one below sea-level) you might be considering a big move more seriously.

Either way, there are a few tips you can follow to make a better long-term home buying decision. According to the experts:

  • Vet the area carefully. Perform a Google search of the market’s name along with “climate vulnerability assessment” to yield key research. “Find out how well the area is set up to handle emergency situations,” says Rick Sharga, president and CEO of CJ Patrick Company. . “In a natural disaster, are there enough roads to allow residents to evacuate? Are local first responder services adequate to provide relief? How far away are hospitals and other medical facilities?”
  • Learn if the city/state has a Climate Action Plan and what those plans are
  • Determine the cost and level of homeowners insurance protection you’ll need, including separate flood insurance (if needed). “Remember that insurance costs to cover flood, fire, and other natural disaster damages are ly to increase in areas facing increased climate change risks,” notes Phil Georgiades with FedHome Loan Centers
  • Assess if the home can withstand different natural disasters. “If not, determine whether it can be renovated to make it safer,” Sharga adds. “Factor that into your purchase price”

That last piece of advice can be especially useful if you’re buying in an area at high risk for natural disasters. 

It’s not just the location that matters — the home and its features make a big difference too.

By factoring safety features and necessary upgrades into your budget, you can make a home buying decision that offers more security (both physically and financially) in the long run.

So what areas of the country could be safer for home buyers in light of climate change?

Different experts offer different advice.

But some metros and areas are consistently recommended as being possibly less affected by climate change and the natural disasters it can cause.

According to a survey or real estate professionals by BusinessInsider, these cities and their directly surrounding areas are at the top of the list:

  • Tulsa, OK — Safer from sea-level rise
  • Hartford, CT — Safer from sea-level rise
  • Boulder, CO — Self-sufficient water supply
  • Minneapolis/Saint Paul, MN — Sheltered from hurricanes and floods
  • Charlotte, NC — Safer from hurricanes in the south
  • Pittsburgh, PA — Less extreme cold

A paper published by researchers in 2016 also included the Upper Peninsula of Michigan; Seattle, WA; Northern Minnesota; and Portland, Oregon.

It suggested these areas could experience more moderate weather patterns and temperatures in the coming years that could make them safer havens in the era of climate change.

A Popular Science study also predicted that the West will continue to warm up and dry out, with wildfires expanding over larger areas and western states getting hotter by 6.5 degrees.

Climate change map: U.S. temperature changes

Some areas of the U.S. have already warmed considerably — by up to 5 degrees Fahrenheit over the past 120 years.

Image: Washington Press. Data: NOAA

These temperature changes will become more extreme in the coming years. This leads to more extreme weather risks in those same areas.

Insights from real estate experts

Sharga says the most obvious climate-related factors for home buyers to think about are areas prone to flooding and hurricanes.

“In addition to areas historically considered as flood zones, there’s reason to be concerned about coastal properties flooding, as sea levels continue to rise,” says Sharga.

“This includes coastal areas in the Southeast and extends along the Gulf Coast—impacting buyers in states Alabama, Louisiana, and Texas.”

The most obvious climate-related factors for home buyers to think about are areas prone to flooding and hurricanes.

Also, buyers in the Western and Southwestern regions — including California, Arizona, and Colorado —need to pay close attention to areas prone to wildfires, Sharga adds.

Keith Baker is the Mortgage Banking Program coordinator and faculty at North Lake College. He says he’d consider relocating to areas Boston, Massachusetts; Madison, Wisconsin; Denver, Colorado; and Minneapolis, Minnesota.

“Think about moving to areas where it is cooler now. Consider that temperatures are expected to rise an average of 6 degrees hotter in the middle of North America,” suggests Baker.

“Aim for higher ground areas, as some elevation can be helpful both for beating the heat and escaping flooding.” –Keith Baker, Mortgage Banking Program, North Lake College

“Aim for higher ground areas, as some elevation can be helpful both for beating the heat and escaping flooding. And live away from the coast, which will experience an eroded and shrunken coastline.”

Suzanne Hollander is a real estate attorney and Florida International University senior instructor. She advises using good common sense before buying in an area already known for natural disasters.

“In Florida, there’s alwaysgoing to be risks for hurricanes and storm damage. In areas below sea level,you’re going to have to worry about flooding. In Tennessee, we just witnessedhorrific tornadoes,” she says.

Climate change resources for home buyers

There are plenty of studies and interactive maps showing how climate change will affect particular regions, states, and cities in the U.S.

These can be great resources for potential homebuyers looking to make a safe investment.

The bottom line is that the effects of climate change are already here.

Many people will still be willing to buy in riskier areas, thanks to their other benefits — beaches, forests, and waterways.

But making a strategic decision about the location and features of your home will be crucial to your safety and your investment in the long run.

So do your research, talk to real estate professionals in the area where you hope to buy, and be sure to balance your location desires with the risks they may present.

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Real estate climate risks: How will Europe be impacted?

Report: Climate Change Could Severely Impact Real Estate Investments

By Léonie Chatain, Climate Risk Senior Analyst

Extreme weather events driven by climate change are having severe impacts that are increasingly being seen across Europe. Between 1980 and 2017, weather and climate-related extremes caused approximately €453 billion of total economic losses.

Among those losses, it is estimated that only 35% were insured. Climate change has a substantial impact on real estate markets. It can directly damage individual buildings, decrease their value or even lead to assets being rendered unusable.

In Europe, floods from extreme rainfall and sea level rise represent a major threat to real estate markets.

As climate change leads to more frequent and severe extreme weather events it is increasingly important for real estate investors to understand the climate risk exposure of key assets and prepare for impacts.

Assessing exposure to climate change in real estate

To provide a view on physical climate-related risk for the real estate industry in Europe, Four Twenty Seven used a proprietary model that leverages global climate data to provide asset-level risk assessments to physical climate hazards. We analyzed the exposure of 20,816 retail spaces and 16,188 offices in Four Twenty Seven’s database of one million corporate facilities.

The real estate sites are owned by over 900 listed companies, the 2,000 companies included in our database. We used our climate risk scoring methodology to assess each facility’s exposure to climate hazards, with a focus on floods, sea level rise and heat stress looking out to mid-century. Flood risk and sea level rise are assessed with a precision of 90x90m.

Heat stress is evaluated at a 25x25km scale.

We found that 19% of retail spaces and 16% of offices are exposed to floods and/or sea level rise, with floods representing the highest risk for both types of asset. Heat stress also presents significant risk to these facilities.

Inland floods: A major threat for a warming Europe

Floods are one of the most prominent risks for real estate in Europe. In most European cities, climate change is increasing the frequency and the intensity of heavy precipitation events, threatening urban infrastructure and increasing flooding.

Floods can inundate facilities directly, leading to disrupted operations and equipment damage and can also have indirect impacts on operations by damaging regional transportation, power and communication infrastructure. Fluvial and pluvial floods can increase costs associated with maintenance and repair of buildings, lead to higher insurance premiums, and reduce revenue due to business disruptions.

Figure 1. Retail spaces’ exposure to floods. A dot represents a city and its size represents the number of retail spaces in the city. The dot’s color represents the percentage of retail spaces exposed to floods, with red representing the highest percentage. Source: Four Twenty Seven

Floods also have wider impacts on real estate markets. For example, studies looking at the residential market in Germany and Finland show that properties in flood-prone areas are sold at lower prices compared to properties without flood risk.

Retail spaces in the United Kingdom are particularly exposed to flood risks, our analysis (Fig. 1). Climate change is ly to contribute to more events the winter storms of 2015-2016 which resulted in around £1.6 billion of total economic damages in the United Kingdom. Over 20% of Edinburgh, Glasgow and Sheffield’s retail assets are located in flood-prone areas.

Figure 2. Retail spaces exposed to flooding in the Greater Glasgow area. A dot represents a retail space and the dot’s color represents its flood risk. Source: Four Twenty Seven

The amount of rain during heavy precipitation events in Glasgow (Fig. 2) is projected to double by 2030-2040 compared to 1975-2005. London is also exposed to surface, fluvial and tidal floods.

In our analysis, London is the city with the highest number of retail spaces in flood-prone areas (Table 1).

Its most exposed sites have a 20% probability of being flooded each year, and a 1% probability that the flood depth will be higher than one meter, Four Twenty Seven’s data.

Without adaptation measures at the site-level and the city-level, these assets will ly suffer from increasing property damages and potential business disruptions due to more frequent and severe rainstorms.

For example, floods can reduce business at retail sites such as clothing stores when consumers may prefer to stay home or be prohibited from shopping by inundated infrastructure.

wise, grocery stores and other retail sites may experience supply chain disruptions or damaged goods with impacts on sales and revenues.

England, Scotland, Wales and Northern Ireland all have a Climate Change Adaptation Program. The English program pledges to construct additional hard defenses and to support communities and businesses in increasing their properties’ and investments’ resilience.

Table 1. Cities with the highest percent of retail spaces exposed to floods, those cities with over 70 retail spaces. Source: Four Twenty Seven

Sea level rise: When beach front no longer means value

Several recent studies have found that there is potential for severe sea level rise if certain tipping points are reached. For example, East Antarctica is warming faster than previously expected, with immense implications for global sea levels.

According to opinions gathered from experts, there is a possibility of sea levels rising to two meters by 2100 under a 5˚C scenario.

Without coastal adaptation investment, it is estimated that annual damages, due to storm surges and king tides, could reach up to almost €1 trillion by the end of the century in Europe.

The real estate industry is at the front line of sea level rise risk. Properties can suffer from severe damages leading to maintenance and repair costs. Even if a facility itself is not permanently inundated, it may be rendered unusable if its closest rail and road infrastructure experience chronic disruptions.

Sea level rise can also have far-reaching market impacts such as increasing insurance costs and higher local taxes to fund adaptation efforts. The perception of sea level rise risk can also impact an asset’s value.

For example, French coastal properties suffered from substantial damages after coastal flooding caused by storm Xynthia in 2012. At the Ile de Ré, a touristic French island close to La Rochelle, material losses had a longer-term effect on the real estate market.

Home prices dropped in the most exposed part of the island. Fields previously sought after by developers became classified as non-constructible areas after the storm.

Figure 3. Corporate offices’ exposure to sea level rise. A dot represents a coastal city and its size represents the number of offices in that city. The dot’s color represents the percentage of offices exposed to sea level rise, with red representing the highest percentage. Source: Four Twenty Seven

Our assessment found that corporate offices are highly exposed to sea level rise in Europe (Fig. 3). Increasing floods and chronic inundation from sea level rise can affect employee commutes, with implications for business continuity at offices. Assets in Ireland, France, Sweden and the United Kingdom have particularly high exposure.

Copenhagen is highly exposed to sea level rise, with 81% of its offices exposed to coastal flooding.

In its Climate Adaptation Plan, the city acknowledges that it will be at high risk of flooding in 2040, stating that if no adaptation measures are undertaken, sea level rise will cause “unacceptable” damage.

An asset’s risk to sea level rise will be largely driven by regional adaptation efforts to prepare for flooding from higher tides and storm surge.

Copenhagen has defined a long-term adaptation strategy, including the creation of green infrastructure and flexible spaces that can be inundated during high tides, such as sports fields and parks. The city also constructed dikes and quays to protect it from up to 2 meter storm surges.

However, the construction of hard protective infrastructure is leading to very high expenditure for local authorities, which can have impacts on local taxes and the strength of other government services.

Adaptation policies may also affect building permit requirements and add restrictions to real estate development. Dublin is the city with the highest number of corporate offices from our database exposed to sea level rise (Table 2). This exposure is concentrated in Dublin’s business district (Fig. 4).

Floods in the business district can impact the transportation system, electric grid and telecommunications networks, which all impact local businesses.

Figure 4. Corporate offices exposed to sea level rise in Dublin. A dot represents an office and the dot’s color represents its sea level rise exposure. Source: Four Twenty Seven

Dublin is aware of its risk and has developed a 2019-2024 adaptation plan that budgets the construction of new flood defenses and includes a flood risk management strategy. Property managers and real estate investors can engage with the surrounding community to support these regional resilience-building efforts that will also mitigate the risk to their own assets.

Table 2. Cities with the highest percent of corporate offices exposed to sea level rise, those cities with more than twenty corporate offices. Source: Four Twenty Seven

Heat stress: Shattered records becoming the new norm

Heat stress is a growing concern for Europe.

The region experienced two recording-breaking heat waves within two months during summer 2019, affecting public health, hindering productivity and contributing to train delays, with implications for economies across the continent. The decade from 2009-2018 was the warmest on record, with temperatures around 1.7°C above the pre-industrial level in Europe.

Figure 5. Retail spaces’ exposure to heat stress. A dot represents a retail space and the dot’s color represents its heat stress risk. Source: Four Twenty Seven

Our analysis shows that offices and commercial spaces throughout Europe will experience heat waves that are 21 days longer on average compared to 1975-2005.

Four Twenty Seven’s data, Southern Europe is expected to experience the highest increase in the duration of heat waves, with projections showing an additional month of temperatures above the 90th percentile every year in Madrid (Fig. 5).

Heat waves will also bring higher temperatures, with an 8% average increase in maximum temperatures by mid-century, and over 10% in Paris, for example. This will manifest in cities experiencing climates typically associated with locations significantly further south.

For example, a recent study noted that “Madrid’s climate in 2050 will resemble Marrakech’s climate today, Stockholm will resemble Budapest, London to Barcelona.”

The urban heat island effect and worsening air quality will exacerbate the impacts of increasing average temperatures in many European cities, with implications for human health and economies. Heat stress can create new cooling needs for buildings and thus increase operations costs at real estate assets.

This is particularly true for assets such as data centers and retirement residences, with significant cooling needs. Extreme heat can also affect consumer behavior, reducing the desire to window shop outside, for example, but increasing the visitors to air-conditioned facilities such as shopping malls.

In the long run, increasing average temperatures could have indirect effects on real estate markets as consumer preferences shift.

To reduce their vulnerability, many cities are adapting to extreme heat by increasing green spaces and the use of reflective materials to reduce the albedo effect, for example. Property managers can model on-site adaptations after these examples, while also contributing to wider regional efforts that reduce the urban heat island effect to preserve public health and economic activity.

Conclusion: Understanding risk to build resilience

Real estate assets are already experiencing the impact of extreme heat and floods across Europe and the real estate industry will continue to be impacted by climate change in the near-term.

There is an urgent need for resilience-building across assets to ensure business continuity and reduce financial losses. Understanding asset risk is an essential first step towards building resilience.

Asset owners and managers can leverage asset-level risk exposure data, alongside awareness of regional adaptation efforts, to improve the resilience of their assets and engage communities around shared resilience priorities.

This analysis does not capture coastal flooding for areas further than five kilometers inland from the coast. This limitation may under-represent risk in coastal-adjacent, low-lying areas that extend inland Amsterdam.


CRE investors are concerned that cities aren’t resilient enough for climate change

Report: Climate Change Could Severely Impact Real Estate Investments

The consensus among leading real estate investors is that market-scale climate risk assessment will play a role in future investment decisions, mirroring the recent advances in assessing physical risk at the asset level.

However, valuation still lags recognition of climate risk.

And investors question whether adaptation and resilience actions by high-risk cities sufficiently respond to the extent of the risk faced, and ultimately what the overall impact of real estate will be.

These are some of the conclusions of Climate Risk and Real Estate: Emerging Practices for Market Assessment, the latest study on this topic from the Urban Land Institute and Heitman, a real estate investment management firm, that dives into how forward-thinking real estate investors factor climate change into their business decisions.

The report is based, in part, on recent interviews with 28 major real estate investors and developers ranging from Arcadis, Goldman Sachs, and LaSalle to the City of Rotterdam.

Arup and the actuarial firm Milliman contributed insights into specialist areas such as measuring city fiscal health and catastrophe models “that enrich our understanding of what tools we need to assess, price, and address climate risk.”


That risk has rarely been more palpable. Worldwide losses from extreme weather events from 2010 to 2020 totaled over $3 trillion, $1 trillion more than the previous decade. Over the past few months alone, wildfires in California have scorched four million acres of land and displaced 200,000 residents.

A 2019 study by Deloitte found that more than half of U.S. state insurance regulators “indicated that climate change was ly to have a high impact or an extremely high impact on coverage availability and underwriting assumptions.

” And earlier this year, Larry Fink, CEO of BlackRock, the world’s largest asset manager, warned that climate change was now “a defining factor in companies’ long-term prospects.

” He added “we are on the edge of a fundamental reshaping of finance.”

Real estate investment managers interviewed for the ULI-Heitman report noted that they are seeing increases in property insurance premiums, a trend many of those investors attributed to climate change and the increased frequency of storm events.

In an extreme scenario, some investors envisioned a future where properties can’t qualify for insurance and therefore can’t borrow. In short, a loss of insurance could cause a downward spiral even in the absence of a peak climate event.

Even without a worst-case scenario, the annual insurance pricing structure can underpredict risk for longer hold periods as well as for infrastructure.

Anyway you call it, weather events are increasingly disastrous globally. Image: ULI and Heitman, data from MunichRe


Right now, it doesn’t appear as if investors are fleeing en masse from high-risk markets because of their fears of climate change. But the report identifies key considerations and next steps for the investment industry to improve awareness and understanding of market-level climate risk. These include:

•Developing strategies to measure market-level climate risk and resilience considering physical risk, resilient infrastructure, and public policy;

•Linking asset-level physical risk assessments with market-scale analysis;

•Exploring the role that the real estate industry plays in supporting funding mechanisms for future infrastructure and resilience initiatives;

•Facilitating collaboration between policymakers, chief resilience officers, and real estate investors and investment managers;

•Working with the insurance industry and actuaries to refine tools to reflect current and future climate risks; and

•Partnering with the valuation industry to accurately build climate change risk into appraisals.


Perhaps the biggest challenge to climate-related risk assessment is the lack of qualitative measurement of climate change’s impact on cities and whether risk mitigation is enough.

One investment manager interviewed for the report put in bluntly: “We have never found any [tools of frameworks] that cut to the chase and say, first, is this city impacted by climate change? And second, is the city’s reaction appropriate and sufficient given the risk?”

Compounding this problem is the lack of agreement among investors about how to qualify markets for climate risk in ways that incorporate vulnerability and resilience investments.

The study cites several considerations for climate-risk market analysis, including physical risk, city governance capacity, city resilience governance, building and land-use codes, and the extent, quality and implementation of a city’s resilience planning.

“The concept of urban resilience—and a city’s adaptive capacity in response to both major disruptions and chronic stresses—is fundamental to city governance,” the report states. That’s especially true today, as globally, most major economic hubs are in coastal, river delta, or other high-risk areas.

In 2020, McKinsey Global Institute explored Florida real estate as a theoretical example of this phenomenon, determining that if investments in flood preparedness are not made and flooding losses continue, homes in that state could be devalued by $30 billion to $80 billion, thereby leading to reductions in property tax revenue from 15 to 30 percent.

Investors are incorporating more factors into their risk management calculations. Image: ULI and Heitman


The report observes that Investors are beginning to systematically follow how markets are making these infrastructure, policy, and investment decisions to contribute to their forecasts for the future economic health, vitality, and attractiveness of real estate investment in these markets.

But for catastrophe models to provide real estate investors with meaningful information, the report states that modifications are needed that take a longer-term focus on real estate value, and accept a dynamic view of the future.

The report warns, as well, that oversimplifying model results can lead to unintended consequences that undermine the risk management principles that the metrics were intended to support. “Under a changing climate, using a single-point estimate or metric that summarizes model results could be disastrous, as uncertainties compound over time.”


The report also touches on the need for cities to replace aging critical infrastructure as part of their resilience strategies.

It notes that investments in stormwater management and coastal protection can have quality-of-life benefits.

Some cities are also exploring value-capture strategies, where future high-value waterfront development would contribute funding to protective infrastructure nearby.

City governments implementing resilience plans are increasingly striving to make future investments in resilience in an equitable manner to ensure that all people benefit from climate solutions and to avoid further exacerbating patterns of discrimination.

Municipalities are also thinking outside the box when it comes to funding their resilience actions, looking beyond bond issues to explore partnerships with the private sector, whether through financial contribution, tax increment financing (TIF)-style funding districts, transfer of development rights, partnership in delivery of district-scale infrastructure, or by codifying resilience measures for new construction.

“In short, funding resilient infrastructure will require city staff to think creatively,” the report states.


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