Real Estate Industry Lacks Strategy for Climate Change, Study Finds
The real estate industry has been very slow in adopting new standards to deal with the growing effects of climate change, according to a new study published by the Urban Land Institute, a nonprofit research institute and Heitman, a real estate investment firm.
In recent years numerous scientific studies have found climate change to be a major threat to real estate markets across the U.S. as the likelihood of fires and flooding increases.
The risks and impacts of climate change are increasingly being reflected in the residential real estate market. Homes located in areas at risk of flooding or sea level rise sell for less than homes without flood risk, the ULI study says, citing a previous academic study.
Declining Values in Vulnerable Areas
The study finds climate change is an “urgent and complex challenge which must be addressed but for which the industry does not yet have a clear strategy.”
ULI said real estate investors hold many assets in cities vulnerable to the effects of climate change. It is encouraging investors to pay attention to areas where devaluations may occur. For example, a 2018 ULI study found coastal homes in several East Coast states had declined in value by roughly $7.4 billion between the years 2005 and 2017.
The report also warns that commercial properties in areas vulnerable to climate change could face worse outcomes. Over $130 billion of U.S. institutional real estate is in metros that rank in the top 10 percent for risks due to sea-level rise, according to a study conducted by Heitman and climate risk firm Four Twenty Seven.
Higher Insurance Costs
Climate change is also impacting the insurance industry, the ULI study reports. In 2017, insurers paid out $135 billion globally for damage resulting from natural disasters and storms. The figure is not representative of actual damages which are estimated by National Oceanic and Atmospheric Administration at $307 billion in the U.S. alone for 2017.
“Beyond damages, climate and weather events can lead to increased insurance, maintenance, and operational costs and, potentially, a decrease in property liquidity, and value,” the study’s key findings appendix says.
“At this early stage, investment managers view insurance as the primary means of financial protection against physical damage from climate events,” the study’s key findings appendix continues.
Although some efforts have been made to improve the sustainability of buildings, thereby lowering operating costs, they are not useful for resolving the threats posed by rising sea levels in some real estate markets.
Risk Mitigation Options
The authors of the ULI study conducted a series of interviews with real estate professionals and found many investors are considering options to mitigate climate change risks. They are exploring seawalls, dikes, and cooling systems in order to help improve the resilience of their properties.
Overall, ULI recommends the real estate industry increase its role in helping the investment community understand the risks of climate change.
The report suggests investment managers:
- Assess the climate risks to properties at the portfolio and property level.
- Include the risks of climate change in the investment decision-making processes.
- Incorporate additional adaptation and mitigation for assets at risk.
- Provide insurance coverage as a means of addressing potential concerns.
- Monitor and address regulatory risk and policy.
- Examine the risks in specific markets and engage with city-level preparatory efforts.
Real Estate Industry Lacks Strategy for Climate Change, Study Finds
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