The Real Risks of Climate Change to Commercial Real Estate

| September 6, 2019

by Lauren Bertolino

The consequences of the uptick in extreme weather events are being felt across industries, including commercial real estate, and at a significant cost to investors.

Hurricanes, rising sea levels, and wildfires, to name just a few disasters, have resulted in hundreds of billions in losses over the past decade, and these events are only increasing in frequency.

2017 broke records for the costliest weather events in the U.S., totaling a staggering $307 billion in damages. Then 2018 saw eight extreme hail, tornado, or damaging wind storms, one large drought episode, and two severe winter storms in addition to Hurricanes Michael and Florence at a cost of $91 billion.

Surprisingly, the commercial real estate industry seems to have put this issue on the back burner. There are limited studies evaluating the impacts and no clear strategy for how to quantify risks related to extreme weather.

Some industry players are reactive and retrofitting for resiliency. Some are looking to design new buildings and communities to be resistant to disaster. Concepts like fire-resistant landscape design, water-absorbent concrete, and living roofs and walls that absorb excess water before it even reaches ground level are developing in attempts to mitigate some of the effects of these disasters.

Still others are developing their own risk criteria to curb investment in disaster-prone areas altogether. There are some emerging technologies, like tools that help identify sea-level rise, that are being utilized to help quantify these risks. However, many investors are non-reactive and have no strategy at all or are simply relying on insurance to mitigate losses.

Whether preventing investment in disaster-prone areas or dealing with the recovery after an extreme weather event, challenges for CRE investors run the gamut. Water intrusion and mold buildup may be challenges for those in flooded areas, whether the result of increased rainfall or a hurricane. Many hospitals and other high-priority emergency facilities are looking into moving key systems out of areas more likely to suffer weather-related issues. Municipalities and other local governments are looking into innovative strategies to combat heat islands, a phenomenon where heat is trapped in urban or metropolitan areas, making them warmer than less dense surrounding areas.

An additional challenge for real estate investors on this topic is the socio-political demand for policies on energy use in the public and private sector. Hundreds of cities across the United States have already developed their own programs for energy reduction, including limitations on energy outputs in commercial properties and criteria for new developments that meet green standards. In the private sector, many firms have experienced pressure from stockholders to include green standards as part of their investment strategy.

While the industry has been slow to come around to it, there is no denying that these extreme weather events pose one of the greatest challenges to commercial real estate in 2019 and beyond. Through the end of the year, EBI will be delving into this topic to better understand these risks and the strategies that can mitigate them so you can make the best, most informed business decisions for your firm.

Lauren Bertolino

Lauren Bertolino is a marketing specialist at EBI Consulting.

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