Climate change has created a huge demand for sustainable and resilient design and construction. Climate-resilient design focuses on the design of buildings, landscapes, communities and regions to respond to natural disasters and the effects of climate change, such as rising sea levels, increasing heat waves and regional droughts. For real estate professionals, climate-resilient strategies ensure that capital doesn’t fail and continues to perform at a net positive rate, even during catastrophic events.
The interest in climate-resilient design is no surprise given the $300 billion in residential and commercial real estate damage caused in 2017 by natural disasters. Exacerbated by the climate epidemic, natural disasters will crush real estate values for underprepared investors. After all, failing to invest in climate-resilient designs and strategies can render properties obsolete and illiquid.
In major cities that sit on or near the shoreline, like my hometown of New York City, it’s no surprise that plans have been introduced to fight the destruction of our most iconic and beloved boroughs and buildings. In March, Mayor Bill de Blasio announced a $500 million climate-focused project that helps protect the shoreline and infrastructure.
As an early investor in sustainable design of my own properties, I agree that climate-resilient principles are necessary to ensure the safety and strength of future investments. To mitigate climate risk, here are some strategies real estate pros can use to ensure their properties stand the test of time.
Review For At-Risk Properties
Investors are starting to explore how to incorporate climate-mitigation strategies by including seawalls, increasing elevation and adding supplementary cooling systems into their existing properties, reducing the risk of loss and major business interruptions. After Hurricane Sandy, New York City building owners and managers began to move backup generators to higher floors and modify their water pumping systems. In high-risk markets, it’s worth projecting for these kinds of resiliency expenses during your due diligence process.
How at-risk is your market? Some companies have made use of environmental risk tools to create a climate change risk index that answers that question. The index assigns scores to areas vulnerable to climate change over the next 20 years. Often, these models consider the ability of property owners to manage these risks and the ability of the country to deal with recovery. The composite area is scored from low to extreme. Considered part of the due diligence process, this index allows companies to start thinking ahead on how they’ll mitigate the risk if and when that time comes.
Increasingly, environmental, social and governance (ESG) agendas or sustainability indexes suggest that they can present a more nuanced consideration of property values and climate risks. One investment manager I know of included a “catastrophe score” in the company’s ESG checklist to identify necessary insurance coverage to protect against loss. Using this data offers more accuracy during the due diligence process.
Adapt Your Assets
Physical building adaptations to mitigate climate risk are numerous and varied. Real estate owners and investors should “harden” their assets to guard against extreme weather. Doing so reduces this risk, improving asset efficiency and the tenant’s comfort by creating energy efficient options and other mitigation measures.
The Urban Land Institute reports that some real estate investors involved in markets with extreme heat focus on improving the cooling capacity of their properties while ensuring outdoor spaces remain welcoming and sheltered from intense sun exposure. Other real estate pros use features like the use of native plants to absorb high heat and reduce air-conditioning costs.
Like any investment, acquiring new properties must make sense within your broader investment goals. At the beginning of the process, acknowledge climate risks as part of the due diligence strategy, rather than considering them separately. While mitigation measures are important, it’s equally important to strike a balance between making capital investments and remaining practical with return expectations.
Investments in climate change reduction are becoming more commonplace, but often need to have additional purposes to justify the expense — like reduced operational costs or improved tenant experience — for insurers to cover damages.
Invest With Proptech
Across the sector, tools and tech are emerging to help real estate pros mitigate, and plan for, the impact of climate-related damage. Several startups couple advanced mapping capabilities with risk analysis for buildings using potential extreme weather and long-term climate risk scenarios. Some companies focus on different aspects of climate risks, while others cover certain geographies.
For example, a company called Four Twenty Seven offers scientific analytics to examine the current and future impact of climate change on properties, equity and fixed-income portfolio, and teams up with private and public partners to mitigate risk. Then there’s GeoPhy, an AI-based CRE valuation platform that provides insights into the physical risks of REITs, along with other calculations. As these innovative proptech companies help the industry evolve, it’s likely more competitors will emerge.
Ultimately, real estate investors should only invest in resilient design if and when it helps their business. In the near-term, investing in resilience can be costly, especially if risks are low. However, it can create numerous co-benefits in the right situations: minimizing damages, stabilizing operating expenses, reducing utility prices and enhancing the tenant experience.
Real estate pros wishing to attract large-scale capital and institutional investment should expect to demonstrate their assessments and climate prevention strategies to pass investment screenings. The inevitable effects of climate change are upon us, and with these steps, at least we’ll be able to better forecast environmental concerns — and revenue projections.