The Very Real Impact of Climate Change on the Real Estate Industry
“Climate risk is investment risk.” – Larry Fink
The real estate industry is undergoing transformation and challenges. Wildfires, hurricanes, floods, earthquakes, tornadoes, record high temperatures, rising sea levels… all these weather events (and more) could impact how we buy and build property.
Let’s go in depth into how climate change is transforming the real estate industry and investment, including everything from property risk today to green construction tomorrow.
Property vulnerability today
Property today is increasingly vulnerable to climate change. All types of property locations may see higher risk, including those on the coast, floodplains, tornado corridors, earthquake zones and temperature-exposed cities.
Whether rural, suburban or urban, the weather patterns in certain geographical areas could have serious impacts on housing. In fact, they already are. In 2020 alone, we’ve seen how Oregon wildfires have displaced more than 500,000 Americans to date.
Future weather impacts are just as compelling. For example, experts forecast that 300,000 properties will face chronic flooding by 2045. And that’s just for current floodplains. By accounting for other weather events, we could see even greater impacts.
Impacts on the real estate industry
Extreme weather is becoming a worrisome issue for investors, construction companies and property owners. This isn’t only due to direct damages after an incident. The industry has long been aware of the high expense of repairing damaged or destroyed structures.
For example, Hurricane Katrina was the costliest natural disaster in U.S. history, with $100 billion in investment needed to rebuild. This number doesn’t even account for business productivity losses throughout the region.
However, the real estate industry isn’t just concerned about damages. Instead, climate-related expenses have a much wider range, including the following issues.
- Increasing number of climate-related regulations
88% of real estate investors are concerned about the increasing number of climate-related regulations. This #1 concern involves several different cost areas, such as code compliance, infrastructure and financing.
As policy makers set laws to combat climate change, investors will have to take into account how to implement them. Policies such as energy savings could involve a high initial investment, not to mention changes in taxes and insurance.
- Green construction and retrofit costs
Constructing properties is also changing with new building codes and investor interest in climate resilience. Both the government and investors want properties that withstand extreme weather, which means a shift in how to build with green design. At the same time, investors may have to retrofit older properties to comply with regulation.
Green construction costs involve climate-related risk analysis, environmentally sustainable materials, renewable energy sources and less reliance on fossil fuels. It also requires builders and designers with green construction expertise.
- Spiking property insurance and premiums
Risk and insurance go hand-in-hand. With greater climate change risk, insurance will likely become expensive. Investors, builders and owners will face uncertainty in insurance pricing and premiums, which could quickly become prohibitive. Insuring property against climate events could also significantly impact bottom lines, as well as taxes.
- Lower property values in vulnerable areas
The real estate market is also diverse, with properties just about everywhere. As potential owners try to avoid climate change impacts, the real estate industry will have to handle lower property values in several major areas. In particular, coastal cities may be unpopular with buyers, which affects already-existing property investments. Overall buyers will prefer climate-resilient areas, influencing property supply/demand.
- Unstable buyer/renter decisions
In addition to uncertainty in the market, buyers and renters may make unpredictable decisions, based on current weather incidents. For real estate investors, it may be difficult to invest, market and turn over properties. The real estate industry will have to account for a more volatile market than before.
- Resource availability
Overall, the availability of water and energy could influence geographical demand, as well construction costs. This may be especially true as fossil fuels become scarcer and more expensive. The amount of resources available could also be unstable and fluctuating, leading to uncertainty.
Climate risk reduction strategies
Dealing with climate change will be a challenge for all of us, especially the real estate industry. Luckily, real estate stakeholders are already planning for major strategic changes. In particular, they’re taking the following actions:
- Mapping physical risk of properties, including predictive information.
- Using environmentally sustainable materials and reusing raw materials.
- Designing for sustainability and energy savings, such as water and waste efficiency.
- Investing in climate leaders, including employees, products and clients.
- Prioritizing sustainability in portfolio construction and risk management.
- Exiting investments with high sustainability-related risk, including those that rely on fossil fuels.
- Diversifying portfolios and directly investing in sustainability initiatives to minimize climate risk.
- Working with policymakers to set sustainable building codes and policies.
- Creating construction guidelines to aid in climate transition.
- Subsidizing green construction projects to incentivize change.
At the end of the day, sustainability is no longer an extra for real estate projects. As the climate crisis continues, we’ll see that green policy and construction take center stage. Real estate brands will also rely on climate-resilient strategy in order to maintain their brand reputation and stand out from the competition.
There’s no doubt about it: the impact of climate change on the real estate industry is very real.