Oct 03, 2023

ClimateCheck advisor Jesse M. Keenan: How physical climate risk is transforming real estate

Risk | by Tess Townsend, Director of Communications | 4 Minutes

If you follow news about the intersection of real estate and climate change, there’s a good chance you’ve heard from Dr. Jesse M. Keenan. The Tulane University professor has been interviewed and cited by outlets including The New York Times, The Wall Street Journal, NPR, Bloomberg News, CNBC, and more, in stories about how climate change is transforming the real estate market — and what that means for consumers and investors alike. He advises ClimateCheck on how to model and communicate the nuances of physical climate risk to our clients.

Keenan is a globally recognized researcher and thought leader when it comes to climate and the built environment. With a multi-disciplinary background that spans science, law, economics, architecture , and urban planning, he has held senior leadership positions at the Harvard Graduate School of Design and the Graduate School of Architecture, Planning and Preservation at Columbia University. He has advised government agencies, politicians, international NGOs, Fortune 500 companies and more.

We caught up with ClimateCheck advisor Keenan to discuss how climate risk is transforming real estate, and what that means for our clients.

Climate change is a growing consideration in the housing search

As more people become aware of the potential impact of climate-related hazards on their homes and neighborhoods, shifting perceptions of risk can impact demand for certain types of housing and geographic locations. A 2021 Redfin survey found that about half of survey respondents cited climate change as a factor in their housing decisions. These consumer preferences and decisions can impact property values and a range of investors.

“People are increasingly thinking about the impacts of climate change on their properties and neighborhoods, and are deciding where to live with this in mind,” Keenan said. “It's also important to note that people have perceptions about future climate risk and what that property value will be in the future.”

Investors consider climate risk when they buy commercial property

Stakeholders in the commercial real estate space are increasingly seeking to incorporate climate risk into decision-making. In addition to understanding risk at the level of individual properties, REITs and other real estate investors are leveraging climate data to understand the distribution of risk across their portfolios.

“There is growing research showing that commercial real estate is revaluing properties and that climate change is shaping investor behavior,” Keenan said. “Investors are observing signals about how stakeholders look at climate – not just today, but also their forward-looking perception of real estate value.”

More and more investors are taking action to map climate risk across their portfolios, according to a 2019 report by the Urban Land Institute. To do this, REITs and investors are seeking out climate data providers to quantify current and future risk and shape their investment theses moving forward.

Lenders are incorporating climate risk into mortgage rates

Climate risk awareness in the finance industry is influencing the flow of capital for debt and equity, Keenan said. There has been a growing effort in capital markets, including the primary mortgage market, to address uncertainty and mitigate risk by adding risk premiums.

“We certainly see a trajectory here where the term of mortgages, the interest rate of mortgages and even the availability of some mortgage credit is responding to high-risk areas,” Keenan said. Lenders are contending with devaluation of collateral and property, creating more risk for investors. This is in addition to more conventional challenges for default risk and prepayment risk among mortgagees.

Climate risk is influencing insurance premiums

The growing frequency and intensity of climate-related hazards also affects insurance premium pricing and coverage, burdening homeowners and others with real estate holdings. Insurance companies are responding to climate change by hiking up premiums, raising deductibles, and sometimes denying coverage altogether. Certain states, such as Florida and California, have seen their homeowner insurance markets become increasingly destabilized.

A destabilized insurance market carries repercussions for real estate. Rising premiums and coverage issues can affect property values, mortgage terms, and lender behavior. There’s also an immediate impact for homeowners when insurance premiums go up.

“Rising insurance costs are going to weigh down on their disposable income today, then keep going up. That’s basically going to leave the consumer with less cushion when things go wrong, which impacts their overall financial wellbeing,” Keenan said.

Real estate professionals must keep up with evolving climate data

Physical climate risk influences real estate at every level: Owners, investors, consultants, lenders, insurers, and tenants. It is important to make sure your understanding of climate risk to your property is informed by reliable climate science and data that is most appropriate for its intended use.

“ClimateCheck stands out to me in a sea of data and service providers because their experts use models that are commensurate with the state-of-the-science, are realistic and transparent about the resolution of the data, and communicate the nuance of risk (or non-risk) to clients,” Keenan said.

Stay on top of new information in climate research by working with reliable climate data providers. ClimateCheck’s well-rounded team of climate science and real estate experts use the latest data to produce clear and complete risk assessments across multiple hazards. Our deliverables include portfolio risk reports, individual property risk reports, raw data, and more. You can learn more about our team and climate risk data and assessments here.