Extreme weather and temperature events driven by climate change can have both immediate and continuing impact on growth for real estate investment trusts (REITs) and their portfolios. Climate events such as flooding, wildfires, drought and storms – and the subsequent financial burden on buyers, renters and owners – impact real estate demand.
Transition-related risks such as the rising costs of energy and flood insurance premiums, can also impact property value and market preferences. Frequent, intense climate events can damage and destroy property, squeeze housing availability and impact rent growth.
Before real estate investors and REITs take action to mitigate the effects of climate change on assets, they need insight into how climate change could impact their portfolio over time. This is even more crucial given the SEC’s proposed rule change that would require publicly-traded companies to disclose information related to climate risk.
ClimateCheck scores portfolios and properties on a 1-100 scale for future risk of climate-related hazards, with a higher rating indicating that climate change is likely to negatively impact that home. The rating is based on two factors — future risk and how much the risk level will change over time. ClimateCheck covers five hazards: heat, storm, fire, drought and flood.
Understanding the possible enduring impacts of climate change allows REITs to fine-tune investment strategies and take appropriate action to protect their portfolios. Here are climate impacts REITs should understand, based on analysis by ClimateCheck and our client, commercial real estate analytics firm Green Street.
- Learn more from Green Street about the role of climate change-related metrics in underwriting.
Economic impact of climate events is growing overall
As climate events escalate, local real estate markets will increasingly feel an economic impact. Studies have documented immediate economic ripples from climate events, as well as the effects on rent growth and property value over time.
Chronic climate-related hazards can wear on property value over the long-term. Research into wildfires, for instance, has documented falling property values from repeated fires in an area.
Coastal flooding alone carries a huge economic burden. By 2100, large swaths of privately-held land in the United States could lose at least $108 billion in value to rising seas, according to an analysis from Climate Central, a nonprofit research group.
To better approximate location-related risk, REITS can use ClimateCheck’s climate risk score, which takes into account the repercussions of both acute and persistent climate hazards. Climate-related risks vary across geographical areas. Regional and more localized data on climate risk helps investors estimate an asset’s profitability and rent growth as conditions change over time and across regions.
According to ClimateCheck client Green Street, portfolios with many assets in the Sun Belt of the United States and the southern part of Europe have high climate risk scores due to flooding, drought and intense heat. Miami, Phoenix, and Atlanta were among the US cities with the highest risk scores, indicating the markets there are likely to be heavily impacted by climate risk.
Green Street also finds that transition-related risks can burden local markets differently. Homeowners in Florida already pay disproportionately high insurance premiums compared to the rest of the country, according to the Insurance Information Institute, and climate-related risks such as hurricanes could increase costs.
Assessments at the level of individual properties can also guide investment strategy and risk mitigation efforts. ClimateCheck’s portfolio analysis tool charts climate risk across a portfolio or for an individual property. Understanding which assets bear disproportionate climate risk can help investors identify a portfolio’s current vulnerabilities and inform future investment.
Assets in the same area can perform differently
In general, REIT portfolios are concentrated in more urban areas that are densely populated. Heat absorbent surfaces and lack of green spaces contribute to the urban heat island effect, making these cities more susceptible to extreme heat. REIT assets in these areas carry more heat and storm risk, but bear less wildfire risk than market averages, according to Green Street’s analysis.
Within a local area, impacts from extreme weather and temperature events can be uneven. Flooding, for example, can vary greatly across neighborhoods. Properties on elevated land may perform better in the long run than neighboring properties that are more likely to suffer the immediate consequences of flooding. The increasing frequency of climate events may progressively exacerbate these inequalities, underscoring the need for the real estate market to adapt.
Taking action to protect your portfolio
REITs can take actionable steps to protect portfolios from the long-term impacts of climate change, starting with a portfolio level climate risk assessment. REITs can then narrow in individual property level risk and vulnerability. ClimateCheck recommends using both high-level and property-specific data to screen investments for susceptibility to climate hazards and identify possible problem spots.
Property-specific assessments can identify asset vulnerability, and help investors prioritize which resiliency measures to implement.
Leveraging these tools will allow you to plan areas of future real estate investment, adapt your overall strategy to a changing climate, and better understand how to prepare current assets for likely risks.
Looking to incorporate climate into your risk assessments?
Looking to incorporate climate into your risk assessments? Contact us
- ClimateCheck’s proprietary risk assessment tools empower property buyers, owners, and brokers by exposing and quantifying climate risk to real estate. Our team of experts uses data from government, academic and other public and institutional sources, such as the Intergovernmental Panel on Climate Change (IPCC) to rank drought, heat, fire, flood, and storm risk for entire portfolios as well as individual properties.