A new report warns that commercial real estate may suffer from climate change and calls on property owners to consider a range of adaptation strategies. The report, authored by the Urban Land Institute in partnership with Heitman, is the first of its kind to assess how climate risks can impact real estate investment locations and opportunities.
While there is still debate over the existence of climate change, it’s clear that many aspects of our world are changing, from sea levels rising to a higher frequency of hurricanes and flooding in coastal areas. The consequences of these changes will inevitably affect the value of commercial real estate, requiring a shift in the industry’s long-term strategy.
The most visible impacts are physical climate risks, which can cause direct damage to buildings and decrease their values. For example, the National Oceanic and Atmospheric Administration has reported that the number of extreme weather events resulting in flood insurance claims is on the rise. Sea level rise is also a growing concern, with the Union of Concerned Scientists forecasting that by 2045, nearly half of the nation’s homes could be exposed to chronic flooding.
Transition risks, on the other hand, can affect buildings and their valuations indirectly by influencing markets, systems and societies with which they interact. These include energy regulations that require a reduction in carbon emissions and the availability of natural resources, including water. Indirectly, these can lead to a loss in economic growth and job gains in some sectors, while reducing the supply of goods and services needed to operate buildings.
In the short term, these impacts are likely to increase operating costs and capital expenses for properties in affected areas, but as the world moves toward a low carbon economy and renewable energy becomes more cost competitive, these risks are expected to be mitigated. However, this shift will require significant investment in infrastructure and will have a major impact on market conditions for real estate investments in the coming decades.
While these challenges are clear, there are also some important opportunities for the real estate sector to embrace the new normal. Zoning regulations and building codes are already changing to reduce the risk of climate-related disasters, and new technologies like sensors and monitoring systems that streamline water management, HVAC systems with energy-saving features, and predictive analytics can make buildings more resilient and profitable in high-risk areas.
Private finance is essential to accelerating the change, and impact investing – which benchmarks investments against measurable environmental and social outcomes alongside financial returns – can be a powerful tool for promoting sustainable real estate practices.
In the long term, the industry will have to move away from a model of passive observation towards active participation in climate risk management and innovation. This will require a greater focus on resilience and sustainability, as well as a renewed commitment to green building techniques. In the meantime, we can all play a role by raising awareness and advocating for policy changes to better protect our homes, businesses, and communities.
