Sustainability has traditionally been thought of as a measure of a company’s impact on the environment, but investors and savvy CRE companies are shifting their focus to the impact the environment has or will have on their assets. And it’s easy to see why: According to NOAA, 2019 marked the fifth consecutive year in which 10 or more severe weather events or climate-related disasters causing at least $1 billion in damages impacted the United States.
Physical climate risk is becoming a mounting concern as climate-related events become more frequent and extreme due to the worsening effects of climate change. Because of the enormity of the situation, every building is likely to be affected by physical climate hazards to some degree. That statement may seem foreboding, but knowledge is power—the sooner commercial real estate firms make an effort to learn about the risks their buildings face, the faster they can take action to mitigate the effects.
So where to begin? Even if you’ve never considered the way climate change will affect your portfolio, there is still time to investigate relevant risks and allocate capital accordingly to make your buildings more resilient to the impacts they are likely to face.
Step 1: Be aware of the types of risks your assets face
There are a number of shocks (sudden catastrophic events) and stressors (slow-burning conditions that worsen over time) that can affect your portfolio. These include hurricanes, typhoons, and floods, as well as rising sea levels, heat stress, and drought conditions.
But which of these factors are most likely to affect your individual assets? Until now, many CRE companies have relied primarily on property insurance policies to assess their physical climate risk. However, to make these assessments, insurers often rely on historical data rather than taking into account climate trends and projections.
A more proactive, forward-looking approach is critical to understand asset-level risk. There are market intelligence firms like Four Twenty Seven that score buildings based on how severe their risks are to different types of climate-related shocks and stressors. Measurabl has recently integrated Four Twenty Seven’s climate risk data to show customers which of their assets are exposed and the degrees of exposure to those risks. Understanding which threats to keep an eye on will help you determine what actions to take next.
Step 2: Understand how these risks will likely affect your assets
What will happen to buildings with greater exposure to climate risks? The answer might be a bit more obvious for buildings that are in areas affected by major weather events like hurricanes and typhoons. Hurricane Florence, which hit the Southeastern United States in 2018, impacted approximately 5,545 commercial assets owned by 94 U.S. REITS and created over $10 billion USD in damages.
Buildings in the path of a powerful storm system like Florence can incur rainwater and flood damage, shattered windows, stripped or destroyed roofs, and high-speed impact from flying debris. Severe storm systems and rising sea levels can both lead to flooding, which can damage a building’s foundation, destroy valuable servers and electronics, and cause lasting rot, rust, and mold on surfaces.
Then there are the stressors. Buildings located in areas with rising temperatures can expect to see spikes in energy use as HVAC systems work overtime to keep indoor environments cool. Droughts can dry out the soil underneath buildings, causing it to recede. This can lead to cracks in the foundation, damaged pipes and sidewalks, and misaligned window and door frames.
This all may sound bleak, but the good news is that when companies are aware of which of their properties are exposed to these long-term effects, they can allocate funds accordingly to help protect those assets.
Step 3: Develop strategies to increase your portfolio’s resilience
So now that you know your risks, what can you do now to protect your assets? It’s not as though you can pick up and move your buildings away from high-risk areas. However, simply knowing what percentage of your assets are exposed to these threats can help you diversify your portfolio. You can focus on building or acquiring new properties in lower risk areas, assess the true resale value of owned buildings that are exposed to climate risk, or allocate capital toward projects that will make buildings in high-risk areas more resilient.
For example, developers in areas exposed to severe storm systems can design roof slopes and fortify structures with appropriate materials to withstand high winds or heavy rain or snow. Building facades can be protected from major storms with impact resistance glazing and water intrusion resistance. Properties that are exposed to heightened flood risks can benefit from improved drainage systems, anchored HVAC and generators, and flexible connections with automatic shutoff. Risers can be installed, or expensive servers and other electrical equipment can be moved to higher floors.
Extreme temperatures will also continue to take a toll on commercial buildings. CRE companies that have a good handle on their energy consumption will be in a much better position to determine which buildings meet energy efficiency standards and which ones may need to be retrofitted with solar panels and other forms of renewable energy. Some companies are also choosing to install smart windows, which include motorized shades, electrochromic window coatings, and other technologies that switch on and off throughout the day in response to variations in light level or temperature. Smart windows could reduce peak electric loads by 20 to 30 percent in commercial buildings.
Climate risks are inevitable, but the actions you take now have the potential to change the trajectory of your real estate portfolio’s future. To learn more about your risks, you can watch our webinar, “Physical Climate Risk: Identifying Your Exposure with Measurabl.”