How Commercial Real Estate Investors Are Weighing Climate Change When Planning Future Business Strategies

While COVID-19 is the leading disruptor of the commercial real estate market at the moment, the industry is preparing for even further long-term disruption from climate change. According to housing professionals, the rising sea levels, increasingly volatile swings in temperature, and the routine occurrence of natural weather-related disasters— ranging from hurricanes and floods to droughts and wildfires—have forced brokers and investors, alike, to reckon with this potentially existential threat.

I am aware that businesses are concerned about locating or staying in California, Florida, New York, New Jersey, and Boston due to climate issues,” says RE/MAX Town & Country’s Bruce Ailion-. “Personally, I would not invest in climate-sensitive areas, as I believe we will not see a change over an investment holding cycle, and expect extreme weather events to continue.”

As the company’s associate broker based out of Atlanta, Ailion says he expects his region in the Southeast to remain relatively stable. However, he noted that climate change seems poised to worsen, and the fall-out could ultimately span the whole country.

“I am concerned that as these [extreme weather events] accelerate, we will see social unrest and significant global disruption,” Ailion says. “Climate change is more than just it getting hotter, colder, wetter, and drier. These will have geopolitical and security implications that are in a pressure-cooker situation—once overheated, it cannot be reversed.”

Recently, global real estate investment management firm Heitman teamed up with the Urban Land Institute to research investment trends in light of increasing risks brought on by climate change. The report found that even though flood and fire insurance can offset some short-term exposure to climate-related losses, those policies alone will not protect commercial real estate investors. According to the report, new investment strategies to deal with the risks include the following:

  • Mapping physical risk for current portfolios and potential acquisitions

  • Incorporating climate risk into due diligence and other investment decision-making processes

  • Incorporating additional physical adaptation and mitigation measures for assets at risk

  • Exploring a variety of strategies to mitigate risk, including portfolio diversification and investing directly in the mitigation measures for specific assets

  • Engaging with policymakers on local resilience strategies

Joel G. Block, a disruption futurist in the commercial real estate industry and founder of the private equity firm Bullseye Capital, says that such measures need to be taken seriously. “No investor can afford to put their head in the sand,” Block says. “Climate change is a real thing, whether it’s manmade or otherwise. There is something going on and it’s changing the risk profiles of certain territories.”

According to Block, insurance companies have been using many antiquated methodologies and datasets, which will have to be updated as weather events worsen. As “100-year storms” become more and more regular, the premiums will have to spike in order to support all the payouts. Owners will then pass it on to tenants, who pass it on to consumers, and eventually, population migrations will be triggered—maybe not directly because of weather, but because of the consequential economic fall-out.

When considering an investment in an environmentally sensitive region, Block advises investors to work with local specialists who have a better understanding of what communities are at risk or will be at risk in decades to come, and which ones could be problematic from a compliance standpoint.

The National Association of REALTORS® (NAR) provides education to its members about a variety of topics pertaining to climate change. According to the association, “NAR recognizes the threats posed to the commercial property by extreme weather events, such as flooding, droughts, and hurricanes, and is working to help members and state and local associations adapt and thrive in the face of these increasing climate risks. To achieve this goal, NAR supports sustainable energy practices, voluntary incentives, tax credits such as the 179D Energy Efficient Commercial Buildings Deduction, and energy efficiency education and research for real estate professionals, real estate owners, developers, tenants, and occupants. NAR also supports smart building and high-performance construction technologies that enhance the community while protecting the environment.”

Block adds that volatility in the commercial real estate market could be used as a negotiation tactic to acquire assets at better entry prices. Some assets, which are deflated from insurance or regulatory instruments, could spark even cheaper fire sales if there’s a perception that demand is decreasing.

Eric Molfetta, vice president of Investments at Colliers International, Las Vegas, specializes in industrial properties, a subset of commercial real estate that has been thriving amid the pandemic due to the surging demand for logistics and warehousing. He agrees that just because the weather won’t substantially impact his region (Las Vegas has always been hot), climate change will still be an issue.

One of the main drivers is the increasing regulations in neighboring California, which is mandating a switch to electric vehicles by 2035 and has higher taxes relative to most states. Therefore, Molfetta predicts an accelerated exodus to business-friendly states such as Idaho and Texas in order for businesses to remain competitive.

“At the end of the day it always comes down to the bottom line,” Molfetta says.

Andrew King is a contributing editor to RISMedia.

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