Real estate investments are uniquely vulnerable to climate change:

  • The impacts of rising seas and storms at the coastlines of climate migration will cost coastal cities $1tr each year by 2050, according to the Global Commission on Adaptation
  • Based on today’s carbon emissions trajectory, $35 trillion in real estate assets will be at risk by 2070, according to the United Nations Framework Convention on Climate Change (UNFCCC)

Real estate investors and financial institutions are starting to recognize climate risk as an important gap in their pricing considerations. The statistics above reflect the financial risks of the two major categories of climate risk used to evaluate the real estate sector. 

  • Physical risk: Climate change risks that directly impact real estate assets and markets, such as storms, floods, sea level rise, extreme temperatures, and drought.  
  • Transition risk: Shifts in policy and perception related to climate change adaptation that can impact the real estate investment decisions, such as regulatory changes, litigation, reputational damage, and technological changes.   

Buildings, facilities, and land are not only impacted by climate change, they can play important roles in climate mitigation and conservation through sustainable land resources management, energy efficiency upgrades, and retrofitting.  

  • 40% of the world’s energy fuels buildings, and as a result, the buildings sector contributes an estimated 30% of the GHG emissions worldwide, according to the UNEP Finance Initiative.  
  • Outdated energy codes have not kept up with energy efficiency technology; new technology enables new projects to be built 30-50% more efficient than in the past. 

Due diligence in the sale process, investor pressure, and other things are making environmental, social, and governance (ESG) factors increasingly important to real estate investors and other stakeholders. Shifting policies could start to impact building owners in the form of building code updates, while real estate investors may increasingly demand information at the asset and market level regarding climate change.  

Communities are especially important stakeholders. Urban resilience is a growing concern, prompting some municipalities to allocate budgets to mitigate sea level rise, while others are falling behind. 

For example, Miami is investing significant funds ($200 million) towards water pumps and infrastructure upgrades from bonds and voter-approved property tax increases. In spite of this investment, it still may not be enough. Estimates for high emissions scenarios show that Miami will see billions of dollars of damage from climate change between 2040 and 2060. The losses will come from storms, sea level rise and deaths caused by heat. 

Across the board, the real estate industry lacks awareness (as well as the tools to assess) the risk climate change poses to the sector. Real estate investors, insurers, urban planners, and local policy leaders need to better quantify the long-term implications of climate risk. So far, they predominantly assess risk through a short-term lens. 

TCFD-aligned climate risk assessment and scenario analysis can help broaden the horizon to a longer time span according to different warming scenarios (such as 1.5, 3 and 6 degree Celsius scenarios for 2050 and beyond). 

The Climate Service Climanomics® Platform gives real estate investors reliable and accurate predictions of physical and transition risks under different scenarios. We provide insights at the asset, portfolio, and market levels to underscore the relationship between specific physical risks and broader transition risk trends. 

Through our work with the world’s largest real estate investment managers, we analyze millions of properties providing a range of nuanced insights. Our engagement outlined the physical risks, market-level trends (tenant behaviour, tourism, and rental market growth), the probability for municipal adaptation, and insurability. The data maps data risk across our client’s real estate investment portfolio in a way that supports due diligence, strategic decision-making, and a comprehensive understanding of real estate investment risk.  


Real estate asset management and climate risk

At the individual asset level, real estate investors and insurers should understand conditions related to climate change. Climate risk and opportunity assessment incorporates a longer time-scale for projecting climate impacts. This process highlights the existing adaptive capacity and resilience of assets in the region, as well as the actions building managers and owners to improve these aims.  

Typically, the Climanomics® Platform reveals how the proportion of climate risk weighs heavily towards a minority of assets--generally about 20% in line with the Pareto Principle. Understanding exactly which assets face greater financial risk due to climate change helps asset managers decide what assets to prioritize for strategic planning. 

The analysis identifies the vulnerability of an asset to climate risk such as its physical risks (flood, wildfire, extreme heat, etc), asset-type, or low regional adaptive capacity. The platform also gives insights on opportunities to improve resilience such as resource efficiency, energy sourcing options, and retrofitting. 

Tracking and monitoring transition risks, which rely heavily on the policies of different regions, can also assist managers understand how fast adaptation measures and risk-averse policies are being implemented. Climate change risk is time-sensitive and it has a compounding effect. Typically, areas with faster climate transitions in place present less risk to investors. This is why scenario analysis is so important. It helps investors understand exactly how swiftly impacts will incur in different regions based on different warming scenarios. 


The real estate market and climate change

Real estate climate risk assessment at the market-level summarizes physical and transition risks for entire cities or regions. Market-level resilience measures for climate change mitigation depend on infrastructural improvements as diverse as building efficiency, water systems and powerline placement. These efforts depend on both private and public financing to implement them over a relatively short period of time to mitigate the worst impacts of climate change. 

The Urban Land Institute (ULI) and Heitman recently published an influential report on the practices for assessing the climate risk of real estate at the market level. It identifies key concerns that investors are increasingly considering for market-level investment decisions:

  • Physical risk at the asset- and market-levels
  • A city or region’s investment in infrastructure, and the ability of that infrastructure to withstand the risks associated with different warming scenarios
  • A city or region’s capacity to fund and implement adaptation and resilience policies
  • The different funding sources for resilience investments 
  • Impressions of market risk from a wide range of stakeholders, which can influence the pricing and insurability of the market: insurers, lenders, companies, and residents

Currently, investors lack the level and quality of data that exists for these different elements. Climate risk vulnerability is increasingly important to investors, but many rely on anecdotal rather than comprehensive data to inform their decisions. The result can also have consequences for local cities and governments that rely on investments in their communities. 

The report highlights the need for collaboration among policy-makers, community stakeholders and real estate investors to avoid debilitating market impacts from climate risk. Here are some of the ways investors can improve their role in the assessment of market-level risk: 

  • Improve the data analysis and measurement of market-level risk such as physical risk, infrastructure, and policy
  • Connect the dots between asset-level and market-level risk in assessments
  • Improve collaboration and communication among real estate investors, managers, local governments and resilience officers
  • Partnering with insurance and valuation agencies to incorporate climate risk assessment as a consideration for actuaries and valuation


TCS Market Impact Framework

Recently, TCS completed a Market Impact Framework that builds upon the work of the ULI and Heitman report providing market-level insights not only for transition risks but opportunities on community behavior, municipal resilience and adaptation investments, and insurability.

 The framework helps to assess market-level climate risk impacts in various cities around the world. The tool extends beyond the report published by ULI by providing insights on the materiality of the risks and the indirect impacts within the covered markets. Specifically it provides information on community behavior (rental market growth and tourism), municipal adaptation, insurability, liquidity and building-level adaptation (discussed in the previous section). 


Community behavior

Our framework dials in on how tenant behavior, tourism, and rental market growth can become indirect opportunities for the real estate  market. Underpinning some of these insights is the understanding that climate change impacts could lead to greater migration from areas posing greater physical risks such as extreme heat and humidity, wildfires and sea level rise. By accessing the framework, real estate firms can systematically assess these dynamics.   

Municipal adaptation

Real estate market shifts from the pandemic highlighted how fast conditions can change. By April 3 following the Covid outbreak, an estimate of impacts on the unlevered enterprise value of real estate assets showed a decline of 25% or more for most asset types and as much as 37% for lodging. Apart from exposing the risk of the impacts of a crisis, the pandemic also revealed how different assets can be impacted unevenly. 

Climate risks like sea level rise are already impacting the housing market. According to a 2018 study, homes close to the sea in coastal cities are already selling for 7% less than other homes in the same area. 

Municipalities are grappling with both planning and funding adaptation measures for climate change. Key policy improvements can enable fast adaptation such as updating building codes and flexible zoning regulations, according to The World Economic Forum. Funding for infrastructure improvements can come from a variety of different partnership models including public-private partnerships. 

But one of the most difficult aspects of municipal adaptation could prove to be getting stakeholder support and buy-in. Climate risk assessments for long-term planning provide the accurate data and insights to improve collaborative efforts at resilience. 


A key component of market-level assessment offered by the TCS Market Impact Framework is how insurability will change over time for different climate scenarios. Insurability can vary depending on physical risks such as wildfires, so investors need to understand the dynamics impacting future availability and cost of insurance for different markets. 

Currently, insurers reprice annually, while FEMA flood plains are assessed on a five-year timeline. These insights reveal the prevailing short-term outlook for insurers, while climate change requires much longer projections, due to the compound interplay of both gradual changes and sudden impacts. 


Improving real estate climate risk management and assessment

TCS has developed the tools for a robust approach to climate risk assessment in real estate. The full Market Impact Framework covers both asset- and market-level insights and strategies for improving your real estate investment strategy, due diligence, and property management. 

You can systematically calculate the financial risks and opportunities related to climate change with the full Framework. The information will reveal direct physical risk, indirect transition risks, and market dynamics. Beyond this, the Framework includes acquisition checklists to use during due diligence. 

Our comprehensive and consistent data models give a holistic picture of physical and transition risks at the asset, portfolio and market-level, along with actionable insights. We have extensive experience working with real estate investors and financial institutions. The insights provided by the framework lead to expanded investor awareness about portfolio-wide risks. 

To see a high-level overview of the Framework to better understand our systematic process for assessing climate risk in the real estate industry, contact us today.  


More resources:

  • Partnering with the Partnership for Carbon Accounting Financials (PCAF) and the Carbon Risk Real Estate Monitor (CRREM), GRESB also provides investors insights on the greenhouse gas emissions associated with their real estate investments. For asset-level management, both the mitigation of risky investments long-term and improvements to existing investments by establishing emissions-reduction targets are essential to a resilience strategy. 


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