Preparing for the Storm

Government action on infrastructure development and energy efficiency can help the industry prepare for an uncertain future.

Government action on infrastructure development and energy efficiency can help the industry prepare for an uncertain future.

The 1980-2018 average for weather and climate-related disasters is 6.3 events. Fom 2014 to 2018, that average increased to 12.6 events. In March 2019, the Pentagon sent Congress a list of bases most at risk from climate change risks.

This increase in climate-related disasters and weather events is already impacting property valuations in certain risk-prone areas. A 2018 study from the First Street Foundation estimated homes vulnerable to flooding in the New York metro area collectively lost $6.7 billion in value from 2005 to 2017. Experts used this same methodology to examine residential properties in 22 states to determine the collective erosion of property values in coastal areas. The study examined three million coastal residential properties in Texas, concluding they collectively lost $76.4 million in value.

Commercial properties are also vulnerable. A May 2018 article in National Real Estate Investor noted that two years after experiencing a hurricane, five commercial property types saw a 10.5 percent drop in valuation.

Impact of Climate Risks

When examining the impact of climate change, scientists and policymakers have defined risks as either physical or transitional. Properties most vulnerable to weather-related disasters are at risk of both physical damage and a loss in value. The Urban Land Institute and Heitman report notes that physical risks include climate catastrophes that directly affect buildings through extreme weather, wildfire, and sea level rise. The impact on buildings from physical risks would include costs to replace or repair damaged property; business disruption because a property is out of service for a time period; and increased wear and tear on a property due to changes in weather patterns such as extreme temperatures, high winds, and increased precipitation.

Transition risks include changes in market preference, increasing costs of energy and water, reduced economic activity in vulnerable markets, and increasing compliance costs. Insurance will generally cover physical risks, but it may not address losses from transitional risks. As the ULI and Heitman report explains, “insurance will cover damages from catastrophic events; it will not cover loss in value from a reduction in the asset’s liquidity.”

F An October 2018 Wall Street Journal article noted, “Big insurers are expanding teams of in-house climatologists, computer scientists, and statisticians to redesign models to incorporate the effect of the warming earth on hailstorms, hurricanes, flooding, and wildfires.” It remains challenging to predict such risk with precision, because historical data cannot dictate future risk.

While the impact of these risks on the insurance industry is not entirely clear, the ULI and Heitman report notes that volatility in premiums will likely increase, though mitigation measures can lower premiums or temper their increases. These measures could include additional cooling systems, building hardening to secure building structure in the face of heightened weather risks, and increasing elevation.

Climate resilience measures can mitigate climate risk’s impacts. “The insurance and real estate industries should be asking if they are building things the right way and in the right places,” says Greg Lowe.

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Resiliency Planning and Infrastructure Policy

Upticks in periods of extreme temperature, heavy rain, and strong winds impact roads, bridges, railways, and runways. A report from the International Institute for Sustainable Development explains how increasing temperatures can soften asphalt and place additional stress on railway and bridge joints. Investments in infrastructure should also plan for redundancies in transportation systems to account for climate-related events that might disrupt one mode of transportation.

As Congress considers an infrastructure package, these climate-related factors must be evaluated and taken into consideration. Investments to current and new systems need to not only employ climate-resilient measures.

Energy Efficiency Measures

The section 179D deduction for energy efficiency encourages the construction and rehabilitation of new and existing commercial buildings to state-of-the-art efficiency levels. The deduction has been a temporary part of the tax law since 2005. However, it has expired and been reinstated five times, most recently at the end of 2017.

One of CCIM Institute’s legislative priorities is advocating for the retroactive and long-term extension of the deduction. In addition, the Environmental Protection Agency’s Energy Star brand indicates a building’s energy efficiency. Demonstrating a property’s reduced carbon footprint can increase its value by confirming lowered utility costs and by increasing appeal to tenants and responding to market preferences for environmentally friendly buildings.

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Resiliency in the Nation’s Capital

In 2016, Washington, D.C., was selected to be part of the 100 Resilient Cities network, which is a global network founded by the Rockefeller Foundation in 2013, to assist cities in becoming more resilient to the physical, social, and economic challenges of the 21st century.

Other U.S. cities in the network include Boston, New York, Norfolk, Pittsburgh, and Tulsa. New York has implemented a Cool Neighborhoods Initiative. They incorporate green infrastructure efforts with communication efforts to protect residents from extreme heat. Cities that have implemented climate resiliency efforts might prove more attractive to real estate investment. For more information, visit www.100resilientcities.org.

Elizabeth Vincent | July.Aug.19 in CIRE Magazine

 

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