Are Investors ‘Short-Sighted’ About Climate Risk?

October 12, 2018

Hurricane Michael’s path of destruction through Florida, Georgia, the Carolinas, and Virginia this week—putting more than 145,000 homes in peril—is a reminder that “real estate is on the front lines of climate impact,” experts said Thursday during the Urban Land Institute’s fall conference in Boston.

Urban Land Institute's Fall Meeting in Boston

© REALTOR® Magazine

The rapidity of climate change makes it difficult to assess long-term risk to property in disaster-prone areas of the United States, panelists said at a Thursday session about climate risks to real estate during the Urban Land Institute’s fall conference.

Nearly every region of the United States is experiencing intensifying natural hazards: hurricanes in the South and along the Eastern Seaboard, drought and wildfires in the West, and tornadoes in the Midwest and Northern Plains. But that hasn’t stopped demographic shifts toward some of the most disaster-prone areas of the country. Real estate investors have followed the demand, expanding their portfolios particularly in the Sun Belt. What’s wrong with this investment strategy?

“It’s short-sighted,” said Egbert Nijmeijer, senior portfolio manager for Amsterdam-based Kempen Capital Management N.V., which owns properties across the U.S. “Investors are too focused on short-term ROI. If they were thinking about a longer-term strategy, they probably wouldn’t flock toward high-risk areas the way they are now.”

Though properties at high risk of natural disasters—especially flooding—tend to be worth about 10 percent less than those at lower risk, Nijmeijer added, investors don’t necessarily need to pull out of disaster-prone markets. But with increasing insurance and maintenance costs related to storm-proofing and protecting property, they need to consider how this may impact their long-term ROI goals. “A lot of investors don’t understand that and just say, ‘Well, I’m diversifying my portfolio,’” Nijmeijer said. “That alone is not a sound strategy.”

Assessing Climate Risk to Your Properties

Investors with large portfolios should collaborate with insurance providers to assess the climate risk of individual properties rather than relying on data about entire neighborhoods or cities, said Laura Craft, head of global sustainability for real estate investment management firm Heitman. “You need an assessment of your specific property—not the one across the street or those within a certain radius—because actual risk varies from property to property,” she said.

Doing so allows investors to be more strategic when deciding whether to take measures to mitigate a property’s risk, such as raising it above the flood zone or installing flood gates, or unload it, added Emilie Mazzacurati, founder and CEO of market intelligence provider Four Twenty Seven. “REITs are most exposed to risk because of the diversity of their portfolios,” she said. “There’s plenty of data available on climate risk to real estate so you can prioritize your investments.”

However, assessing long-term risk and its impact on ROI can be difficult. “When you look at the next 10 to 20 years, predictions for climate impact in that time period are already built into today’s data,” Mazzacurati said. “But from 2040 on, there’s not much data about what climate impact may look like.”

Craft said investors should pay attention to the relocation patterns of people who are leaving high-risk areas. Citing a study that predicted 2.5 million people will leave Miami over the next 10 years, she said there may be less risky investment opportunities in the markets those people are moving to. “There are definitely areas that will benefit from increased climate risk, and these are the places investors may want to focus on expanding future portfolios.”

—Graham Wood, REALTOR® Magazine