Considering Climate Risks When Investing In Real Estate
Climate risks are already impacting residential real estate values. According to a report from the Urban Land Institute in partnership with Heitmen, studies published in both 2017 and 2018 “found that homes exposed to flood risk or sea-level rise have sold for less than comparable properties or have seen values increase at a reduced rate in comparison to similar properties without flood risk.” The report also discusses the existent damage and related costs as a result of catastrophic climate events: Globally, insurers paid a record $135 billion for damage caused by storms and natural disasters, a figure not representative of the actual damages (which in the United States alone were $307 billion).
Real estate investors should definitely take note of this trend. Traditionally, investors take several factors into consideration when evaluating new assets, such as location, valuation and opportunity. Rising concerns over environmental events, driven in part by climate change, should be part of the equation when considering the purchase of an investment property. It’s important to be aware of the impact that these changes and events can have on real estate investing.
Climate risks, such as storms or wildfires, pose a significant threat to both residential and commercial buildings and can negatively impact a real estate investment. Besides causing property damage, climate events can result in more than just a decrease in property value or increased insurance rates. They can also spell expensive maintenance and operations costs. In a worst-case scenario, a natural disaster could cause a complete property loss. Despite the major consequences that climate risks evoke, there’s a lack of standardization when assessing investment risk versus opportunity. Thankfully, there seems to be increased awareness surrounding climate risks in the real estate investment industry as a whole.
Real estate assets across the nation are susceptible to both gradual and more acute climate risks, depending on geographical location and other factors. Gradual climate risks might include sea-level changes, varying weather patterns (such as an increased frequency of rain or wind), drought and higher or lower average temperatures. While investors may not see an immediate impact or risk from these gradual weather events, shifting climate patterns can lead to increased wear and tear on properties and the potential need for more or alternative resources. Increased wear and tear can eventually lead to higher maintenance costs, while the need to add resources like cooling/heating methods or water sources can lead to increased operating costs. In addition, properties already suffering from the effects of gradual climate risks are likely to experience an exaggerated impact if a catastrophic climate event does take place.
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