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October 18, 2021

How CRE professionals can manage the impacts of climate change

From increasing asset-level damage during flooding events and catastrophic loss from wildfires, to rippling impacts on commutes and supply chains, physical climate hazards present material risks to commercial real estate. Below we share insights from the climate symposium at CREtech’s annual New York conference, where Thomas LaSalvia, Senior Economist at Moody’s Analytics, CRE, and Natalie Ambrosio Preudhomme, Director at Moody’s ESG Solutions took the stage. They presented on datasets that enable the integration of physical climate-risk into decision-useful information for real estate investors and developers and discussed findings from initial economic modeling on climate risk and real estate development.

Key takeaways include:

• Physical risks have multifaceted impacts on assets themselves, but also on commutes, supply chains and factors affecting real estate development like insurance and tax bases.

• Rapidly developing datasets distill complex climate model outputs into forward-looking, asset-level data on how specific properties are exposed to climate hazards, like floods, heat waves, wildfires and others.

• The DiPasquale – Wheaton “Four Quadrant Model” for real estate development theory can be adjusted to account for climate variables, allowing reduced uncertainty and greater insight on the variables affecting real estate. Climate risks can affect each part of the model: Capital Market; Space Market; Development Market; and Supply Adjustment.

• Hurricane Harvey had significant impacts on key CRE metrics such as vacancy rates, and initial findings indicate that increased flood risk in Florida has a negative impact on real estate development – though this is not yet widely visible in real estate markets.

• There are opportunities for real estate investors to get ahead of their risks now, by leveraging climate risk thresholds to inform their due diligence and engaging with property managers and communities around resilience priorities that address the hazards that pose the greatest threat to their properties.

For more about our work on the link between climate risk and commercial real estate here. You can also register for our upcoming webinar where we’ll discuss the physical impact of extreme climate conditions on CRE property performance.