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Real estate is on the front-line of climate risk. Recent research highlights the impacts of physical climate risks on real estate, while growing demands to shift to a low-carbon economy place pressure on the real estate industry to prepare. Existing and emerging datasets and technologies provide building owners, communities and financial stakeholders tools to integrate climate risk into their decision-making.
The International Energy Agency estimates that buildings were responsible for almost 30% of global emissions in 2019, and real estate is also a key asset class in many lending portfolios. The built environment is thus essential in global efforts to transition to a low-carbon economy. From regulations focused on reducing carbon emissions to shifting consumer sentiment towards green buildings, there are many ways in which transition risk affects real estate. Building owners have an opportunity to stay ahead of these risks by leveraging advanced energy retrofit and scenario analysis platforms designed to analyze building energy performance and assess retrofit options in terms of cost and energy savings and other information. This also provides opportunities for lenders and investors to support the transition to net zero while creating value-add solutions, such as new products to finance energy efficiency retrofit.
Real estate is also a sector with among the most clear vulnerability to physical climate hazards. Research on properties exposed to costly hurricanes shows a decrease in value of nearly 6% one year after the hurricane and by 10.5% two years after. Similarly we’ve found that assets directly affected by Hurricane Harvey have decreased asking rents and increased vacancy and expenses compared to a control group. Our early research indicates that flood risk exposure should have a negative impact on commercial real estate development, but this is not currently evident consistently across development. The costs of wildfires, floods and other extreme events are significant, for asset owners themselves, but also have rippling impacts on tax bases, insurance markets and development. Integrating forward-looking climate risk data early into the development and lending processes can help ensure that relevant preparedness measures are budgeted in and that loss it mitigated.
Real estate is also vulnerable to disruption from exposure to climate risks beyond an individual asset. If key transportation nodes are flooded or employees enduring high temperatures don’t have access to relief outside of working hours, there is potential for disruption even at flood-proofed, air-conditioned buildings. This highlights the need for looking at climate risk and adaptation at the city or regional level. Our most recent data on climate risk at the county and regional level shows that 26% of assessed large urban areas globally have high exposure to floods and 30% are highly exposed to heat stress. Understanding the exposure of the area surrounding a real estate asset is essential for informing resilience measures that addresses community vulnerability and maximizes co-benefits between the resilience of an asset and the people it depends upon.
Speaking today at EVORA’s panel on Real Estate Investment and Finance, Emilie Mazzacurati, Global Head of Moody’s Climate Solutions, emphasized “Understanding the multifaceted impacts of climate change on real estate markets requires both hyper-local data on the characteristics and risk exposure of particular assets, alongside data on market-level climate and economic trends which will also drive risk and opportunity for real estate assets.”