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Climate Change Part 2: What it is & How it Impacts Commercial Real Estate

In part 1 of our climate change series, we explored how the real estate and construction sectors are making efforts to reduce their negative impact on the environment, and how climate change impacts investor’s business decisions. In part two, we will discuss the short- and long-term implications of climate change on real estate, including adoption of corporate Environmental, Social & Governmental (ESG) initiatives, as well as what markets are the most vulnerable.

Short- and Long-Term Implications of Climate Change on Real Estate

 Short-term implications of climate change can take the form of natural disasters including hurricanes, sea level rise, drought, and wildfires. With these catastrophic events comes a significant increase in the cost of maintaining, repairing, and reconstructing severely damaged or destroyed property; sky-rocketing costs of property insurance; and post-event business and economic productivity losses.

As explained by the Washington Post, long-term implications due to the accelerating effects of climate change include a lack of real estate market growth and a considerable decrease in property values. Public policies and regulations aimed at mitigating climate change effects could inflate investment and ownership expenses, including taxes, insurance, code compliance, infrastructure and financing. Essential resources, such as energy and water, could also become increasingly scarce and more costly than ever.

Adoption of Corporate Environmental, Social & Governmental (ESG) Initiatives

Fortunately, investors are taking action to fight against climate change by implementing ESG practices in their own businesses and diligently researching companies’ ESG profiles and using ESG criteria to screen potential investments. ESG refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company. In fact, the percentage of global retail and institutional investors that apply ESG principles to a quarter or more of their portfolios jumped from 48% in 2017 to 75% in 2019, according to ALVA, a leading solution for reputation intelligence, analysis, and media monitoring. In 2018, sustainable investing assets totaled $14.1 trillion in Europe and $12 trillion in the United States. Additionally, ESG asset investing in the U.S is expected to reach $35 trillion by 2025. This impressive growth reflects just how important ESG practices and ESG-compliant investments are becoming in real estate, investing, and global business.

What Markets are the Most Vulnerable?

Real estate properties located in areas closest to large bodies of water are the most at risk for climate change related hazards. According to the Washington Post, rising sea levels are the number one threat to the housing market. Sadly, sea levels are currently rising around 0.13 inches (3.3mm) a year. NASA calculates that the global sea level has risen nearly four inches since the mid-90s. Four inches may seem like nothing, but in reality, it can be the difference between a property or home being completely flooded or perfectly safe. Additionally, a 2018 study by the Union of Concerned Scientists states that more than 300,000 coastal homes or properties will be at risk of flooding regularly by 2045. The real estate markets in those areas will likely be negatively impacted because of the constant threat of flooding.

The markets that have the most risk due to high amounts of growth and the potential of climate change related disasters* include:

  1. Santa Ana, California

    • Located in the Los Angeles metro area, Santa Ana ranks at the top of the list due to rising real estate prices, threats of drought and wildfires, and above-average risk of flooding.
  2. Hialeah, Florida
    • Located in the Miami metro, Hialeah has a high flood risk, high drought risk, and a high rate of increasing real estate prices.
  3. Paterson, New Jersey
    • Located near New York City, Paterson doesn’t have as much climate change risk compared to other places on this list. It’s above average for drought and flooding. However, where the risk lies is its 17.8% year-over-year home sale rate. With this explosion in growth, if an extreme weather event hits here, it will affect many homes and other real estate properties.
  4. Inglewood, California
    • Similar to Santa Ana, Inglewood is also located in the greater Los Angeles area. While there’s not much of a risk of flooding in this area, drought is prevalent. With rising home sales and real estate prices, an extremely high demand for water could be a cause for concern.
  5. Allentown, Pennsylvania
    • Located north of Philadelphia and west of NYC, this city has seen a significant rise in home sale rates and prices. Coupling that with an above average risk for flooding and drought land this market is in the top five for risk.

In this two-part series, we covered the negative impact of real estate and construction sectors on the environment, what positive steps are being taken in real estate and construction, how climate change is impacting the decision making of investors, the short- and long-term implications of climate change on real estate, including adoption of corporate Environmental, Social & Governmental (ESG) initiatives, and what markets are the most vulnerable to climate change. Now that you’ve learned about the significant impact of climate change on the real estate sector, you can make smarter investments, mitigate potential climate change risks, implement ESG practices in your business, and educate others on the importance of climate change awareness. For more information on ESG, visit: https://www.cbcworldwide.com/blog/esgpart1whatyouneedtoknow

 

*According to Rocket Mortgage

 

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