Commercial Investment Real Estate July/August 2019 | Page 24

PREPARING
FOR The
THE
STORM:
Impact of Climate Risks
on Commercial Real Estate
Government action on infrastructure
development and energy efficiency can help
the industry prepare for an uncertain future.
by Elizabeth Vincent
L
ast year, the United States incurred $91 billion
in costs from weather- and climate-related disas-
ters, making it the fourth most expensive year
since 1980, with the top three years all occur-
ring in the past decade. Fourteen events — including
hurricanes, drought, wildfires, flooding, severe winter
and hail storms, and tornadoes — topped $1 billion in
damages, according to the National Oceanic and Atmo-
spheric Administration.
“Climate Risk and Real Estate Investment Decision-
Making,” a recent report from the Urban Land Institute
and Heitman, notes that insurers paid $135 billion glob-
ally in 2017 in response to damage caused by storms and
other natural disasters. The actual costs were much higher,
with the National Oceanic and Atmospheric Administra-
tion estimating $307 billion in damages within the United
States. The 1980-2018 average for weather and climate-
related disasters is 6.3 events, but from 2014 to 2018, that
average increased to 12.6 events. In March 2019, the Pen-
tagon sent Congress a list of bases most at risk from climate
change risks.
This increase in climate-related disasters and weather
events is already impacting property valuations in cer-
tain risk-prone areas. A 2018 study from the First Street
Foundation estimated homes vulnerable to flooding in the
New York metro area collectively lost $6.7 billion in value
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July | August 2019
from 2005 to 2017. Experts used this same methodology to
examine residential properties in 22 states to determine the
collective erosion of property values in coastal areas. The
study examined three million coastal residential properties
in Texas, concluding they collectively lost $76.4 million
in value.
Commercial properties are also vulnerable. A May 2018
article in National Real Estate Investor noted that two years
after experiencing a hurricane, five commercial property
types — including apartment, industrial, office, retail, and
hotel — saw a 10.5 percent drop in valuation.
Impact of Climate Risks
When examining the impact of climate change, scientists
and policymakers have defined risks as either physical or
transitional. Properties most vulnerable to weather-related
disasters are at risk of both physical damage and a loss in
value. The Urban Land Institute and Heitman report notes
that physical risks include climate catastrophes that directly
affect buildings through extreme weather, wildfire, and
sea level rise. The impact on buildings from physical risks
would include costs to replace or repair damaged property;
business disruption because a property is out of service for a
time period; and increased wear and tear on a property due
to changes in weather patterns such as extreme tempera-
tures, high winds, and increased precipitation.
COMMERCIAL INVESTMENT REAL ESTATE