With hurricanes Harvey and Irma delivering a historic one-two punch in the US in early September, the issues of extreme weather and flood risk have come to the forefront for the private real estate industry. After all, many of the largest investors and managers stateside own properties in coastal markets, including those hard-hit by the storms.
Harvey ranks as the second costliest natural disaster in US history, with an estimated $81 billion-$108 billion in property damage and economic loss, according to a report from commercial real estate services firm CBRE. The storm falls behind Katrina in August 2005, with $160 billion in damage, and Superstorm Sandy in October 2012, with approximately $70 billion in damage, the report said. An assessment of the damage caused by Irma was not available at press time.
This brings us to the concept of sustainability, which investors and managers have widely embraced, primarily through mitigation strategies for greenhouse gas emissions, such as reduction targets for energy usage in buildings.
But as Chicago-based real estate investment management firm LaSalle Investment Management noted in a recent report, sustainability includes not only managing a building’s carbon footprint but also addressing the consequences of climate change, including extreme weather and flooding.
So-called resilience measures include not only selecting sites and designing properties to minimize vulnerability to catastrophic events, but also underwriting potentially higher insurance costs, lower liquidity and less tenant demand in flood-prone markets.
Some investors have turned their attention to this aspect of sustainability, including the New York City Pension Funds, which in February hired Mercer Investment Consulting to assess the pension system’s climate change exposure and risk. “A failure to adapt to the realities of global warming could present potential investment risks,” the funds said at the time. The leadership of such capital providers is in turn expected to compel their managers to do the same.
Overall, however, relatively few real estate owners have publicly recognized the significance of adaptation strategies to prepare and protect vulnerable properties for what is expected to be more frequent extreme weather events and flooding in the years to come.
In fact, at least half a dozen of the industry’s largest investors and managers declined to comment or did not respond to requests for comment when PERE approached them to be interviewed on how extreme weather factors into their investment decision making.
Typically, being forward-thinking gives an investor or a manager an edge over the competition. Indeed, one real estate manager expects that resilience measures, which include moving mechanism systems to a higher floor and installing storm surge barriers, will help to boost the value of some of its assets upon exit, given that other buildings in the same market often lack such features.
But the validity of such an assumption depends largely on the market. A real estate owner does not benefit from resilience measures if its property is the only one left standing after a hurricane or another catastrophe.
It is important, then, that other property owners in flood-prone markets also recognize that severe weather events are going to become more common, and that they consequently adopt strategies to better protect their properties.
It cannot hurt for them to be more transparent about disaster preparedness, either, as greater awareness will lead to greater adoption of best practices. As another manager told us, properties do not survive in isolation. When it comes to extreme weather, all boats will rise, or sink, with the tide.